What Is Breach of Contract? How It Differs from Non-Performance of Obligations and the Initial Response in Corporate Legal Practice

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

When drafting contracts, attention tends to focus on reviewing clauses in advance. In practice, however, problems after signing, such as the counterparty failing to meet deadlines or your own company finding it difficult to deliver, occur on a daily basis. If the response is mishandled, termination or claims for damages that should have been available may not be legally recognized.

In everyday conversation the term "breach of contract" is often used, but under the Civil Code and in contract practice it is dealt with as "non-performance of obligations." First, without being confused by the difference in terminology, start by establishing which contractual obligation has not been fulfilled, since when, and to what extent. Immediately after receiving a consultation, check not only the contract but also purchase orders, specifications and the history of changes in emails, distinguish whether the situation requires a demand for performance or allows termination without a demand, and also confirm whether there is evidence to support the damage.

Companies that want to entrust lawyers with handling post-signing problems such as delayed performance or rechecking their contracts can consult our legal outsourcing, which lets them hand day-to-day work to outside lawyers on a continuing basis even when legal staff are short.

The Relationship Between Breach of Contract and Non-Performance of Obligations

In general, breach of contract refers to a state in which a contractual promise is not fulfilled, such as goods not being delivered, a price not being paid or a breach of confidentiality. The corresponding legal concept is "non-performance of obligations" under the Civil Code. Non-performance of obligations is a broad concept that includes not only obligations under contracts but also non-performance of duties arising from statutory provisions, and it is easier to understand breach of contract as the everyday term for the subset of these that concerns contractual obligations. In practice, on receiving a consultation that "a breach of contract has occurred," we proceed by applying the provisions of the Civil Code and the termination and damages clauses of the contract.

Where non-performance is suspected in a business-to-business transaction, do not immediately resort to aggressive measures; instead, calmly check the facts, the contract clauses and the evidence at hand. This is because, even if the contract sets a delivery date, the parties may have agreed to change it in later emails, or the wording of the specifications may be vague, making it difficult to judge whether it is non-performance or a difference in understanding.

Legal Requirements for Demand, Termination and Damages

In responding to non-performance of obligations, consider the three elements of demand, termination and claims for damages separately.

A demand is a request to the counterparty to perform or remedy within a reasonable period. Termination under Article 541 of the Civil Code requires that there be no performance even after the demand period has passed. If the non-performance at the time that period has passed is minor in light of the contract and socially accepted conventions in transactions, termination under that Article is not possible. Termination under Articles 541 and 542 of the Civil Code is also not possible where the non-performance is due to grounds attributable to the obligee (Article 543). On the other hand, where performance has become entirely impossible or the counterparty has clearly refused to perform in full, the contract can be terminated immediately without a demand (Article 542 of the Civil Code).

A contract may contain a clause permitting termination without a demand in the event of credit concerns. However, even with a clause permitting termination without a demand, notice of termination itself is still required. In addition, the effectiveness of credit-concern clauses is judged individually depending on the wording of the clause, the applicable laws, the actual business situation and the relationship with insolvency laws.

Termination, which ends the contractual relationship, and a claim for damages can coexist. As a rule, termination does not require grounds attributable to the counterparty, but in a claim for damages under Article 415 of the Civil Code, if the non-performance is due to grounds not attributable to the counterparty in light of the contract or other source of the obligation and socially accepted conventions in transactions, no liability for damages arises under that Article. However, there are special rules such as Article 419, Paragraph 3 of the Civil Code, under which force majeure cannot be raised as a defense to delay in a monetary obligation. Also check, contract by contract, the scope of damages (Article 416 of the Civil Code), the cap on liability and the effectiveness of exemption clauses. Upon termination, also check, depending on the type of contract, restoration to the original state, such as returning goods or money, and settlement after the end of a continuing contract. At the same time, in light of the right to defense of simultaneous performance (Article 533 of the Civil Code), confirm that there are no shortcomings in your own company's performance.

Preserving Evidence and Organizing the Timeline at the Initial Stage

The foundation of responding to non-performance is an objective record of the facts. As time passes, the memories of the personnel involved fade, and it becomes unclear who communicated what and when, and how the counterparty responded.

Therefore, prepare a timeline memo at the initial stage. The items to organize are as follows.

• Contract date, order date, delivery date and payment deadline
• When the counterparty's delay or non-performance became known and the history of your company's communications
• The counterparty's responses and the content of requests for remedy
• When the damage occurred and the course of internal decision-making

If the facts are organized chronologically, drafting notices and reporting internally go more smoothly. It is also useful to use AI to extract termination and damages clauses from the contract or to arrange the correspondence chronologically. However, simply giving AI the contract will not determine whether there has been non-performance. Gather the full set of emails and minutes, and make sure that agreed changes along the way are not missed. Delivery notes, inspection records and invoices should also be checked against the latest contract and related memoranda. Timelines and draft notices created by AI should be checked by the personnel in charge against the original documents.

Handling Notices and Options for Resolution

When sending a demand letter or notice to the counterparty, review its content in advance. Check whether the content of the breach and the relevant clauses are identified, whether the remedy period is reasonable, whether the notice complies with the method specified in the contract, and whether it gives advance notice of termination or reserves a claim for damages. Sending an emotional letter may work against you in subsequent negotiations, so state the facts and the claims separately. Confirm the addressee and keep a record of who notified what, when and by what method, together with a record that allows receipt to be confirmed. Consulting the legal department early makes it easier to avoid having to rebuild your response after acknowledging unfounded liability or communicating unnecessary concessions.

Where your own company experiences delivery delays, quality shortfalls, payment delays or system failures, the legal department and the business department should also cooperate early. Check the cause, the outlook for the timing of performance, the impact on the counterparty, and whether contractual notification obligations or grounds for exemption apply, then consider feasible alternatives and enter into discussions. Avoid admitting full liability without confirming the cause or promising a recovery deadline that cannot be met.

The actual means of response range widely, from voluntary discussions and changes to terms by memorandum to termination of the contract, provisional remedies and litigation. Where there is a risk that the counterparty's assets will be dissipated because of credit concerns, check its assets, its willingness to pay and the movements of other creditors, and consider early the requirements and necessity of provisional remedies such as provisional attachment. Where there is a risk that evidence will be lost, consider the procedure for preservation of evidence under the Code of Civil Procedure.

After a non-performance dispute has been resolved, conduct a review to prevent recurrence. Look back at which stage, such as finalizing specifications, checking progress or inspection, the problem could have been identified. For non-payment, check credit management and billing procedures; for information leaks, check the management of access rights, including for former employees; and reflect the findings in the next contract and business procedures.