JAPAN Law and Practice Contributed by: Satoru Hasumoto, Takahiro Sato and Fuyuki Uchitsu, Mori Hamada
of early termination by the tenant without cause, the court may determine that the provision is against public order and morals and therefore void because it allows the landlord to obtain an excessive amount of damages. Upon execution of a lease agreement, the tenant is usually required to pay a cash deposit as security for the payment of rent and other tenant obligations, although there are rare cases in which the landlord may allow the tenant to provide a letter of credit in lieu of a cash deposit. 7. Construction 7.1 Common Structures Used to Price Construction Projects The most typical construction price structure is the fixed-price arrangement, in which the parties agree on the price at the signing of the construction contract, taking estimated costs and expenses, as well as the contractor’s profit, into account. For a large construc - tion project, a price adjustment mechanism may be implemented to reflect fluctuations in the procurement prices of materials or services linked to the cost ele - ment of the construction price. 7.2 Assigning Responsibility for the Design and Construction of a Project Design and construction works are typically provided under separate independent agreements, ie, the own - er tends to enter into a design contract with a design company and a construction contract with a construc - tion company. Each contract’s terms and conditions are usually prepared and negotiated based on general terms and conditions provided as templates by the relevant industry associations in Japan. 7.3 Management of Construction Risk The general terms and conditions of a typical con - struction contract that are made available jointly by the pertinent industry associations (the “Form Terms and Conditions for Construction Contracts”) provide for the construction contractor’s obligation to take out insurance and for defect liability.
With respect to insurance, the Form Terms and Condi - tions for Construction Contracts require the contrac - tor to purchase and maintain fire insurance or con - tractor’s all risk insurance for the completed portion of the work, materials and building equipment and other materials delivered to the construction site. The details of the insurance coverage are left to the par - ties to agree. With respect to defect liability, the Form Terms and Conditions for Construction Contracts provide that the owner may demand that the contractor repair the defect, reduce construction fees and/or pay damages. In principle, the contractor’s liability is subject to a time limitation of one to two years, depending on the construction materials (such as wood, stone, metal or concrete). However, for a newly constructed residen - tial building, the defect liability period for certain major structural works is mandatorily set at ten years from the building’s delivery, pursuant to the Housing Quality Assurance Law (a special law aimed at ensuring the quality of residential buildings). 7.4 Management of Schedule-Related Risk Schedule-related risks can be managed by the con - tractor paying liquidated damages. These contractual arrangements are permitted under Japanese law and the courts are bound by the agreed amount of liqui - dated damages, without having to ascertain the actual damages incurred. In particular, the Form Terms and Conditions for Con - struction Contracts provide that if the contractor fails to deliver the completed work by the due date for any reason attributable to the contractor, the owner may claim liquidated damages calculated at 10% per annum of the agreed construction price (minus a por - tion of the construction price equivalent to the part of the work already completed and delivered), calculated on the basis of the number of days delayed. On the other hand, the Form Terms and Conditions for Construction Contracts allow the contractor to seek an extension of the due date for a justifiable reason, such as a force majeure event or a need to adjust the works. If the reason for the delay is not attributable to the contractor and the owner agrees to extend the due date, the owner is not entitled to liquidated damages.
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