Akio Hoshi is an Associate Professor at Gakushuin University in Japan, where he teaches courses of Business Law, Comparative Corporate Law, Corporate Finance Law and Economic Analysis of Law. His research focuses on corporate governance, corporate takeovers, law & finance and private deal-making. Prior to joining the Gakushuin Faculty in 2015, he was engaged in private legal practice with a special focus on cross-border M&A transactions for over seven years at Nishimura & Asahi, the largest law firm in Japan. He holds a Bachelor’s degree in Law from the University of Tokyo, a Master’s degree in Law from Harvard Law School, and a Master’s degree in Finance from the University of Cambridge.
Knowledge of Corporate Party in Contractual Liability: An Analysis of Japanese Law and interpretation from Function‐Based Approach
Knowledge of a corporate party to a sales agreement often becomes an issue in contract disputes. For example, Japanese law disallows a seller from disclaiming his warranty against defects if he knew the defects and did not disclose them to a buyer (Article 572 of the Civil Code). Also, it does not apply the six-month limitation of a buyer’s inspection and notice, which is required in advance of its warranty claims, to the defects known by the seller (Article 526, Paragraph 3 of the Commercial Code). Using knowledge as a sorter of the seller’s liability may not be an issue if he is an individual, but in the modern business transactions, the parties to many contracts are corporations. Such a fact creates a legal issue of which individual’s knowledge within a corporation a court should look at in the disputes of the seller’s knowledge.
Japan’s old cases and scholarly commentaries resolved the issue in the frame of agency law and asserted that the knowledge of a corporation’s representative(s) should be deemed that of the corporation. This formulation, however, does not fit the reality of the information processing within modern corporations. There, information is generally processed by many internal departments, shared among only the relevant individuals and stored in the form of records, and not necessarily reduced to the knowledge of their representative(s). In the paper, the author analyzes Japan’s recent lower court cases where a corporate seller’s knowledge was disputed and claims that they do not necessarily look at the knowledge of corporate representatives but instead carefully scrutinize actual information processing within the organization. In light of the analysis of those cases and the economic theory of business organizations, the author presents a better formula to judge whether a corporate party knew the relevant facts in contract disputes.