Governing Law and Dispute Resolution in Cross-Border Contracts with Japan: Japanese vs New York Law, Arbitration and the CISG

In an international contract, decide two things separately and write both into the contract: which country's law will govern it (governing law) and where disputes will be resolved (court jurisdiction or arbitration). If the parties make no choice, a Japanese court applies the law of the place most closely connected to the contract, presumed to be the law of the place of business of the party performing the characteristic obligation, such as the seller (Act on General Rules for Application of Laws, Art. 8).

Choose the dispute resolution method by asking whether a judgment or award can actually be used in the country where the counterparty holds assets. For sales of goods, the UN Convention on Contracts for the International Sale of Goods (CISG), to which Japan is a party, may apply automatically, so decide whether to keep it or exclude it.

• An overseas customer sends an English template that says "Governing Law: New York," and you are unsure whether to accept it.
• You have traded with a long-standing partner without a written contract, and only after a payment default do you start asking which country's law governs your claim.
• As a foreign company dealing with a Japanese business, you want to know whether you can be sued in a Japanese court, or whether disputes can go to arbitration.
• You won a judgment in a foreign court, but the debtor's assets are in Japan, and you do not know whether they can be seized on that basis.

When a Japanese court hears a contract dispute, it decides the governing law under the Act on General Rules for Application of Laws (the "Conflict of Laws Act"). The formation and effect of a contract are governed by the law the parties chose at the time of contracting (Art. 7). The parties may later change their choice, but a change that harms a third party's rights cannot be asserted against that third party (Art. 9).

Without a choice, the contract is governed by the law of the place with which it is most closely connected (Art. 8(1)). Where only one party performs the characteristic obligation, meaning the obligation that defines the contract, such as delivering goods in a sale, the law of that party's place of business is presumed to be the most closely connected law (Art. 8(2)). For contracts concerning real property, the law of the place where the property is located is presumed (Art. 8(3)).

Suppose a Japanese parts manufacturer sells components to a German company, and the contract says nothing about governing law. The seller performs the characteristic obligation, so Japanese law is presumed to apply. Conversely, if a Japanese company outsources software development to a Singapore company, the law of the developer's place of business is presumed.

In a contract between a business and an individual consumer, even if a foreign law is chosen, the consumer may tell the business that specific mandatory rules (rules the parties cannot contract out of) of the law of the consumer's habitual residence should apply, and those rules then apply as well (Conflict of Laws Act, Art. 11(1)). Without a choice, the law of the consumer's habitual residence governs (Art. 11(2)).

Employment contracts work in a similar way. Even if the parties chose a law, the employee may tell the employer that specific mandatory rules of the most closely connected law should apply, and they then apply (Art. 12(1)). The most closely connected law is presumed to be the law of the place where the work is to be performed (Art. 12(2)).

Choosing a foreign law for an employee working in Japan does not necessarily take the relationship outside the mandatory protections of Japanese labor law. The same caution applies to cross-border consumer e-commerce. Agreements giving exclusive jurisdiction to a foreign court over future disputes also have only limited effect in consumer contracts and individual employment disputes (Code of Civil Procedure, Art. 3-7(5) and (6)).

Under New York General Obligations Law § 5-1401, parties to a contract relating to a transaction of at least USD 250,000 in aggregate may choose New York law whether or not the contract bears a reasonable relation to New York. The provision does not apply to contracts for labor or personal services, or to transactions for personal, family or household services.

Section 5-1402 adds that, for a transaction of at least USD 1 million in aggregate where the contract chooses New York law and the foreign party agrees to submit to the jurisdiction of New York courts, an action may be brought in New York courts.

Choosing a governing law does not settle where disputes will be resolved; that needs its own clause. A combination such as "Japanese law, arbitration seated in Singapore" is perfectly possible. Also note that regulations in which the state has a strong interest, such as export controls, may apply regardless of the governing law the parties choose.

Parties may agree on the country whose courts may hear their disputes (Code of Civil Procedure, Art. 3-7(1)). The agreement is effective only if it concerns actions based on a specified legal relationship and is made in writing (Art. 3-7(2)). An agreement made by electronic or magnetic record, such as email, is treated as being in writing (Art. 3-7(3)).

An agreement giving jurisdiction exclusively to a foreign court cannot be invoked if that court is unable, legally or in fact, to exercise jurisdiction (Art. 3-7(4)).

A clause naming "the Tokyo District Court as the court of exclusive jurisdiction in the first instance" limits proceedings to Japan. A non-exclusive clause leaves room for proceedings in other countries. Choose between them by thinking about whether your company is more likely to be the claimant or the defendant.

A final and binding judgment of a foreign court has effect in Japan only if all of the following are met (Code of Civil Procedure, Art. 118):

To enforce in Japan, the creditor must also obtain an execution judgment from a Japanese court (Civil Execution Act, Art. 24).

For some countries, whether reciprocity exists is unclear. In the other direction, whether a Japanese judgment can be used abroad depends on the law of that country. If you choose a forum without checking where the counterparty's assets are, you may win and still be unable to collect.

Arbitration is a process in which the parties agree to submit their dispute to arbitrators of their choosing and to be bound by the award. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) has 172 parties, and Japan acceded in 1961. Japan has declared that it applies the Convention to awards made in the territory of another contracting state.

Arbitrations seated in Japan are governed by the Arbitration Act (Art. 1). An arbitration agreement must be in writing, such as a document signed by the parties or an exchange of letters (Art. 13(2)).

If a lawsuit is filed on a matter covered by an arbitration agreement, the court must, on the defendant's application, dismiss the action, subject to limited exceptions (Art. 14(1)). An arbitral award, whether made in Japan or abroad, has the same effect as a final and binding judgment, and enforcement requires an enforcement decision from a court (Arts. 45(1) and 46).

The Arbitration Act was amended in 2023 (Act No. 15 of 2023), and the amendments took effect on April 1, 2024. The main changes are:

• Interim measures ordered by an arbitral tribunal (orders preserving assets or evidence pending the award) can now be enforced.
• In enforcement proceedings, where the court considers it appropriate, it may dispense with a Japanese translation of the award (Art. 46(2)).
• Applications such as those for an enforcement decision may now also be filed with the Tokyo District Court or the Osaka District Court.

An arbitration clause should specify the seat (which country's arbitration law supports the proceedings), the institution and rules (for example, JCAA or ICC), the number of arbitrators, and the language. If the parties do not agree on the language, the tribunal decides it (Art. 30). Arbitration is generally final in a single round and conducted privately, but arbitrator fees and institutional costs also need to be weighed.

The CISG (UN Convention on Contracts for the International Sale of Goods) unifies the rules for cross-border sales of goods. Japan acceded in 2008, and the Convention entered into force for Japan on August 1, 2009. It has 97 contracting states.

The CISG applies to contracts for the sale of goods between parties whose places of business are in different states: when those states are both contracting states (Art. 1(1)(a)), or when the rules of private international law lead to the law of a contracting state (Art. 1(1)(b)). The United States, China and Singapore have declared that they are not bound by Article 1(1)(b).

It does not apply to sales of goods bought for personal, family or household use, sales by auction, sales of shares or securities, ships or aircraft, or electricity (Art. 2). The validity of the contract and the passing of title are outside its scope (Art. 4).

The parties may exclude the CISG (Art. 6).

The CISG has its own rules on matters such as price reduction and avoidance of the contract that differ from the Japanese Civil Code, so decide whether to keep it based on the transaction.

1. 1

   Governing law

   Identify the country, and for the United States the state (Conflict of Laws Act, Art. 7).

2. 2

   Dispute resolution

   For litigation, name the court and say whether it is exclusive or non-exclusive. For arbitration, specify the seat, institution, rules and number of arbitrators.

3. 3

   Enforcement

   Identify where the counterparty's main assets are and check whether a judgment or award can be used there.

4. 4

   CISG

   For sales of goods, state whether the CISG applies or is excluded (CISG, Art. 6).

5. 5

   Language

   If there are English and Japanese versions, say which prevails.

6. 6

   Notices

   Set out addresses, contact persons, delivery methods (registered mail, email and so on) and when a notice is deemed received.

7. 7

   Interpretation

   Check the entire agreement clause (which excludes understandings outside the document) and how headings are treated.

Before accepting the other side's template, list the clauses that work against you. Because governing law and dispute resolution shape the meaning of every other clause, settle your position on them early rather than leaving them to the end.

• An overseas counterparty asks you to sign an English contract governed by foreign law.
• You receive papers starting proceedings in a foreign court or before an arbitral institution.
• You want to use a foreign judgment or arbitral award against a counterparty's assets in Japan.
• As a foreign company negotiating with a Japanese business, you want to check what Japanese law says or how enforcement would work in Japan.

Attorney Yusuke Abe of our office is qualified in Japan and admitted in New York, and reviews and negotiates contracts in both Japanese and English.

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Before a Japanese court, the contract is governed by the law of the place with which it is most closely connected (Act on General Rules for Application of Laws, Art. 8(1)). That is presumed to be the law of the place of business of the party performing the characteristic obligation, such as the seller in a sale or the service provider in a services agreement (Art. 8(2)). Because the presumption can be rebutted, it is safer to state the governing law expressly.

Under Japan's conflict-of-laws statute, parties may choose the governing law (Art. 7), including New York law. On the New York side, General Obligations Law § 5-1401 allows parties to a transaction of at least USD 250,000 in aggregate to choose New York law whether or not the contract bears a reasonable relation to the state. Contracts for labor or personal services are excluded from that provision.

The deciding question is whether a judgment or award can be used in the country where the counterparty holds assets. A foreign judgment has effect in Japan only if it meets requirements including a mutual guarantee (reciprocity) (Code of Civil Procedure, Art. 118). Arbitral awards benefit from the New York Convention's framework for recognition and enforcement among contracting states, so arbitration often gives a clearer path to enforcement, depending on the counterparty's country.

Not necessarily. Because the CISG forms part of Japanese law, most court decisions and arbitral awards hold that simply choosing the law of a contracting state does not exclude it (UNCITRAL Digest of Case Law on the CISG). If you do not want the CISG to apply, say so expressly in the contract (CISG Art. 6).

If the contract has a clause stating which language version prevails, the contract is normally read in line with that clause. Without one, the parties may end up disputing which text reflects their actual agreement. Whenever a translation is prepared, state in the contract which language controls.