What Is a Contract? The Contract Basics to Grasp First in Corporate Legal Work

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

When I receive requests for contract review, I am sometimes asked, before we get into the individual clauses, questions such as "Has a contract actually been formed here?", "Does an exchange of emails or a purchase order alone have legal effect?", and "Is a contract without a seal invalid?" These may look like elementary issues to legal staff, but for business divisions, contracts are something exchanged naturally in the course of daily work, and they do not always take the form of a "contract document." Contracts are concluded in many different settings, such as applying for a SaaS service, adjusting a delivery date over chat, or agreeing to terms of use on a website.

If you check separately whether a contract document exists and whether an agreement has been formed, and separately again internal approval and signing authority, these questions become easier to answer.

A Contract as an Agreement That Produces Legal Effects

Put simply, a contract is an agreement that creates legal rights and obligations between the parties.

Article 522(1) of the Civil Code provides that a contract is formed when the other party accepts an offer made by a person indicating the content of the contract. Under paragraph 2 of the same Article, unless otherwise provided by law, the formation of a contract does not require a particular formality such as the preparation of a written document.

Therefore, even if no formal contract document has been exchanged, a contract may have been formed if there is an offer and acceptance and the content of the contract can be identified. There are many situations in which an oral agreement, an exchange of emails, or a submission through a web form is recognized as having effect as a contract. In corporate legal practice, however, a formal check of "whether a contract has been formed" is not enough.

What matters in practice is whether you can later explain objectively who agreed to perform what, for how much and by when. In addition to forming the contract, a contract document serves as a tool for preserving the terms of the transaction as evidence and preventing discrepancies in understanding inside and outside the company.

Whether There Is a Contract Document and Its Role in Preventing Disputes

When you hear that a contract can be formed without a written document, you might think, "Then do we even need to prepare a contract?" But if the record of the agreement is not sufficiently preserved, it becomes difficult to prove the terms of the transaction if a dispute arises later.

For example, the specific scope of the work, the distinction between an obligation to deliver work product and an obligation to provide working time, the criteria and period for acceptance inspection, and the conditions under which additional costs arise are typical examples where understandings tend to diverge without a written document. Items such as the contract term and renewal provisions, whether early termination is allowed, the scope and cap of damages, restrictions on the handling of confidential information and personal information, and the ownership of intellectual property rights also tend to become vague with only oral agreements or brief emails.

While the transaction is going smoothly, such arrangements may not even be noticed. But the moment you face a problem such as a delayed delivery, dissatisfaction with the quality of the deliverable, or a leak of information, a dispute over their interpretation can arise. Contract review is not merely a matter of tidying up the wording; it is the work of identifying, before the transaction starts, the matters likely to be disputed in the future and aligning both sides' understanding.

The Difference Between the Requirements for Forming a Contract and Internal Approval Procedures

What is often confused in corporate legal work is the difference between the formation of a contract with the counterparty and internal approval within your own company. Even at a stage where internal approval, a seal application or a board resolution has not yet been obtained, a contract may be regarded as having been formed externally in relation to the counterparty. On the other hand, even if the company seal has been affixed to a contract, if this violates the internal rules on authority or approval criteria, it will be a breach of internal controls and may be called into question in a later audit or in accountability to stakeholders.

However, whether a contract with defects in internal procedures has legal effect against the company depends on factors such as whether the person who concluded it had authority of agency or the appearance of such authority, whether any approval required by law exists, and whether the counterparty acted in good or bad faith and with or without negligence. A problem with internal procedures does not necessarily make the contract invalid, nor, conversely, does it mean the contract is always valid.

In practice, therefore, it is important to check separately whether a contract has been formed externally with the counterparty, whether evidence supporting the content of the agreement has been secured, whether approval in accordance with internal rules has been obtained, whether the signatory or electronic signatory has proper authority, and whether you will be able to explain things properly for future accounting, debt collection, audits and due diligence. Growing companies in particular tend to let the order of internal approval and contract execution slip because they prioritize the speed of transactions, so you need to pay attention not only to the text of the contract itself but also to the operational procedures before and after execution.

Points to Focus on by Type of Contract, and Standard Terms

When reviewing a contract, you must bear in mind that the laws to focus on and the issues that arise in practice differ greatly by type of contract. When the type changes, such as a non-disclosure agreement, a service agreement or an investment agreement, the clauses to check and the room for negotiation also change.

In a service agreement, the main issues are whether there is a deliverable, the acceptance procedure, whether subcontracting is allowed, the ownership of intellectual property rights, and the scope of damages. In SaaS terms of use, you check the conditions for suspending the service, the rights to use data, and the rules for amending the terms. Note that not all SaaS terms fall under standard terms (teikei yakkan) under the Civil Code. After checking whether they qualify as standard terms and whether the requirements for incorporating them into the contract are met, you consider, for clauses that allow unilateral amendment without individual agreement, whether the substantive requirements and the procedures such as public notice set out in Article 548-4 of the Civil Code are satisfied. In an investment agreement, the focus is on the terms of the shares concerned, representations and warranties, preemptive rights, consistency with the shareholders' agreement, and so on.

Non-conformity liability in a sales contract requires similar consideration in a service agreement involving deliverables, and confidentiality obligations are a central item to check not only in a standalone NDA but also in M&A, development outsourcing and license agreements. Damages clauses, too, even if they look like standard boilerplate, need to be adjusted according to the size of the transaction and the significance of the information handled. In contract review, first identifying the type of contract and then reading through while sorting out the issues specific to that type and the general clauses common to all contracts is the shortest way to avoid rework.