Practical Guide to Contract Termination Notices: Procedures for Termination With and Without Demand, and How to Draft the Notice

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

In practice, whether a contract termination is effective can depend not only on the wording of the contract clauses but also on the procedure and content by which the declaration of termination was communicated. Termination with demand under Article 541 of the Civil Code presupposes a demand for performance that sets a reasonable period, so defects in the period set or in the wording of the notice can lead to later disputes over whether the termination succeeded. Once you have finished checking the clauses, you move to the practical phase of deciding what kind of notice to prepare and how to make sure it reaches the counterparty.

Criteria for Termination With Demand and Termination Without Demand

When proceeding with a contract termination, first sort out whether the case requires a demand or allows immediate termination without one. The main text of Article 541 of the Civil Code provides that if one party fails to perform its obligation, the other party may demand performance, setting a reasonable period, and may terminate the contract if performance is not made within that period. However, termination is not permitted if, at the time the demand period has elapsed, the non-performance is minor in light of the contract and socially accepted norms in the transaction. What is assessed here is the degree of non-performance remaining when the period elapses; minorness is not judged by looking only at past delays. In addition, under Article 543 of the Civil Code, if the non-performance is due to grounds attributable to your own company, termination under Articles 541 and 542 is not permitted.

Article 542(1) of the Civil Code, which provides for termination without demand, lists cases such as where performance of the entire obligation has become impossible, where the counterparty has clearly expressed an intention to refuse performance in its entirety, where the date for a fixed-date performance has passed, and where it is clear that there is no prospect of performance sufficient to achieve the purpose of the contract even if a demand is made. Where there is only partial impossibility or partial refusal of performance, terminating the entire contract under item (iii) of paragraph 1 of that Article on that ground requires that the purpose of the contract cannot be achieved with the remaining part alone. Paragraph 2 of the same Article permits partial termination for partial impossibility or refusal. Even if the contract contains a clause permitting termination without demand, a business partner's single statement that "we can't pay this month" will not necessarily be recognized as a definitive refusal of performance, and it is important to check whether the facts satisfying the requirements for termination are in place.

The Reasonableness of the Demand Period and How to Set It

If you choose termination with demand, the demand letter states the obligation whose performance is demanded and the period for performance. There is no fixed statutory number of days for the "reasonable period" under Article 541 of the Civil Code. The reasonable period is determined case by case from the nature of the obligation, the history of the transaction and the realistic time the counterparty needs to prepare for performance. For payment of a monetary obligation, a relatively short number of days is often sufficient, whereas demanding repair or remanufacture of deliverables requires a number of days commensurate with the work.

If the period is too short, consider whether termination is possible and when it takes effect in light of subsequent events. Conversely, there may be circumstances in which the longer you wait, the harder it becomes to recover assets, so consider both the time needed for performance and your company's recovery risk. Also keep a record of exchanges with the counterparty so that the reason for the period chosen is clear.

What to Include in a Termination Notice, and Conditional Termination in Practice

A termination notice sent when performance has not been made even after the demand period has elapsed should include the following, with later proof in mind.

• Identification of the contract concerned (title of the contract, date of execution, names of the parties)
• Specific facts of the counterparty's non-performance
• The date of the demand letter already sent and how performance was not made
• The contract clause or Civil Code provision on which the termination is based
• The effective date of the termination
• Demands regarding settlement and restoration to the original state

These items are included so that the content and basis of the notice can be verified later. Although there is no uniform statutory form, also check the notice items specified in the contract and write so that the counterparty can understand the reasons for termination. In practice, a termination notice subject to a condition precedent is also used, combining the demand letter and the termination notice into one: "If performance is not made within [X] days after this letter reaches you, the contract is hereby terminated by this letter." This method saves the trouble of sending two letters, but if the condition is worded ambiguously, the time when the termination takes effect tends to become unclear, so state the deadline and the declaration of termination clearly and separately.

Means of Proving Delivery and Choosing the Method of Sending

A declaration of termination follows the arrival principle and takes effect from the time it reaches the counterparty (Article 97(1) of the Civil Code). Arrival does not always require that the counterparty actually opened and read it; it means that the declaration has entered the counterparty's sphere of control and been placed in a state in which it can objectively be known. If the counterparty prevents arrival without justifiable reason, the declaration is deemed to have arrived at the time it would normally have arrived (Article 97(2) of the Civil Code). That said, whether arrival can be deemed immediately in cases of refusal to accept or expiry of the holding period for undelivered mail depends on the specific circumstances of the case.

Japan Post's certified-content mail, used as a means of sending, is a system that certifies the existence and content of a document and the date it was sent; it does not certify delivery to or arrival at the counterparty. As material showing the fact and date of delivery, add delivery certification. Using certified-content mail with delivery certification leaves a record of both the text sent and the date it reached the counterparty. If the mail is returned because of refusal to accept or the like, no delivery certificate is issued, so keep the notes attached to the returned envelope and the postal tracking records as evidence.

When sending notice by email or a chat tool, keeping only the sending logs leaves room for dispute over whether it reached the counterparty's server. Where the contract contains an agreement on written notice, the general rule is to follow that agreement, but even without such an agreement, one option is to also use certified-content mail with delivery certification to prevent disputes over arrival.

Organizing Restoration to the Original State and Settlement Terms on Termination

When a contract is terminated, the parties owe an obligation to restore the original state, but the rights of third parties may not be prejudiced (Article 545(1) of the Civil Code). When returning money, interest from the time of receipt must be added (paragraph 2 of the same Article), and a claim for damages is not precluded (paragraph 4 of the same Article). Whether damages are recognized is determined separately according to the provisions on which the claim is based and the requirements of the contract. Termination of a continuing contract may take effect only for the future, and payment obligations such as unpaid consideration before termination may remain.

The notice should state specifically the settlement of advance payments, the deadline for returning delivered deliverables and loaned items, and procedures for disposing of confidential information and personal data. In doing so, the practical key is to take into account exceptions such as books and records that must be retained by law, and to proceed with settlement in line with the survival clauses that remain in effect after the contract ends. How to read the termination clause itself is covered in What to Check When Reviewing Termination and Early Cancellation Clauses.

Frequently asked questions

Is it necessary to make a demand for performance before terminating a contract?

As a rule, a demand is required, but where performance has become wholly impossible or the counterparty has clearly refused to perform the whole obligation, the contract can be terminated immediately without a demand. This is because Article 541 of the Civil Code requires a demand that sets a reasonable period, while termination without demand is permitted where there are grounds such as the total impossibility of performance or a clear refusal to perform as provided in Article 542. However, it is understood that the contract cannot be terminated where the non-performance is minor or where it is attributable to your own company.

How should the "reasonable period" for termination with demand be set?

It is set by judging the individual circumstances, based on the nature of the obligation, the course of dealings, and the realistic time the counterparty needs to prepare for performance. This is because the law does not provide a fixed number of days. For payment of a monetary obligation, a relatively short period is often sufficient, whereas repairs to deliverables and the like require a period commensurate with the work. I think the time needed for performance and your company's collection risk should be considered together.

When sending a notice of contract termination, can delivery be proven simply by using certified-content mail?

Certified-content mail alone cannot prove the fact that the notice reached the counterparty. This is because certified-content mail is a system that only certifies the existence of the document, its contents, and the date it was sent. Since a termination notice takes effect when it reaches the counterparty, sending it with delivery certification added, which proves the fact and date of delivery, is likely to prevent later disputes over whether and when it arrived.