JAPAN: Supreme Court interpretation of a franchising agreement.

Carlotta Mazzetti | JAPAN | 2008-09-16

Carlotta Mazzetti

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Under the franchise agreement, a list of suggested suppliers is offered and the computerized system for making orders is made available by the franchisor. (The franchisee, however, is free to make orders to other suppliers.) If the franchisee makes orders to the suggested suppliers through the ordering system, the franchisor makes payments to the supplier on behalf of the franchisee. Such payments are later settled by the ‘open account’ system, which means they are settled together with other claims and debts (such as the franchise fee) arising under the franchise agreement. The details of each order and payment are stored in the system operated by the franchisor but not totally disclosed to the franchisee: besides the profit and loss statement as well as the balance sheet made by the franchisor and sent to the franchisee every month and year, the franchisee is given information only to the extent necessary for the tax declaration.
The Court of Appeals denied the request by the franchisees for the reason that the franchise agreement does not provide for any obligation of disclosure by the franchisor. The Supreme Court reversed this decision and held that the franchisor shall disclose the details of payments as long as such details are stored as data in the ordering system. In reaching this conclusion, the Supreme Court held, first, that under the franchise agreement as described above, the franchisee is the buyer of goods from the suppliers and the franchisor is mandated by the franchisee to make payment on behalf of the latter. Then it was pointed out that the supplies of goods are the fundamental part of the operation of the franchise convenience store and it is quite natural for the franchisee to wish to know the details of the payments for such supplies. Further, the Supreme Court mentioned that disclosure of such details would not cause difficulties to the franchisor if the extent of disclosure is limited to the data stored in the system. Based on all these (nature of the franchisor-franchisee relationship, needs of the franchisee and the cost on the franchisor), the Supreme Court held that the franchisor, as the mandated party (mandatary), is under the obligation to make necessary report to the mandating party (mandator) as provided in the Civil Code (1), even if the franchise agreement does not explicitly mention such an obligation.
The case was remanded to the Court of Appeals for consideration of the specific extent of disclosure required of the franchisor.


(1) Art.645, Civil Code: A mandatary must, if so requested by the mandator, report the current status of the administration of the mandated business at any time, and must report the process and results without delay upon completion of the mandate.



Souichirou Kozuka, IDI Country Expert for Japan.



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