What Is Contract Execution? How It Differs from Contract Formation, and Signatures, Seals and E-Contracts Explained

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

Once a contract review is finished, the contract execution process is surprisingly easy to overlook. If you proceed while it remains unclear who will sign, whether a seal is needed, or whether an electronic contract is acceptable, discrepancies with internal approvals may emerge after execution, or unexpected disputes may arise.

In corporate legal practice, contract execution is not merely clerical work. It is the procedure by which the company formally takes on the agreement, and it also matters when the contract is reviewed later in an audit, in debt collection, or in legal due diligence (legal DD) in an M&A transaction.

How to Think About Contract Execution and Contract Formation

Contract execution and contract formation are not always used in clearly distinct legal senses. In practice, contract execution covers the series of steps from finalizing the final version, to recording the agreement through signatures, seals or similar means, to storage after execution. Under the Civil Code, a contract is, as a rule, formed when an offer and an acceptance coincide, and a written document or seal is not always a legal requirement for formation. Even so, in corporate practice, it is a widely established practice to preserve the agreed terms as evidence, for example by signing and sealing a contract document or executing the contract through an electronic contract service.

The criteria to keep in mind in practice are three: that the contract terms have been finalized as the final version; that a person with authority to execute on behalf of the company is involved; and that the executed contract is stored in a state where it can be checked later. If these premises break down, even if the document itself exists, it becomes difficult to explain the validity of the agreement both inside and outside the company. In particular, who has authority to sign is an issue that tends to be overlooked even in practice.

Confirming the Authority of Signatories and Those Affixing Seals

The first thing to confirm when executing a contract is the authority of the signatories and those affixing seals. In addition to cases where the representative director executes the contract on behalf of the company, in practice it is not uncommon for a department head, business manager, branch manager or similar person to sign. With electronic contracts, the account from which the document was sent or approved is recorded, but having a record of account use and that person having authority to enter into contracts on behalf of the company are separate issues.

As an internal procedure, confirm in light of the authority rules, approval rules and electronic contract operating rules whether the person may execute that contract. For contracts involving large amounts or long terms, or contracts imposing heavy obligations on the company such as damages or guarantees, failing to make this check will cause discrepancies with internal approvals to surface after execution. For contracts related to resolutions under the Companies Act, such as investment agreements and shareholders' agreements, the check extends to whether the necessary resolutions have been passed.

Even if the signatory's title appears appropriate at first glance, it can happen that their authority under internal rules is insufficient. Moreover, not only whether internal authority exists, but also who appears, from the counterparty's perspective, to represent the company affects the outcome in post-execution disputes. In contract execution, it is important to pay attention to both legal authority of representation and internal approval.

Along with your own company, also confirm the authority of the counterparty's signatory. Contract execution authority is a matter of your own internal rules and, at the same time, relates to the reliability of the transaction from the counterparty's perspective. For contracts involving large amounts, contracts related to M&A and contracts dealing with important intellectual property, check the commercial registration information and powers of attorney for the counterparty's signatory as necessary. Even if the counterparty is a large company, where the contract proceeds in the name of a group company or business division, confirm that the signatory is signing with authority on behalf of the proper contracting party. If there are discrepancies in how the parties are described, extra verification work arises when making claims or handling disputes after execution. So that you can explain the background if it is later asserted that "that person had no authority," it is practical to keep a record of the pre-execution checks as part of the internal procedure.

Whether a Seal Is Needed and How to Think About Evidence

In Japanese corporate practice, the custom of affixing seals to contracts has continued for a long time. Although electronic contracts have recently become widespread, there are still many situations where people are unsure whether a seal is needed. Because contracts are, in principle, not required to take any particular form, a contract without a seal is not necessarily invalid for that reason alone, and in some cases the formation of the agreement can be explained even without a seal.

That said, a seal has significance as evidence showing that the individual or the company prepared and approved the document. Particularly for contracts involving large amounts, long-term contracts and contracts with high dispute risk, keeping a trail of signatures and seals or electronic signatures provides material for confirming the agreement.

Whether a seal is needed is decided based on the applicable laws and what you want to preserve as evidence. After checking whether the contract is one for which a written document or signature and seal is required by law, and whether the counterparty or internal rules require a seal, choose a format that makes it easier to prove the formation of the contract in the event of a dispute. When executing by electronic contract, also check whether the electronic signature trail is sufficient and how the stamp duty treatment changes. Putting in place the approval flow, the notice of completion of execution and the method of storing the original data makes it easier to explain the execution process later. Regardless of whether a seal is used, the basic point is to keep solid records showing the existence of the agreement and the process leading up to execution.

Preventing Mix-Ups of the Final Version and Operating Electronic Contracts

A common problem in contract execution practice is mixing up the final version. Mix-ups can occur such as executing an old file instead of the reviewed version, the counterparty's revisions not actually having been reflected, the amount or delivery date having been changed between the business division and the counterparty after the legal review, or the PDF uploaded to the electronic contract service not including the schedules. If such mistakes are discovered after execution, renegotiation with the counterparty may be required to correct them.

Before execution, check the file name and version number and the date of the last revision of the contract text, and see whether any tracked changes or comments remain and whether the schedules, specifications and quotations are all present. Basic information such as the contract amount, payment terms and the description of the counterparty should also be checked one last time at this stage. Only after confirming that you are uploading to the electronic contract service the same file as the version that received internal approval should you proceed to execution.

Mixing up the final version is a mistake arising from deficiencies in file management, separate from the quality of the review. Even if the legal department or outside counsel has reviewed the contract carefully, if file management breaks down at the time of execution, the prior checks may be wasted. Cases such as executing a contract before internal approval is complete, or the approver in the electronic contract service differing from the actual decision-maker, have the same structure. Treating everything from legal review to internal approval to confirmation of the execution version as a single flow helps reduce discrepancies in the execution version and the approved content.

Electronic contracts are a powerful means of speeding up the contract execution procedure. They eliminate the time spent on mailing, binding, sealing and returning documents, and allow execution to proceed smoothly even with remote work or cross-border transactions. On the other hand, introducing electronic contracts does not automatically put contract management in order.

When introducing them, decide on operating rules such as who can send and approve and how much identity verification of signatories will be performed. Also design at this stage where executed data will be stored, how it will be linked to the contract management ledger, and how renewal deadlines and termination deadlines will be managed. If you start operating without checking the relationship with the Act on Electronic Bookkeeping and internal document management rules, you will often end up having to rebuild the storage method later.

Using AI review and electronic contract services increases the speed to execution, but can blur where responsibility for the final check lies. Having reviewed a contract with AI does not mean the execution version is correct, and uploading it to an electronic contract service does not mean internal approval is complete. In practice, setting a procedure for confirming the contract's version number, the signatory and the post-execution storage location immediately before uploading makes it easier to catch mix-ups before execution. Electronic contracts are merely a tool for faster execution. So as not to end up unable to find contracts after execution or unable to manage renewal deadlines, it is appropriate to treat contract execution and contract management as one.

Points to Check Before Contract Execution

Immediately before executing a contract, checking at least the following points will help the procedure go smoothly.

• The contract is the final, settled version
• The execution version reflecting the agreed revisions contains no unprocessed tracked changes or internal comments
• Schedules, specifications and attachments are all present, with nothing missing or extra
• The contract amount, term and payment terms are stated correctly
• The execution authority of the signatories, those affixing seals and electronic signatories has been confirmed
• All internal approval procedures have been completed
• The counterparty's trade name and representative are stated correctly
• The method of sealing or electronic contracting conforms to internal rules
• The storage location after execution has been decided
• Renewal deadlines, termination deadlines and performance dates can be managed

Even after execution, the management of the obligations and deadlines set out in the contract continues. By setting up the management items at the time of execution, you can greatly reduce the burden of later tasks such as searching for contract documents or checking renewal deadlines.