Contracts and Doing Business in Japan: A Practical Guide

Jeffrey Shimamoto, Head of Legal Content
July 27, 2023

Contracts serve as vital bridges across borders, cultures, and legal systems when doing business internationally.

Recently, LegalOn Technologies was recognized as part of the prestigious Innovation Showcase at the Japan-US Innovation Symposium, celebrating the strong links between Silicon Valley and Japan. Notable past award recipients include Zoom, Dropbox, Square, and Tesla.

As an international lawyer with over twenty years of experience in contract drafting, business strategy, and regulatory compliance, I have had the opportunity to work across borders, particularly in Japan and the United States. Throughout my career, I’ve been a partner in strategic business ventures, providing legal guidance and navigating different legal systems.

Here, I’ll share insights for US lawyers on doing transactions in Japan. I also write about how AI contract review technology can facilitate and scale business internationally.

Jeff is pictured near the Arashiyama Bamboo Forest during a recent trip to Kyoto.

Lawyering across the Pacific

International lawyering across countries is an intricate task, with challenges grounded in cultural differences, language barriers, and legal systems that vary from country to country.

Understanding and adapting to cultural differences is essential for fostering great relationships and smooth negotiations. For example, Japanese corporate culture often leans towards a collective decision-making process that values established relationships. In contrast, American businesses typically have decision-making hierarchies with more emphasis on key leaders and less on consensus. US lawyers should approach negotiations with high cultural sensitivity, considering Japan’s focus on building relationships and consensus. By staying updated on Japanese laws and regulations that impact their clients’ international transactions, US lawyers can have a more effective impact on the deal and gain the respect of their Japanese counterparts.

Language barriers, too, can pose a significant hurdle. Mastery of legal terminology in both languages is crucial, but so is understanding the nuances and idiosyncrasies of each language. For those with an overseas office or a parent or subsidiary in Japan, working with local legal experts who are well-versed in both English and Japanese legal terminology can assist in providing accurate analysis and interpretations of contract clauses, mitigating the risk of miscommunication or misunderstandings.

Additionally, each country has its defined legal system. For instance, the American legal system is based on common law, while the Japanese legal system is based on civil law. In this context, Japanese lawyers’ expertise lies in navigating the Japanese legal system and employing a comprehensive understanding of case law and statutes to build persuasive legal arguments. On the other hand, lawyers in the United States often serve a broader range of functions. In-house lawyers, in particular, are actively involved in corporate matters, providing legal advice, drafting contracts, managing regulatory compliance, and advising on business strategies.

Cross-border legal work requires constant learning and adaptation to a different legal system and cultural practices. US lawyers should consult legal experts and scholars specializing in Japanese law. Conferences, webinars, and academic seminars provide opportunities to interact with professionals who can offer insights into the intricacies of the Japanese legal system. Further, building a network of contacts in the international legal field can be beneficial in seeking guidance and advice when navigating cross-border transactions.

Commonalities and Differences between Contracting in Japan versus the United States

Despite being grounded in different legal systems, contracts in Japan and the US share certain commonalities. Both countries emphasize the importance of clear and mutually agreed-upon contract terms.

Notable differences arise in the interpretation of contracts. Japanese courts tend to interpret contracts less literally, focusing on the overall intent of the contract. As a result, American-style contracts may not operate in the Japanese jurisdiction as expected, leading to potential misunderstandings and disputes. It is essential to avoid overly complex language or ambiguous terms that may lead to varying interpretations. Instead, contracts should be drafted with a focus on expressing the parties' specific intentions. Seeking the assistance of legal experts who understand the nuances of the relevant legal systems can help ensure that the contract language is clear and accurately reflects the parties' intent in both jurisdictions.

Dispute resolution practices between the US and Japan also differ due to contrasting legal systems and cultural norms. Litigation is common in the US, while alternative dispute resolution methods, such as mediation and arbitration, are more prevalent in Japan. For contracts involving Japanese parties, US lawyers may consider incorporating alternative dispute resolution methods like mediation or arbitration to align with Japan's preference for such practices.

How AI Contract Review Can Help

AI contract review can support legal teams doing deals internationally that involve distinct cultural contexts, legal jurisdictions, and legal issues. By flagging potential contract risks, AI can help reduce the complexity inherent in cross-border legal work.

Here are a few examples of how AI can help:

  • Dispute Resolution: AI can analyze the dispute resolution clause in a contract and flag any language that may have implications in cross-border transactions, including venue and alternative dispute resolution methods.
  • Compliance with Export Laws and Regulations: International transactions often require compliance with export laws and regulations. AI can assist by flagging export control and compliance terms, ensuring alignment with relevant export laws in both the originating and receiving countries.
  • The United Nations Convention on Contracts for the International Sale of Goods (CISG): AI can recognize and analyze terms related to the CISG, an international treaty that governs contracts for the sale of goods between parties from different countries.
  • Anti-Corruption: International transactions may involve compliance with anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act (FCPA), Japan Unfair Competition Prevention Act, or the UK Bribery Act. AI can flag terms that pertain to anti-corruption measures, helping lawyers ensure that the contract adheres to the relevant anti-corruption laws and mitigates potential risks related to bribery and corruption.

At LegalOn, we’ve trained our AI to identify potential risks and omissions of these principles. In addition, LegalOn provides helpful practice notes written by seasoned attorneys to help explain why these risks matter and possible ways to mitigate them.

Conclusion: The Future of Cross-Border Legal Work

As more businesses, especially software businesses, scale globally, in-house legal teams increasingly confront cross-border legal work, including contract drafting and negotiation. Navigating differences in legal systems, cultural norms, and decision-making processes among countries can pose challenges, and successful in-house legal teams understand and manage these differences well.

AI contract review technology can help legal teams reduce the complexity and potential contract risks in international transactions. If you’re interested in learning more about how LegalOn’s AI can help by identifying risks and providing guidance content, please reach out. We’d love to tell you more and share more insights on doing business internationally, especially in Japan. 

Disclaimer: LegalOn is neither a law firm nor an attorney and is not a substitute for the advice or services of an attorney. The information provided in this blog post is for general informational purposes only and does not constitute legal advice.

About LegalOn
LegalOn Technologies is a global leader in AI contract review, trusted by over 4,500 companies and firms worldwide. Our software helps legal teams find and fix contract risks with industry-leading AI and legal guidance content purpose-built for pre-signature contract review. LegalOn operates globally with businesses in Japan and the United States. Sign up for a demo today and start negotiating stronger contracts faster.

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