Construction Law 2025

Last Updated June 05, 2025

Japan

Law and Practice

Authors



Mori Hamada & Matsumoto has a construction practice that extends from traditional construction transactions to complex construction transactions involving fund structures with a special-purpose vehicle or a trust, including investment structures for overseas investors, backed by significant experience of real estate transactions. The team’s work in this practice primarily includes the following: acquisition of land for construction, advising on construction-related agreements, structuring and fund formation for construction projects, and financing for construction. Recent highlights include advising an US-based data centre developer on the formation of a joint venture for hyperscale data centres, advising on hotel construction projects in Okinawa, Kyoto and Niseko, and advising on many other construction projects, including Urban Redevelopment Projects.

The principal statutes governing the construction market in Japan include the following:

  • the Civil Code, which provides general rules applicable to contracts and torts;
  • the Building Standards Act, which provides minimum standards concerning the site, construction, equipment and use of buildings;
  • the Construction Business Act, which provides the rules applicable to (sub)contractors, including the necessary licence, regulations, statutory requirements for construction agreements, roles of the main contractors and subcontractors, and alternative dispute resolution (ADR);
  • the Act on Architects and Building Engineers, which provides the rules applicable to architects, including the necessary licence, regulations and statutory requirements for design contracts; and
  • the Real Estate Brokerage Act, which mainly provides real estate brokerage business but also includes some restrictions on sales and other actions before the completion of construction work.

Also, residence-related laws such as the Housing Quality Assurance Act apply to residential buildings. Furthermore, contractors must comply with acts requiring buildings to be handicapped-accessible, environmentally friendly and earthquake-resistant.

There are some standard forms with respect to construction and design in Japan. The features of each form are as follows.

  • The “General Conditions of Construction Contract” (minkan (nanakai) rengoukyoutei kouji ukeoi keiyaku yakkan) published by the General Conditions of Construction Contract Committee (which is a group of seven associations and organisations) (Seven Associations GCCC) in Japanese is the form of construction-only contract most commonly used by private employers and contractors.
  • The “General Conditions of Design and Supervisory Services Contract” (yonkai rengou kyoutei kenchiku sekkei kannritou gyoumuitaku keiyaku yakkan) issued by the Research Society for General Conditions of Design and Supervisory Services Contract (which is an industry organisation consisting of four associations and organisations) (Four Associations GCDS) is the form of design and supervisory services-only contract most commonly used by private employers, designers and supervisors.
  • The “General Conditions of Design/Build Contract” issued by the Japan Federation of Construction Contractors is the form of design-and-build contract. In Japan, design and construction are often ordered from employers to contractors and designers separately, in which case the Seven Associations GCCC and the Four Associations GCDS are typically used. However, in the case of a design and build contract (both are ordered from the employers to one party acting as a designer and a contractor at the same time), this form can be adopted.
  • For the construction of some domestic power plants, the “Model Form for Domestic Plant Construction Work” issued by the Engineering Advancement Association of Japan is used. However, a customised engineering, procurement and construction contract is often adopted for renewable energy projects.
  • The “General Conditions of Public Construction Standard Contract” (koukyou kouji hyoujyun ukeoi keiyaku yakkan) is typically used as a standard form for projects involving public works. Aside from government agencies and local governments, private electric power companies, railway companies and other companies that regularly order construction work also use this form.
  • Recently, in some cases where offshore parties are involved in the construction project (such as offshore wind farm projects), FIDIC-based contracts may be adopted when agreed between the parties.

In Japan, employers can range from very large to small legal entities, including SPCs for joint venture and real estate investment, individuals and governmental bodies. In some cases, such as housing construction, there can be multiple employers, and they jointly and severally owe obligations, including the payment of the contract fee.

General Rights and Obligations of the Employer

The rights and obligations of the employers vary, depending on the contracts, including contract templates such as the Seven Associations GCCC among private entities, the General Conditions of Public Construction Standard Contract ordered by governmental bodies, or tailor-made construction contracts negotiated for project finance. Despite the differences among contracts, common and typical rights and obligations of the employers include:

  • the right to supervise the work and inspect the completed work by itself or an appointed third party;
  • the right to request repair of defects, deliver substitutes, reduce the payment amount, or compensate for loss or damage (please see 3.11 Defects and Defects Liability Period);
  • the right to request additional work or a change of the work scope and timeline in exchange for an increase or decrease of the contract fee proposed by the contractor;
  • the right to cease or suspend the construction work before completion by compensating for loss or damage incurred by the contractor;
  • the obligation to pay the construction fee;
  • the obligation to secure the land for construction work; and
  • the obligation to compensate the contractor when the employer orders the construction work to cease or be suspended.

General Relationship Between the Employer and the Contractor

Employers and contractors have contractual relationships under construction agreements. These days, due to the active market and high demand for construction, contractors tend to have strong bargaining power, and, in some cases, contractors do not accept any changes requested by employers from the Seven Associations GCCC or their own contract template.

General Relationship Between the Employer and the Subcontractors

Typically, in Japan, the employer orders all construction work to one contractor in a lump sum, and the contractor then contracts with several subcontractors. In this case, employers and subcontractors do not have any direct contractual relationships; rather, contractors have direct contractual relationships with subcontractors and owe an obligation to employers to supervise subcontractors. On the other hand, if, for example, the employer is able to manage and co-ordinate the work of several contractors, the employer may elect to directly execute an agreement with the subcontractors (eg, equipment contractors) separately from the construction of the main building itself.

General Relationship Between the Employer and the Financiers

In order to monitor the progress of the construction, financiers request employers to submit periodical construction reports to financiers and may ask for further rights such as a separate inspection by the lenders. For project finance, because it is important for the construction of building or facilities to be properly completed, financiers tend to be actively involved in the monitoring of the construction and advocate for strong rights against the employers.

In Japan, contractors are required to obtain a construction licence. Under the Construction Business Act, contractors are required to obtain a permit from the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) (if the construction business is conducted in two or more prefectures) or the prefectural governor (if the construction business is conducted in one prefecture only) if a certain threshold is met. This threshold includes conducting construction work for a fee of at least JPY5 million or, for large-scale and complicated construction, JPY15 million.

Usually, the contractor is a single company, though for large-scale and technically challenging works joint ventures may be formed by several companies.

General Rights and Obligations of the Contractor

The rights and obligations of the contractors depend on the contracts agreed upon, though the common and typical rights and obligations of contractors include:

  • the right to receive construction fees from the employer, including additional fees if the contractor conducts additional work;
  • the right to request compensation when the employer directs it to cease or suspend construction work;
  • the right to cease construction work or terminate the contract if the employer breaches certain obligations and fails to remedy the breach despite written notice from the contractor;
  • the obligation to perform the agreed construction work in accordance with contractual and applicable legal requirements, within the stipulated timeline;
  • the obligation to repair defects or deliver substitutes when there are any defects in the completed work;
  • the obligation to purchase and maintain certain insurance for construction required under the contract;
  • the obligation to compensate third parties if the construction work causes any damage to them; and
  • the obligation to support the required inspection under contracts and applicable laws.

General Relationship Between the Contractors and the Subcontractors

Contractors often subcontract part of the construction work to one or more subcontractors. Thus, contractors and subcontractors have contractual relationships. Contractors, as employers under the subcontract agreements, manage and pay subcontract fees to subcontractors, and subcontractors, as contractors under the subcontract agreements, provide agreed construction work and receive a fee. Typically, in Japan, contractors are large-scale companies (some are called “super general contractors”) and have wide discretion to select subcontractors without the employers’ consent. As such, contractors tend to have bargaining power compared to subcontractors, which are middle-to-small-scale companies or individuals.

General Relationship Between the Contractors and the Financiers

Ordinarily, contractors and financiers do not have any contractual relationships. However, in project finance or real estate investment projects, financiers of the employers may require that certain provisions, including limited recourse clauses from a bankability perspective, be incorporated into the construction agreement. Also, in some project finance cases where lenders hope to have direct contractual relationships with contractors, lenders request to execute a direct agreement with the contractors.

Please see 2.1 The Employer regarding the relationships between the contractors and the employers.

Typically, in Japan, subcontractors are middle-to-small-scale companies or individuals, and in some cases they are required to specialise in a particular field and technique for the construction of specific facilities, including power generating plants and aquaculture facilities.

General Rights and Obligations of the Subcontractor

Generally, in Japan, contractors owe the obligation to employers to complete the entire construction work. The contractors order some part of the work, at their own discretion, to subcontractors selected by the contractors by executing an outsourcing agreement. Hence, subcontractors often have contractual relationships only with contractors and usually do not enter into any direct agreement with an employer. The rights and obligations of subcontractors depend on the outsourcing agreements, and contractors and subcontractors tend to have their own contract templates. The relationships and bargaining power between the two parties are decisive for which template or format will be used, but in many cases subcontractors’ rights and obligations are similar to those of contractors mentioned in 2.2 The Contractor.

General Relationship Between the Subcontractors and the Financiers

As mentioned above, contractors commonly have rights and assume all obligations with employers and financiers, and then outsource part of the work to the subcontractors. Hence, the subcontractors rarely have direct contractual relationships with financiers.

Please see 2.1 The Employer and 2.2 The Contractor regarding the relationships between the subcontractors, and the employers and the contractors.

Banks are the main players as debt financiers in Japan. Other institutional investors such as insurance companies, leasing companies or pension funds also play important roles in the market, whether in debt or in equity.

General Rights and Obligations of the Financiers

Debt providers usually have structural or contractual priority over equity providers. In the case of construction project finance, there is usually no source of interest to be paid to the debt providers, so lenders usually seek a reserve sufficient to receive interest payments and other disbursements during the construction period. In addition, during the construction period, dividends to equity providers are generally prohibited. Debt providers in construction project finance usually require securities over all of the major assets of the borrower (ie, the employer), including land, insurance claims and other related rights and claims. For project finance, financiers usually request security over the rights and contractual status of the employers under the construction contracts. Finance providers have information rights to receive the necessary documents and information (such as financial statements).

Please see 2.1 The Employer, 2.2 The Contractor and 2.3 The Subcontractors regarding the relationships between the financiers, and the employers, the contractors and the subcontractors.

Construction companies, architectural design companies/offices and individual architects are the typical designers in Japan. Under the Act on Architects and Building Engineers, designers are required to obtain licences to conduct certain design work. For instance, those who design buildings with two or more floors and a total floor area of more than 1,000 sqm are required to be licensed as a “first-class architect” by MLIT. There are also “second-class architect” and “wooden building architect” licences, with more restricted permitted scopes of work.

General Rights and Obligations of the Designer

The rights and obligations of the designer depend on the scope of the design agreement. The Four Associations GCDS, which is the most commonly used template for design agreements in Japan, includes supervisory work by the designer. The designers’ rights and obligations in this template include:

  • the right to receive design and supervisory fees from the employer, including additional fees if the designer conducts additional work;
  • the right to request compensation when the employer orders the design work to cease or be suspended;
  • the right to cease design work if the employer breaches certain obligations or to terminate the contract by paying compensation to the employer;
  • the obligation to perform the agreed design and supervisory work under the contract and applicable laws, within the stipulated timeline; and
  • the obligation to revise defects or deliver substitutes when there are defects in the completed work.

General Relationship Between the Designers, the Employer and the Contractor

Designers have a contractual relationship with the employers. Although designers, contractors and subcontractors are not always the parties to one agreement, in some cases a designer is appointed by the employer as a supervisor of the construction work. In such a case, designers, contractors and subcontractors collaborate with each other to check if the construction work is carried out and completed in accordance with the construction plan and blueprints.

The scope of the construction work is commercially agreed upon and attached as an exhibit to the construction contract to specify the construction work. The exhibit includes the specifications, requirements, design, floor plan, invoice and/or materials of the facilities to be constructed. The exhibits can be so voluminous that they are often stored in separate physical files and electronic data.

In Japan, employers may order variations of work when necessary and contractors may request a necessary variation of work if there is a reasonable ground for such request. In either case, the contractor may propose the scope and method for the change in the work as well as the amount of the increase or decrease in the construction fees. Once the employer agrees to the proposal, the scope of work and the construction price will be amended.

To the extent agreed, the timeline for the construction work can be revised concurrently, and such change of schedule may be grounds for an increase of remuneration for the construction.

If an employer orders a variation and the contractor incurs a loss or damage, the employer is required to compensate the contractor for such loss or damage.

The scope of work and responsibilities of the designers are often agreed upon in the design agreement, typically in the Four Associations GCDS template, which is separate from the construction contract. Therefore, the responsibility for the design process is taken by the designer, not the contractors. Generally speaking, employers are not responsible for the design work unless the employers:

  • specifically direct and cause the designers to act wrongfully; or
  • engage in any activities that are contrary to the purpose of the design agreements.

Unless employers specifically direct and cause the contractors to act wrongfully or engage in any activities that are contrary to the purpose of the construction contract, contractors are fully responsible to the employers for the construction work, in principle, even if the cause of a defect or breach lies with the subcontractors.

Between contractors and subcontractors, subcontractors are liable for the results within the scope of the outsourced work.

A designer can be liable to the employer for overlooking construction defects if the scope of their work includes supervising the construction work.

Employers must ensure that the construction site can be used by the date necessary for the work. As such, employers are, in principle, liable for the risks to the condition of the construction site. However, this risk allocation is not governed by any mandatory or regulatory law, so parties may contractually agree upon a different risk allocation.

Requirements for the Buildings

In Japan, the Building Standards Act stipulates minimum standards for the site, construction, equipment and use of buildings. Contractors and designers are responsible for the construction and design complying with the requirements under the act.

Although this act stipulates various complicated and technical requirements, the basic points are that:

  • the employer (in reality, designers act for the employer) must apply for confirmation that the designed building complies with all building regulations and must receive a compliance certificate from an authorised person/entity (such confirmation being “Construction Confirmation”); and
  • after the completion of the building, the employer (in reality, contractors act for the employer) must apply for inspection by an authorised person/entity to determine whether the completed building complies with all building regulations and must receive a compliance certificate from an authorised person/entity.

Technically, the employer applies for such confirmation and inspection, though designers and contractors prepare the necessary documents and take responsibility for the result. If any issues are found in the procedure, designers and contractors are responsible for those issues and are thus obligated to repair and revise the defect in order to pass the inspection.

Sales of the Buildings

If a seller of a (unit of a) building is a “Real Estate Broker” under the Real Estate Brokerage Act (ie, an individual or entity engaged in a business in which they buy, sell or exchange building lots or buildings, or provide intermediary or agency services therefor with the required permit), the seller must comply with certain regulations in addition to the general requirements under the act. Such special requirements include:

  • not signing a contract with a buyer before obtaining the Construction Confirmation;
  • not advertising before obtaining the Construction Confirmation;
  • the seller being required to explain to buyers the required additional information pursuant to the act; and
  • not receiving deposits exceeding a certain threshold unless an indemnity agreement with a bank or other financial institution has been executed to protect the buyer.

Before the handover of the completed work, contractors are responsible for the maintenance of the works. Contractors basically assume all obligations and risks of the construction work during that period, and maintenance of the works is a part of those obligations.

Once the completed work is delivered to an employer in accordance with the construction contract, the responsibility of the maintenance shall also be transferred to the employer as a property holder, with discretion on the method of the maintenance. In some cases, employers entrust the contractors or their affiliates specialised in maintaining the same type of facilities to maintain the property, by executing a separate property management agreement or maintenance agreement, considering that contractors already know the specifications and appropriate maintenance method.

It is possible for an employer to instruct the contractor on other functions, though this is not always the case; typically, contractors have discretion on every function, besides what is specifically ordered by the employer in the relevant case.

Before the full handover of the completed work, contractors are typically obligated to:

  • conduct contractually agreed tests; and
  • provide support to pass statutory inspections.

The purpose of the contractually agreed tests is to confirm that the completed work satisfies all requirements under the construction contract, which may include the specifications of the facility. It is often the case, especially in the case of complex facilities such as power plants and data centres, that the methods and passing criteria of such tests are agreed in advance when the contracts are executed.

Statutory inspections include an inspection by an authorised person/entity under the Building Standards Act to confirm whether the completed building complies with all building regulations. Please see 3.6 Permits.

If any other tests are required under the design and supervisory agreements, contractors are required to co-operate when these tests are conducted.

In any case, employers and their appointees have the right to be present when the tests are conducted.

The processes of completion, takeover and delivery are agreed upon in the construction contract. Generally speaking, when the contractor determines that the construction work is ready for completion tests, they ask the employer to conduct the required tests and inspections, including statutory ones. If the facility passes the tests and no physical, performance and regulatory defects are found, the contractor will deliver the facility to the employer.

If the facility fails the tests or issues are found in the inspection, the contractor must repair the facility or resolve the issues until the facility passes the tests and all issues are resolved.

The employer and contractor may agree to:

  • the use by the employer of part of the facility; and
  • partial delivery to the employer before the tests and inspections are completed, other than those required under mandatory regulations.

Such agreements are useful when full turnover takes time and partial use and delivery generate profits for the employer.

Defect Liability Period

Under the Japanese Civil Code, the claim period for non-conformity to the contract is ten years from delivery or five years from knowledge that they can exercise their rights of the claim, whichever is earlier.

That said, market practice (under the Seven Associations GCCC) has modified the general rule as follows:

  • a) contractors are liable for non-conformity to the contract (which includes defects found in a building) for two years from delivery;
  • b) notwithstanding a) above, contractors are not liable for any non-conformity in the main parts of building equipment, interior finishings or decorations, furniture, trees or plants or other similar items, unless the employers require the contractor to cure such non-conformity immediately after inspection at the time of delivery of the construction work – provided, however, that if such non-conformity could not be discovered by the employers with due care during the inspection the employers may make a claim within one year after the date of delivery;
  • c) employers are required to make a claim for non-conformity under a) and b) above in a manner clearly expressing the intention to pursue the claim against the contractor for liability due to non-conformity, with the grounds for the claim and calculation of the amount claimed as damages;
  • d) if the employer discovers the non-conformity within the claim period described in a) or b) (the “Non-Conformity Liability Period”), notifies the contractor of the non-conformity within the Non-Conformity Liability Period, and makes a claim in the manner described in c) within one year from the notification of non-conformity, such claim will be deemed to have been made within the Non-Conformity Liability Period;
  • e) notwithstanding a) to d) above, the limitation under a) to d) above does not apply if the non-conformity was due to the wilful act or gross negligence of the contractor – in this case, the general rules under the Civil Code shall apply; and
  • f) lastly, with respect to a construction contract for a new house prescribed in the Housing Quality Assurance Act, the defect liability period cannot be shorter than ten years after the date of delivery – this statutory requirement is applicable to defects in certain main structural and rainwater-proof components.

If the above periods have lapsed, the employer’s right to seek remedies described below will be forfeited.

Remedies Available to the Employers

If defects are found in the construction, the employer may demand the repair of the defect, delivery of a substitute, reduction of payment, or compensation for loss or damage. These remedies are available whether the demand is made before or after the handover to the employer – provided that the demand was made within the explained defect liability period and the employer completed the described requirements and procedures.

In Japan, a lump sum fixed contract price is widely adopted in the market, and a change in price is subject to the terms and conditions stipulated in the contract (please see 3.2 Variations) or the parties’ mutual agreement.

Under the Seven Associations GCCC, immediately after the signing of the construction contract, the contractor is required to submit the breakdown of the contract price to the employer and its appointed supervisors for their review.

Milestone payments are often agreed between the employer and contractor. Typically, such payments are made:

  • upon the commencement of the work;
  • upon reaching one or more interim milestones (eg, at the time of framework raising); and
  • upon the completion of the work.

While it depends on the agreement, the last payment is typically the largest payment.

Possible grounds to change the construction fees include unexpected changes in laws, inflation and wage increase. These are stipulated in the Seven Associations GCCC.

Though indexation provisions have rarely been used in Japan, due to the current economic status and possible future inflation, some contractors may ask to include clauses for more flexibility to change the contract price. In addition, the amended Construction Business Act, which took effect at the end of 2024, provides a legal framework for construction contract price adjustments. Under the amendment:

  • provisions to change the contract price or calculate a new price on the grounds of inflation must be stipulated in construction agreements;
  • before entering into construction agreements, contractors are obligated to notify employers of the risk of contract price increases due to possible difficulties in procurement or price increases affecting major construction materials, and in certain types of construction, lack of labour due to force majeure circumstances; and
  • private employers are obligated to make an effort (and public employers are obligated) to discuss with the contractor if the contractor makes a reasonable request for a contract price increase pursuant to the construction agreement – MLIT is entitled to inspect whether such discussions are properly made and to publish the results of the inspection.

These amendments were made with a view to (among others) preventing the rising materials prices from putting pressure on wages, and allowing contractors to pay higher wages to their workforce.

Milestone payment is the prevailing method for payment (please see 4.1 Contract Price). If contractors are concerned about late or non-payment, they can request a larger ratio of the price to be paid at the commencement of the work or middle milestones.

Also, a default charge clause (typically, 10% or 14.6% per year) is a measure for deterring late or non-payment.

In Japan, a lump sum fixed fee is widely adopted and changes to the payment amount are not unpredictable (please see 4.1 Contract Price). For this reason, periodical invoicing is not necessary in practice.

Typically, a fee estimate issued before signing the construction contract and for variations can be the basis of a final invoice, indicating the final amount of the contract price.

In Japan, contractors prepare an outline construction schedule, including the necessary work and time for temporary works, permanent works, tests and inspection, and estimated delivery date. These will be discussed between the employer and the contractor, and the Seven Associations GCCC requires contractors to submit the finalised construction schedule to the employer immediately after the signing of the construction contract.

It is often the case that the contractor periodically reports on the progress of the construction to the employer and, as a result, both parties can recognise possible delays before the deadlines. When the construction work is likely to be delayed, parties first discuss the necessary steps to accelerate the work and/or an extension of the timeline. Depending on the reasons for the delay, parties may agree to increase the contract fee or compensate for the delay. It is relatively rare to terminate the contract based on non-material delays as it is detrimental to both parties to cease and abandon the construction or to look for new contractors, which are likely to cost more than maintaining the original contractor.

Reflecting this practice, an extension of time is widely accepted in construction contracts. For instance, employers may propose an extension when it is necessary without any rationale under the Seven Associations GCCC. Please see 5.4 Extension of Time for the grounds of extension requested by contractors.

If the construction work delays due to the contractor’s breach, remedies are available to the employer. Please see 5.3 Remedies in the Event of Delays.

In the event that construction work is delayed after the agreed deadline, the employer may terminate the construction contract or claim compensation and default charges against the contractor for loss or damage incurred. Due to the inefficiency of terminating the contract, employers tend to choose to seek compensation. Under the Seven Associations GCCC, a penalty for delay in delivery of 10% per annum on the contract price is stipulated as liquidated damages. In project finance, the amount of liquidated damages tends to be negotiated to cover the estimated cash flow.

The grounds for time extension are stipulated in construction contracts. For example, under the Seven Associations GCCC, contractors may request a time extension in cases where:

  • there is ambiguity or a discrepancy in the design, specifications and conditions;
  • the employer requests examination by breaking and uncovering the construction to clarify any suspected non-compliance with the construction documents, but the work is found to be in compliance with such documents;
  • there is damage to a third party due to the construction work, which is not attributable to the contractor;
  • there is damage to the contractor due to the construction work, which is attributable to the employer;
  • an issue is found in the course of a statutory inspection, which is not attributable to the contractor, and the parties agree to take necessary steps to resolve the issue;
  • the contractor agrees to partial use of the facilities, as requested by the employer, before the completion of work;
  • construction resumes after an employer’s request to terminate the construction work, and reasons for a necessary extension are given by the contractor;
  • construction resumes after any ground for the termination of the construction contract by the contractor is resolved, and reasons for a necessary extension are given by the contractor; and
  • there are any other reasonable grounds, including force majeure or a request for additional work or a change in the work.

There are some patterns for determining whether or not and for what period an extension of time should be granted. One way is that contractors propose the necessary time for the extension based on the agreed grounds of the time extension, and parties will discuss and agree on the necessity and period for the time extension. As the reasons for the time extension are various and depend on the situation, there is no specific criteria other than “necessity”, though excessive extensions will not be awarded.

In many cases, force majeure is defined as an act of God or other natural or artificial cause for which neither party is responsible or able to control. This includes natural disasters such as earthquakes, floods and typhoon, war, terrorist attacks and riots. After the COVID-19 pandemic, some contracts include infectious disease in the definition of force majeure. There is no statutory requirement for the definition of force majeure, and the parties may contractually agree upon the scope of force majeure.

Typically, when any force majeure event occurs, contractors are entitled to ask for an extension in the construction schedule and a suspension or cessation of the work, and sometimes for an additional cost/increase of the contract price depending on negotiation.

If unforeseen circumstances fall within the definition of force majeure, the same rule for force majeure is applicable. Please see 5.5 Force Majeure for the typical consequences.

In Japan, there is also a general legal principle of “Change of Circumstances”, which allows either party to amend or terminate an agreement under extraordinary changes in the social environment that were impossible to expect at the time when the contract was signed, such that it is unfair to enforce the original agreement. Unexpected changes in laws or extreme inflation may be a possible example, and the Seven Associations GCCC includes the provision derived from this principle as a ground to change the contract price (please see 4.2 Indexation).

However, it is very rare in Japan for the courts to apply this legal principle. Hence, parties should not rely on this principle and its derivatives. If any specific grounds and consequences for unforeseen circumstances are necessary, they should be clearly discussed and agreed upon by all parties.

In Japan, disruption itself is not an individual legal concept that is widely accepted as a ground for extension of time or compensation. It may be one of the components of force majeure, and, if a certain type of disruption falls within the definition of force majeure, the same rule for force majeure is applicable. Please see 5.5 Force Majeure.

If any specific grounds and consequences for disruption are necessary, it should be clearly discussed and agreed upon by all parties.

There are no specific mandatory law provisions in Japan that prohibit certain clauses in construction contracts or design contracts to exclude the liability of a party, other than general legal concepts.

One such general legal concept is the violation of public policy; that is, if specific terms of the contract are considered offensive to public order, such terms are unenforceable on an ad hoc basis due to the principle of public policy.

As a derivative of such a concept, under the Consumer Contract Act, if the employer is a “consumer”, and any terms of the contract restrict the consumer’s rights or expand the consumer’s obligations to the extent that such terms unilaterally prejudice the interests of the consumer and violate the fundamental principle of public order, such terms are void.

In Japan, gross negligence is often referred to as negligence amounting to a wilful act or omission, or a significant deviation from the ordinary duty of care which a person in similar situation would owe. In legal commentary, this has been described as that a person acts with gross negligence where the person could have easily foreseen and avoided the result with ordinary duty of care but has not. The analysis of the concept of “gross negligence” has developed under precedents, and mandatory or regulatory laws do not provide the details of the concept.

On the other hand, there is no separate legal concept of wilful misconduct in Japan. This concept is also discussed under “intentionally” or “with gross negligence”.

It is possible for the parties to limit their liability under construction contracts or design contracts, unless otherwise prohibited in applicable laws.

One such law is the Housing Quality Assurance Act, which prohibits limiting contractors’ defect liability period to being shorter than ten years after the date of delivery in certain cases. Please see 3.11 Defects and Defects Liability Period for when the Housing Quality Assurance Act is applicable.

In Japan, the concept of indemnification is not common. Instead of indemnification, compensation is widely recognised as the legal concept equivalent to indemnification.

When a party breaches a contract, including non-conformity with the provisions or requirements and delay in delivery of the completed work or the payment of the construction fee, the breaching party is liable to compensate the non-breaching party for the loss or damage incurred to the extent that the breach has a causal link to such loss or damage.

In project finance, parties typically agree to incorporate the concept of liquidated damages, which is a special provision for compensation in that the amount of loss and damage are agreed to be fixed to cover the estimated cash flow when the construction schedule is delayed.

From this perspective, compensation functions to fairly allocate the risks of damages to the parties.

In Japan, generally speaking, it is not common to require a guarantee from private parties, especially when an employer is a company in sound financial condition.

On the other hand, in some public works, the government may require the contractor to provide a guarantee for the performance of certain construction work or other obligations. The terms and conditions of the performance bonds are determined by the government office in charge of the project, and it is usually difficult to negotiate for any change. Such performance bonds are typically in the form of a demand guarantee under the Uniform Rules for Demand Guarantees published by the International Chamber of Commerce.

Companies, including employers and contractors, are required by statute to obtain labour insurance and social insurance for their employees.

No statutory insurance is specifically required for contractors to carry out construction work or design and supervisory services.

Contractors usually purchase and maintain fire insurance or contractors’ all risk insurance for the executed portion of the construction work, materials and/or building equipment delivered to the construction site. Considering that, recently, construction works have become larger and more complicated, under the Seven Associations GCCC, contractors are required to purchase fire insurance, contractors’ all risk insurance or other agreed insurance.

Also, contractors purchase guarantee insurance for liability for non-conformity and non-performance of obligations when they construct new residences, to address the requirement under the Act on the Assurance of Performance of Specified Housing Defect Warranty.

Regarding design and supervisory services contracts, if the designers and supervisors are from an architectural firm, the founders of the architectural firm have a duty to make efforts to purchase and maintain business insurance that covers losses in connection with their design and supervisory services.

Contractual Provisions

There are a few provisions related to insolvency under the Seven Associations GCCC and the Four Associations GCDS. However, parties can separately agree to include insolvency-related provisions and limited recourse clauses, including prohibiting contractors from filing for bankruptcy for a certain period.

Statutory Rules

The Civil Code contains a special rule when the employer is insolvent. During the insolvency procedure, the employer’s bankruptcy trustee (or, in the case of civil rehabilitation, the employer with the court’s permission) and the contractor may terminate the construction contract, if the work is not completed.

On the other hand, the Bankruptcy Act or the Civil Rehabilitation Act applies when the contractor is insolvent and the work can be completed by another contractor. During the contractor’s insolvency procedure, the contractor’s bankruptcy trustee (in the case of civil rehabilitation, the contractor with the court’s permission) has an option to terminate the construction contract or request the employer to perform its obligation, including payment of construction fees.

In both cases, contractors are entitled to receive construction fees in proportion to the progress of the work. However, in the case of employers’ bankruptcy, such remuneration will be paid in the insolvency procedure to the extent that there are enough funds to distribute.

In general, risk allocation is an issue to be agreed between the parties.

In the context of typical construction contracts:

  • before the delivery of the completed facility, the contractor bears all risks other than loss or damage incurred that are attributable to the employer; and
  • upon delivery, such risks transfer to the employer.

That said, in cases of force majeure, some contractors’ obligations before the delivery can be deferred or released. Please see 5.5 Force Majeure.

Under the Construction Business Act, contractors are obliged to engage a chief engineer, and, in certain cases, a managing engineer, an assistant managing engineer and/or a specialised engineer. They must satisfy the requirements stipulated in the act – mainly to have certain licences and experience. Also, contractors may engage an on-site agent. Owing to the governmental policy on work-style reform, the regulations on the appointment of full-time chief engineers and managing engineers were eased under certain conditions, including the utilisation of ICT, pursuant to the amended Construction Business Act, which took effect at the end of 2024.

Reflecting these statutory requirements and provisions, the Seven Associations GCCC includes a provision requiring the contractor to engage the necessary personnel and to notify the employer of the names of such personnel.

Under the Seven Associations GCCC, one person may be a chief engineer, managing engineer or assistant managing engineer, specialised engineer and on-site agent at the same construction site concurrently.

In principle, subcontracting all of the construction work is prohibited under the Construction Business Act. However, for constructions of any type other than new apartment buildings, the Construction Business Act allows subcontracting all of the construction work with prior written consent from the employer. Also, there is no statutory limitation on subcontracting part of the construction work.

This is also reflected in construction contracts, including the Seven Associations GCCC – that is, the contracts prohibit subcontracting all of the construction work without obtaining the prior written consent of the employer for constructing facilities other than a new apartment building, in which case subcontracting all of the construction work is prohibited in any case.

The Seven Associations GCCC provides that the contractor shall be solely responsible for using any materials, building equipment or construction methods that contain any protected third-party intellectual property (IP), except if all the following requirements are met:

  • the employer designated the materials, building equipment or construction method;
  • the design documents do not clearly state that they contain third-party IP; and
  • the contractor is not aware of such third-party IP.

In the Four Associations GCDS, the general rule for IP is that any IP attached to the completed building based on the design prepared by the designer belongs to such designer, and the employer may use such IP.

Employer

In the case of any breach, including non-conformity, under construction contracts or design contracts, the employer is typically entitled to require the contractor or designer to:

  • repair the defect or deliver a substitute;
  • reduce the payment amount;
  • compensate for loss or damages; or
  • terminate the contract.

These remedies are not mutually exclusive, and employers may choose any option to recover the loss or damage incurred.

Contractor and Designer

The most important claim for contractors and designers is remuneration for construction or design and supervisory work. If the employer fails to pay, the contractor or designer is entitled to claim default charges, in addition to the remuneration itself.

In addition, under the Seven Associations GCCC, a contractor may stop the construction work or terminate the construction contract if the employer fails to ensure and provide the necessary construction site or to pay the milestone payments.

As for designers, the Four Associations GCDS provides that a designer may stop the work or terminate the design contract if the employer fails to pay the design fees, or if the work is delayed due to a reason attributable to the employer.

In Japan, it is not common practice to contractually limit the remedies available to employers and contractors. Conversely, the Seven Associations GCCC clarifies that all remedies available to employers in the case of non-conformity by the contractors under the Civil Code are also available to the extent that employers follow the procedural requirements. Please see 3.11 Defects and Defects Liability Period for such procedural requirements.

That said, employers and contractors may agree to limit the available remedies to the extent that such limitations do not violate public order or (if the employer is a consumer) the Consumer Contract Act. Please see 6.1 Exclusion of Liability.

As for the design contracts, compared with construction contracts, limitations on the compensation amount are more acceptable in the Japanese market.

In Japan, contractual sole remedy clauses are not used in most construction contracts. Hence, generally speaking, in addition to remedies stipulated in construction contracts, employers and contractors may make a claim under applicable laws such as tort law.

In the Japanese market, contractors are generally liable for all forms of damage unless it is attributable to or directed by the employer. The basic idea is that contractors bear every risk for completing the construction work until the delivery, which is one of the contract types stipulated in the Civil Code.

Retention Right

In Japan, the payment of the remuneration for construction is often divided into several portions, such as the payment at commencement, single or multiple middle milestones and the completion of the work. Middle milestones include the completion of the framework of the buildings, and the last payment is paid only after passing the agreed tests and statutory inspections. Typically, although it depends on the agreement between the parties, the last payment is the biggest amount.

After the last payment has been made at the same time as the delivery, it is generally not acceptable for an employer to retain any fees. Thus, if any defects are found after the delivery, the employers need to claim compensation without any retention.

Hence, employers are substantially able to retain part of the payment only before the completion of work and delivery.

As for the designers, practically, all designing fees are paid after the completion of work. As such, similar to the contractors, the employers are able to retain the payment only before the completion of work and delivery.

Suspension Right

Contractors’ and designers’ suspension rights are incorporated into construction contracts and design contracts, including the Seven Associations GCCC and the Four Associations GCDS.

Typical grounds for suspending construction works are:

  • delay of the employer in making advances or partial payments;
  • it not being possible to proceed with the construction work because the employer failed to make the construction site available for the use of the contractor;
  • significant delay in the construction work due to any ground attributable to the employer; and
  • it not being possible to proceed with the construction work because of force majeure.

In addition, the common grounds for suspending design works are:

  • delay in making any payments due to a reason attributable to the employer; and
  • delay in the work due to a reason attributable to the employer.

Termination Event

Termination events are agreed upon by parties and provided in construction contracts. The termination events in the Seven Associations GCCC include the following:

  • Termination by the employer of the construction contract:
    1. before the work is completed – when necessary, by compensating the contractor for the loss and damage incurred;
    2. after the completion and delivery – if the defects of the facility are so material that there is no option but reconstruction;
    3. the contractor loses any necessary permit to continue the construction work;
    4. it not being possible to complete the construction work; and
    5. the contractor is found to have any relationship with antisocial forces.
  • Termination by the contractor of the construction contracts:
    1. the employer’s breach (excluding minor breaches) of the construction contract;
    2. construction work has ceased for more than two months or one fourth of the scheduled construction timeline;
    3. construction fees are reduced for more than two thirds of the original amount due to a variation request from the employer;
    4. employers have stopped paying their debt and lack the ability to pay the construction fees;
    5. it not being possible to complete the construction work; and
    6. the employer is found to have any relationship with antisocial forces.

As for the design contracts, both the employers and the designers may terminate the contracts at any time without any reason, provided that, in the case of no reasonable grounds for the termination, the terminating party compensates the other party for any loss or damage incurred due to the termination, if the timing of the termination was detrimental to the other party.

Contractual Consequences of Termination

Regardless of the ground for termination of the construction or design contract, the work completed as of the time of termination will be transferred to the employer for consideration: the employer is required to pay part of the remuneration of the contractor in proportion to the progress of the work.

Parties are also entitled to compensation for loss or damage incurred due to the termination of the contract.

In Japan, parties may agree to the exclusive jurisdiction of a competent district court in construction or design contracts. Typically, a court with sufficient ability and personnel, such as the Tokyo District Court, is chosen as an agreed competent court. As construction disputes tend to have complicated and technical issues, special procedures for obtaining support from experts are stipulated in the Japanese Code of Civil Procedure.

Some large-scale courts, including the Tokyo District Court, have set up judicial units that handle construction disputes intensively, and such units are able to manage such cases smoothly. Though parties are not allowed to choose a judicial unit to deal with the case, complicated construction disputes are likely to be assigned to such intensive units, if they exist. This is a good reason to choose a large-scale court as an agreed competent court in construction and design contracts.

Two ADR institutions are typically chosen for construction dispute resolution:

  • the Committee for Adjustment of Construction Work Disputes (CACWD), established at MLIT and each prefecture by the Construction Business Act; and
  • the Designated Housing Dispute Resolution Body (DHDRB), set up at each Bar Association by the Housing Quality Assurance Act, which is designated by MLIT.

CACWDs are public institutions handling construction contract disputes, and DHDRBs are private institutions dealing with construction contract disputes and the sale of residences covered by a performance evaluation report issued in accordance with the Housing Quality Assurance Act. Both CACWDs and DHDRBs are expected to resolve construction-related disputes in an effective, simple and prompt manner, with the support of experts in construction.

There are three types of procedure in CACWDs:

  • mediation;
  • conciliation; and
  • arbitration.

Resolution by mediation and conciliation can be achieved only through agreement on the result among the parties. Hence, they are not always effective. On the other hand, an arbitration award from a CACWD can be granted without any agreement on the result between the parties, provided however that the consent of the parties to commence an arbitration is required.

Owing to such nature of CACWDs, the Seven Associations GCCC designates the CACWD as the recommended body for dispute resolution in addition to a court judgment, and has prepared the format of the advance agreement on commencing arbitration in CACWDs, which excludes going to courts. However, this is not always selected as the first option for dispute resolution, and contractors tend to choose resolution in courts (or select avoiding disputes in the first place by repairing the defects to protect their reputation). One reason may be the provision under the Arbitration Act, which allows consumers to terminate such agreement on commencing arbitration, for the purpose of protecting individuals.

Mori Hamada & Matsumoto

Marunouchi Park Building
2-6-1 Marunouchi
Chiyoda-ku
Tokyo 100-8222
Japan

+81 3 6212 8330

+81 3 6212 8230

info@morihamada.com www.morihamada.com
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Trends and Developments


Authors



Nishimura & Asahi is one of Japan’s largest full-service international law firms. With more than 900 professionals globally (including some associate and alliance offices), the diversity and depth of expertise offered by its world-class lawyers are singular. Leveraging its global network, including associate and alliance offices, the firm provides a full suite of cross-border legal services throughout its network. It has a presence in Bangkok, Brussels, Dubai, Düsseldorf, Frankfurt, Hanoi, Ho Chi Minh City, London, New York, Shanghai, Singapore, Taipei and Yangon, as well as Japan offices in Tokyo, Osaka, Nagoya, Fukuoka and Sapporo, and associate offices in Jakarta, Kuala Lumpur and Manila.

Navigating the Evolving Landscape of Construction Law in Japan

Japan’s construction industry is undergoing a profound transformation, driven by new energy policies, global investment trends and an increasingly complex regulatory environment. From offshore wind farms and data centres to cutting-edge semiconductor and electric vehicle (EV) manufacturing facilities, today’s infrastructure projects are larger in scale, more technically sophisticated, and markedly more international.

In this dynamic context, the need for legal professionals who can bridge the gap between international standards and Japan’s unique legal and regulatory framework has never been greater. Nishimura & Asahi’s construction law practice group draws on extensive industry insight and practical experience to assist clients with all phases of the project life cycle – from contract structuring and risk allocation to regulatory compliance and dispute resolution.

This article examines some key legal developments shaping construction contracting in Japan, with particular focus on the increasing use of engineering, procurement and construction (EPC) delivery models, the growing involvement of foreign contractors, the introduction of statutory requirements governing price adjustment clauses, and emerging challenges (such as community opposition to major developments).

The Influence of New Types of Projects on Japanese Construction Contracts

Traditionally, most infrastructure projects in Japan have been funded by corporate or public sources, and domestic standard form construction contracts were generally considered sufficient to manage construction risks. This trend changed significantly with the introduction of the Feed in Tariff (FIT) scheme for renewable energy in 2011, which led to the development of Independent Power Producer (IPP) projects utilising non-recourse or limited-recourse financing. This increased reliance on project finance, in turn, has driven a rise in the use of turnkey EPC contracts. Given the historically limited number of turnkey EPC projects in Japan, many of these contracts have increasingly been drafted with reference to international models, such as the FIDIC Silver Book and Yellow Book.

Since the late 2010s, Japan has seen a rapid expansion of new types of construction projects – offshore wind farms, data centres, semiconductor facilities and EV plants – largely driven by government efforts to attract investment. Several key characteristics of these new projects are significantly influencing the globalisation of Japanese construction contracts.

First, there is a heightened need to establish extensive, complex risk-sharing arrangements clearly within the contract documents, which differs from traditional domestic projects in Japan. For instance, the risks inherent in offshore wind projects include hazards associated with offshore construction work, delays or cost increases due to Marine Warranty Surveyors, weather and sea conditions, and the limited availability of specialised vessels.

Second, there has been a substantial increase in the participation of foreign companies, both as owners and as contractors, which affects the style of construction contracts. This has led to a growing demand for contractual frameworks that reflect international standards, such as those based on FIDIC, which are more familiar to overseas stakeholders.

Third, and particularly in the wind power sector, the increasing involvement of foreign contractors in both the design and construction phases triggers certain regulatory concerns. When these overseas contractors are engaged, it is crucial to ensure compliance with local regulations, such as Japan’s Construction Business Act (CBA). For example, foreign contractors involved in assembling wind turbines may fall within the scope of the CBA and therefore require a domestic construction licence. However, where their role is limited to technical guidance, there may be grounds for an exemption from this requirement. Therefore, it is necessary to carefully assess which activities foreign contractors may undertake without a licence, and when a licence will be required under Japanese law. If a foreign contractor does pursue a domestic licence, it must employ experienced, qualified engineers in order to satisfy the requirements of the CBA, and must assign them to local projects – an obligation that presents significant challenges.

The importance of a Japanese legal perspective

As construction contracts in Japan become increasingly internationalised, it remains essential to localise the contracts, taking into account Japan’s unique legal and regulatory framework. One key example is the CBA, which applies to all construction work in Japan on a mandatory basis and imposes detailed requirements on both primary construction contracts and subcontracts – requirements that are relatively uncommon in other jurisdictions. An example is the mandatory inclusion of certain statutory clauses, such as those governing adjustments to the contract sum in response to price fluctuations.

Therefore, even when adopting internationally recognised contract models for projects in Japan, it is critical to conduct a thorough review from the perspective of Japanese law to ensure compliance and avoid legal and operational risks.

Price Fluctuation Clauses in Construction Contracts

In recent years, the global construction industry has seen a sharp rise in the cost of materials. Japan is no exception. Domestic contractors are seeking adjustments to contract sums, in response to inflationary pressures, with increasing frequency. This trend has led to more frequent and more intense negotiations between owners and contractors, and further highlights the importance of price adjustment clauses in construction contracts. This section will discuss how these clauses are typically handled in Japanese contract practice, particularly by comparison to international standards.

International contract standards

In many international standard construction contract forms, price adjustments are typically calculated using predetermined formulae. One well-known example is the FIDIC Red Book (1999 edition), which allows for adjustments based on specified indices when a “table of adjustment data” is included. Sub-Clause 13.8 of the FIDIC Red Book provides that adjustments shall be made according to changes in indices relating to labour, equipment and material costs, as designated in the table of adjustment data. The benefit of this formula-based approach is clarity and predictability: once the indices and formulae are agreed upon, the amounts of any adjustments can be calculated without further negotiations between the parties.

However, formula-based mechanisms also have potential pitfalls. Rapid or extreme price changes may not be captured adequately by indexation. Actual market prices may diverge significantly from the published indices. In some cases, suitable indices may not exist. These issues limit the flexibility of this method and may leave one or both parties exposed to financial risk despite the presence of an adjustment mechanism.

Standard contract forms in Japan

By contrast, construction contracts in Japan tend to favour a more discretionary and flexible approach. The most commonly used contract form in Japan is the “General Conditions of Construction Contract”, or minkan (nanakai) rengoukyoutei kouji ukeoi keiyaku yakkan in Japanese. This form contains provisions that permit price adjustments under certain circumstances.

Article 29(1)(e) states that, if, “during the term of the Contract, the Contract Sum has become apparently inappropriate and improper due to an enactment, revision, or abrogation of any law, ordinance, or regulation, drastic change in economic conditions, or any other unforeseeable cause”, either party may request an adjustment.

Similarly, Article 29(1)(f), which applies to long-term contracts, allows either party to request a revision if, after the first anniversary of the contract, “the amount of the Contract Sum corresponding to any portion of the Work that shall have been executed hereunder... is inappropriate and improper due to an enactment, revision, or abrogation of any law, ordinance, or regulation or due to any change in commodity prices, wages, and other such matters”.

The contract further provides guidance on how to calculate adjustments. Article 29(2) states: “In adjusting the Contract Sum, the amount of adjustment for decreased or omitted portions of the Work shall be determined based on the unit prices stated in the Schedule of Values confirmed by the Administrative Architect and for increased portions based on the market prices at the time of adjustment unless otherwise agreed upon by the parties hereto.”

While the exact wording may vary, other standard forms commonly used in Japanese private-sector projects adopt similar mechanisms.

While this approach offers flexibility, it also introduces ambiguity. The meanings of terms such as “apparently inappropriate and improper” and “drastic change in economic conditions” are not clearly defined, nor does the contract specify the point in time with or at which price comparisons should be made. Moreover, there are no automatic calculations; the amounts of any adjustments are to be agreed upon by the parties through negotiations. This can make the process less efficient than the index-based method used in international contracts, but allows for broader consideration of circumstances that may not be captured by rigid formulae.

Recent developments

Contractors have struggled to negotiate revisions to contract sums due to the vagueness of the Japanese standard forms. In response, there has been a recent tendency to supplement the price fluctuation clauses in standard forms by providing examples of reference indices and specifying negotiation procedures. However, this approach is still evolving, and no established practice has emerged.

Regulatory considerations

From a legal perspective, it is also important to consider the requirements imposed by Japan’s CBA. This statute applies to all construction projects in Japan, regardless of the terms agreed upon by the parties. Article 19-3 of the CBA provides that an owner must not exploit its superior bargaining position to agree a contract price that is lower than the cost ordinarily required to perform the construction work in question. This provision seeks to protect contractors against unfair pricing pressure, and can be relevant when disputes arise about cost increases due to inflation or supply chain disruptions.

For a more detailed discussion of the recent amendments to the CBA, please refer to Overview of the 2024 Amendments to the Japanese CBA below.

Summary

Whether you are, or represent, an owner or a contractor, it is essential to understand how price adjustment clauses operate in the context of Japanese law and practice. Engaging proactively with these provisions, and anticipating how they may be triggered or interpreted, can reduce the risk of disputes and help to maintain fair and balanced contractual relationships in a volatile economic environment.

Overview of the 2024 Amendments to the Japanese CBA

Japan’s construction industry has long faced structural challenges – including low wages, excessive working hours and a persistent labour shortage. In response, significant amendments to the CBA were enacted in June 2024 (the “Amended CBA”). These reforms aim to improve labour conditions, promote fair pricing and enhance overall productivity. The changes are also expected to have a substantial impact on the drafting and negotiation of construction contracts in Japan.

Key areas of reform include the following.

Improving treatment of workers and labour cost standards

Estimate requirements

Contractors are now required to make efforts to prepare a written estimate – including material costs, labour costs and other necessary items – to ensure the proper execution of construction work. This estimate, referred to as an “Estimate with Material Cost, etc”, must not fall significantly below the normally recognised necessary amount (Amended CBA, Article 20, paragraphs 1 and 2).

Owners must take the contents of these estimates into consideration when entering into contracts, and are prohibited from demanding changes that would result in materially inadequate pricing (Amended CBA, Article 20, paragraphs 4 and 6).

On the other hand, owners are obligated to make efforts to consider the content of the Estimate with Material Cost, etc when entering into a contract (Amended CBA, Article 20, paragraph 4) and must not request changes to the Estimate with Material Cost, etc that would result in amounts significantly lower than the normally recognised necessary amount (Amended CBA, Article 20, paragraph 6).

Ban on below-cost contracts

As mentioned previously, owners must not exploit a superior bargaining position to force agreement to, or to obtain, a contract price that is lower than the cost ordinarily required to perform the relevant construction work (CBA, Article 19-3). The Amended CBA also prohibits contractors from entering into contracts in which the contract price falls below the normally recognised necessary cost of carrying out the relevant construction work, unless legitimate reasons exist, such as the contractor’s ability to use cost-effective, in-house materials (Amended CBA, Article 19-3, paragraph 2).

(Note: as of 22 May 2025, this amendment has not been enacted, and the date of its entry into force remains undecided.)

Prohibition of unrealistically short completion period

Contractors are prohibited from entering into contracts in which the time for completion of the work is significantly shorter than what is realistically required for the relevant construction work (Amended CBA, Article 19-5, paragraph 2).

(Note: as of 22 May 2025, this amendment has not been enacted, and the date of its entry into force remains undecided.)

Mandatory contract price adjustments due to cost fluctuations

Adjustment clauses

Construction contracts must now include clauses that clearly outline how contract prices will be adjusted in response to changes in costs. Specifically, they must set forth the method(s) of calculating any such adjustments (Amended CBA, Article 19, paragraph 1, Item 8).

Risk notification obligations

Before entering into a contract, contractors are required to notify owners of foreseeable risks – for example:

  • shortages or delays in the supply of key materials and equipment, or substantial increases in their prices, caused by natural disasters or other force majeure events; and
  • shortages in the supply of labour or significant increases in labour costs for specific types of construction work – also resulting from natural disasters or other force majeure events – that could impact the contract price or construction schedule.

They also must provide the necessary information to ensure that the owners can understand the relevant risks (Amended CBA, Article 20-2, paragraph 2).

Good faith renegotiation

If these risks materialise after execution of a contract, contractors may request changes to the completion date, scope of work or contract price in accordance with the agreed-upon calculation method. Owners are obligated to engage in good faith discussions unless there are legitimate grounds for refusal (Amended CBA, Article 20-2, paragraphs 3–4).

Summary

The Amended CBA directly addresses long-standing issues in Japan’s construction sector, particularly the downward pressure on pricing and labour standards historically imposed by top-tier contractors. These reforms prohibit below-cost contracting and mandate fair treatment of workers – regulatory measures that are notably stringent by international standards.

Beyond these core reforms, the Central Council for Construction Business has been tasked with issuing benchmark labour cost standards, to promote consistent, equitable compensation across the supply chain. The Japanese government will also issue updated guidelines to enhance on-site management and encourage digitalisation and the adoption of modern construction technologies.

The CBA applies on a mandatory basis to all construction and building contracts in Japan, and imposes detailed regulations on the form and content of those agreements. These provisions represent significant limitations on the principle of freedom of contract under Japanese law. Accordingly, all stakeholders involved in construction projects in Japan must consider the Amended CBA carefully – particularly the frameworks governing contract price, time for completion, and price adjustments – when preparing and negotiating construction contracts.

Opposition From Local Residents to Construction Projects in Japan

In recent years, a growing number of construction projects in Japan – such as data centres, industrial plants and renewable energy facilities (eg, solar farms) – have faced strong opposition from local residents. Concerns typically revolve around noise, vibrations, black smoke and other environmental impacts generated by these proposed developments. For example, in Nagareyama City, Chiba Prefecture, a data centre project was reportedly cancelled after sustained opposition from residents.

Legal framework governing noise and vibration

Noise and vibration caused by facilities, including plants, factories and construction sites, are regulated by the Noise Regulation Law, the Vibration Regulation Law, and other relevant laws and regulations enacted by central and local governments in Japan.

Pursuant to these laws and related regulations, facilities that install “Specified Equipment” – machinery, such as air compressors or blowers, that is likely to generate significant noise or vibrations – may be designated “Designated Plant(s)”. Once so designated, the relevant facilities are subject to certain relevant laws and regulations that govern designated areas, as determined by prefectural governors or city mayors.

Operators of Designated Plants must comply with regulatory standards established by local authorities (“Regulatory Standards”) within the baseline criteria established by the Minister of the Environment. These standards vary depending on the classification of the area and the time of day. In addition, installation of Specified Equipment requires prior notification to the relevant local authority.

If a governor or mayor determines that a Designated Plant does not comply with the Regulatory Standards and adversely affects the surrounding environment, the relevant authorities may issue strong recommendations to the operator or other responsible party. These may include revising noise and vibration prevention measures, modifying the operation or placement of the equipment, or making other adjustments.

Given this regulatory landscape, compliance with the applicable standards must be ensured at the planning, design and construction stages. Close, early consultations with relevant experts and local government officers are vital.

However, the application of these laws is not always clear-cut. Owing to certain ambiguities in interpretation of the relevant statutes, there may be uncertainty as to whether a specific facility qualifies as a Designated Plant. These interpretative uncertainties can create risks in the planning and permitting process and may trigger objections or disputes later on. Therefore, reaching a clear agreement with, or obtaining authoritative guidance from, relevant local authorities at an early stage is crucial. Early clarification helps reduce legal uncertainty and mitigate the risk of opposition from residents during or after construction.

Engagement with local residents and municipal governments

When local opposition arises based on environmental concerns, municipal governments often prioritise addressing residents’ complaints. The government may adopt interpretations of laws and regulations that favour residents and request substantial changes to construction plans, including adjustments to designs, specifications or construction methods.

These requests can significantly increase project costs and delay implementation. In a worst-case scenario, if disputes are not resolved amicably, the municipal government may issue administrative guidance (gyōsei shidō). If the issues persist, this may escalate into a legally binding administrative disposition (gyōsei shobun). Should such a disposition be imposed, the project owner, operator or contractor is able to contest it through litigation, but this can take several years to resolve.

Moreover, even when a project complies with all applicable regulations, continuing opposition from residents may damage the project’s reputation and disrupt operations. Therefore, it is advisable for project proponents to build trust with the community early in the process – for example, by organising town hall meetings to explain environmental protection measures and addressing local concerns proactively.

Recent developments and best practices

The 2023 amendment to the Act on Special Measures Concerning Procurement of Electricity from Renewable Energy Sources by Electricity Utilities represents an important development in this area. The amendment requires the operators of certain renewable energy projects, including solar power developments, to hold explanatory sessions with local residents as a condition of obtaining government approval.

Some local governments are also adopting proactive policies to guide developers. For instance, in April 2025 Tokyo’s Koto Ward implemented a “Policy on Data Centre Construction”, which mandates the early posting of signs to inform nearby residents of planned construction, as well as requires that advance explanatory meetings be held with the community.

Summary

With the rise of environmentally sensitive construction projects in Japan, successful implementation now requires not only compliance with technical regulations but also careful, proactive engagement with local communities and governments. Developers are strongly advised to seek early legal and regulatory clarity, conduct transparent communications with residents, and embrace best practices in community relations to ensure project viability and long-term operational stability.

Nishimura & Asahi

Otemon Tower
1-1-2 Otemachi
Chiyoda-ku
Tokyo 100-8124
Japan

+81 3 6250 6200

+81 3 6250 7200

t.murata@nishimura.com www.nishimura.com/en
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Law and Practice

Authors



Mori Hamada & Matsumoto has a construction practice that extends from traditional construction transactions to complex construction transactions involving fund structures with a special-purpose vehicle or a trust, including investment structures for overseas investors, backed by significant experience of real estate transactions. The team’s work in this practice primarily includes the following: acquisition of land for construction, advising on construction-related agreements, structuring and fund formation for construction projects, and financing for construction. Recent highlights include advising an US-based data centre developer on the formation of a joint venture for hyperscale data centres, advising on hotel construction projects in Okinawa, Kyoto and Niseko, and advising on many other construction projects, including Urban Redevelopment Projects.

Trends and Developments

Authors



Nishimura & Asahi is one of Japan’s largest full-service international law firms. With more than 900 professionals globally (including some associate and alliance offices), the diversity and depth of expertise offered by its world-class lawyers are singular. Leveraging its global network, including associate and alliance offices, the firm provides a full suite of cross-border legal services throughout its network. It has a presence in Bangkok, Brussels, Dubai, Düsseldorf, Frankfurt, Hanoi, Ho Chi Minh City, London, New York, Shanghai, Singapore, Taipei and Yangon, as well as Japan offices in Tokyo, Osaka, Nagoya, Fukuoka and Sapporo, and associate offices in Jakarta, Kuala Lumpur and Manila.

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