Please enjoy this blog post written by Kenji Miyagawa, Special Counsel, Anderson Mori & Tomotsune
Generally speaking, e-contracts executed by e-signatures are valid, binding and enforceable under Japanese law. Accordingly, the validity of e-contracts is not an issue except for in certain limited cases (e.g., certain types of real estate lease contracts).
One key issue is the admissibility of e-contracts as evidence, i.e., whether or not e-contracts are admissible as evidence under the Code of Civil Procedure.
In this regard, the Act on Electronic Signatures and Certification Business which came into effect on April 1, 2001 (the “E-signature Act”) provides statutory support for the use of e-signatures.
In order to resolve the uncertainties surrounding the interpretation of the E-signature Act, three main Q&As have been published by the relevant government ministries in 2020. Due to such strong support by the ministries, the legal framework related to e-signatures has become much clearer in Japan.
- Technology, Practical and Commercial Considerations
Affixing e-signatures is one of various ways to ensure that an e-contract has been duly executed. It would be practical to mitigate risks of future disputes by conducting due diligence and/or maintaining proper evidences in respect of various facts prior to and/or after execution of an e-contract.
Based on the above consideration, various types of approaches have been taken by Japanese companies in order to mitigate practical risks related to e-contracts. Examples of such approaches include the three approaches set out below.
E-contracts are categorized as high, middle and low risk e-contracts depending on the risks associated with such e-contracts. The risks are analyzed based on various factors (e.g., whether there is a relationship of trust with the counterparty, whether the contract amount is high, and whether the contract contains sensitive information). Companies can choose the appropriate type of e-signatures to use depending on whether the e-contract falls into the high, middle, or low risk category.
Companies can (a) conduct proper due diligence on the counterparty and (b) collect evidences showing the counterparty’s official intent to execute e-contracts (e.g., KYC, maintaining documentation and/or correspondence (e.g., e-mails) relating to the negotiation process as evidence, maintaining evidence of the signatory’s authority (such as a POA or board resolution).
Companies would be able to use a simplified e-signature (which does not require strict authentication procedures) on the basis that such companies can secure a certain level of comfort based on the above due diligence and other evidences.
Companies can execute a paper-based umbrella agreement or a paper-based POA by using the official seals of both parties (which is consistent with the conventional way of executing contracts in Japan) under which the parties agree on the details of the execution process for all future e-contracts.
Companies can then execute e-contracts in accordance with the terms and conditions of such paper-based umbrella agreement or POA.
It is true that certain types of contracts among Japanese companies are still executed by affixing the registered seal of each contract party to the contract. On the other hand, due to the COVID-19 pandemic, the switch from using seals to e-signatures has now been recognized as an important driver for the digital transformation (DX) of the Japanese economy. The Japanese Government plans to set up a new Digital Agency in 2021 which will be a key driver of DX in coming years.
There are challenges ahead in order for both of the public and private sectors in Japan to achieve complete DX in respect of contracts, governmental procedures and civil procedures. However, such challenges can be resolved by the joint efforts of the public and private sectors in Japan. Examples of such challenges are summarized as follows:
- Issues Concerning Cyber Security Risks
Cyber security risks are currently a focus of concern due to various cyber security incidents that have occurred in Japan. In respect of e-signatures, it is important for a company to conduct the proper KYC procedures before it executes e-contracts with a new counterparty.
- Use of e-Signatures Provided by Different e-Signature Service Providers
There are many e-signature service providers which currently provide different forms of e-signatures. Each of the parties to e-contracts may choose different e-signature service providers due to their internal policies. In such cases, it would be ideal if the e-contracts could be executed by e-signatures provided by different e-signature service providers without any adverse consequences.
- Use of e-Signatures in Respect of Cross-Border Contracts
A cross-border contract is typically executed by the exchange of the signature pages in PDF format. However, if the parties would like to execute a cross-border contract by using e-signatures, the validity and due execution of such e-contract would need to be carefully reviewed from a conflict of laws perspective.
Please refer to our newsletter published in December 2020.