Non-Conformity Liability — Scope and Duration in Service Agreements

Since the 2020 Civil Code reform, disputes over defect warranty liability in service agreements have become increasingly serious.

A Specific Trouble Case: Non-Conformity in EC Site Production

Three months after delivering an EC site production project (contract value 1.5 million yen), freelance web designer A received a notification from the client that "part of the display is broken on smartphones." The contract stated "defect warranty liability period for service agreements: 1 year," but because the scope of liability was ambiguous, the following problems arose:

• Client side: "Demand ¥3 million in compensation for lost sales opportunities"
• Receiving party side: "¥3 million for a minor display issue is excessive"
• Point of dispute: Scope of repair claims, price reduction, and damages was unclear

As in this case, when the content and duration of non-conformity liability are not clear, unexpected high-value claims and long-term liability can arise after delivery. Under the previous defect warranty liability, the focus was on "repair of defects or compensation for damages," but the 2020 Civil Code significantly expanded the ordering party's options.

Structural Background of the Problem

Many service agreement contracts are in the following situation:

1. Clauses based on the old law: Defect warranty liability clauses from before April 2020 are used as-is
2. Ambiguity in scope of liability: The distinction between "significant defect" and "minor defect" is unclear
3. Inappropriate duration setting: Duration is excessively long or short relative to the work content

As long as this situation continues, receiving parties carry unpredictable risk and ordering parties cannot receive appropriate rights protection.

The Civil Code reform changed defect warranty liability to "non-conformity liability," having a serious impact on the practice of service agreements.

Differences Between Previous Defect Warranty Liability and Non-Conformity Liability

Specific Practical Impact

1. Introduction of Repair Claim Right

   • Ordering party can directly claim repair or delivery of a substitute
   • Receiving party in principle cannot refuse a repair claim
   • In website production, "implementation of functions as specified" can be demanded

2. Introduction of Price Reduction Claim Right

   • When repair is impossible or refused, the ordering party can claim a price reduction
   • The criteria for calculating the amount is unclear, creating high dispute risk
   • In system development, "pro-rata calculation for underperforming portions" becomes the point of dispute

3. Elimination of "Hidden Defect" Requirement

   • Non-conformity that was apparent at the time of contracting is also subject to liability
   • Any divergence between the specifications written in the specifications document and the actual deliverable is subject
   • In graphic design, a "different look than expected" can potentially constitute non-conformity

Analysis of Impact by Industry

• Website production: Requirements for complete browser support and responsive design have become stricter
• System development: Risk of unmet performance requirements and security specification failures has expanded
• Graphic design: Subjective evaluation of color and layout may be included in the scope of liability

This legal reform practically expanded the scope of receiving parties' liability and increased the ordering party's options for exercising rights. Contract clause design premised on this new framework is essential for service agreements.

Specific clause design is needed according to work content in order to appropriately set the scope of non-conformity liability and the liability duration.

Methods for Clarifying Scope of Liability

1. Setting Function-Based Liability Categories

[Clause example for website production contract]
Article X (Scope of Non-Conformity Liability)
1. Party B (receiving party) bears non-conformity liability for the following matters
 (1) Basic functions: operational failures in form submission, page transitions, etc.
 (2) Display quality: display breakdowns in major browsers (latest versions of Chrome, Safari, Edge)
 (3) Security: failures in SSL certificate setup and basic vulnerability countermeasures
2. The following matters are excluded from the scope of liability
 (1) Matters relating to subjective evaluation of design
 (2) Impact of specification changes in third-party plugins
 (3) Operational failures caused by changes to the server environment

1. Setting an Upper Limit on Damages

To balance the receiving party's risk management with the ordering party's rights protection, set an upper limit on damages.

• Calculation basis for upper limit: 100% to 200% of contract value is common
• Limited to direct damages: Exclude indirect damages such as lost profits and opportunity costs
• Exception for willful misconduct or gross negligence: Specify cases where the limit does not apply

Industry-Specific Duration Standards

1. Website Production

   • Static site: 3 months after delivery
   • Dynamic site (with CMS): 6 months after delivery
   • EC site: 12 months after delivery

2. System Development

   • Small-scale business system: 6 months after delivery
   • Core system: 12 months after delivery
   • Infrastructure construction: 24 months after delivery

3. Graphic Design

   • Logo / printed materials: 1 month after delivery
   • Overall branding: 3 months after delivery

Clause for Staged Reduction of Post-Delivery Liability

Article Y (Staged Setting of Liability Period)
1. Within 3 months after delivery: Liability for all non-conformities
2. After 3 months and within 6 months: Liability limited to serious functional failures
3. After 6 months: Liability limited to serious defects related to security

Limiting Response to Repair Claims

Because the ordering party's repair claim right has been strengthened under non-conformity liability, clauses limiting the response burden on the receiving party side are important.

• Cap on response time: Limits such as up to 10 hours per month
• Receiving party's choice of response method: The receiving party may choose between repair and alternative measures
• Exclusion of emergency response: Limited to response during weekday business hours

This setup allows the receiving party to bear liability within a predictable scope, and the ordering party to exercise rights within a reasonable period. A contract relationship that maintains a balance of interests for both parties can be built.

Here is a specific examination of commonly seen problems in contract clauses in practice, and the risks they create.

Risk of Voidance Through Overly Broad Exemption Clauses

A common error made by many receiving parties is setting one-sided exemption clauses.

[Example of a problematic clause]
"Party B shall bear no responsibility whatsoever for deliverables"
"Minor defects shall be handled by Party A at Party A's own risk"

These clauses carry a high risk of being voided under the Consumer Contract Act or the principle of good faith. In particular, when the ordering party is not a business operator, "clauses that exempt the business operator's liability" are voided under Article 8 of the Consumer Contract Act.

Judgment Standards in Actual Court Decisions

In a Tokyo District Court decision from Reiwa 3, the following judgment was issued regarding a clause in a system development contract that limited "minor defects to exemption":

• The standard for "minor" was unclear, permitting arbitrary judgment by the receiving party
• There was a possibility of unjustly harming the ordering party's legitimate interests
• The relevant clause portion was voided and liability was recognized based on civil law principles

Inappropriate Patterns in Liability Duration Setting

1. Excessively Short Duration Setting

[Problematic example] "Non-conformity liability is limited to 1 week after delivery"
[Risk]:
- Many defects in EC sites become apparent after operations begin
- Unreasonable as an acceptance period for the ordering party
- Possible voidance by the courts

1. Accepting Unlimited Liability

[Problematic example] Absence of a clause on the liability period
[Risk]:
- Receiving party bears perpetual risk
- The civil law exclusionary period (5 years) applies
- Serious impact on business continuity

Design Errors in Damage Compensation Scope

Inadequate Distinction Between Direct and Indirect Damages

A problem commonly seen in many contracts is ambiguity in the definition of types of damages.

[Before improvement] "Party B's liability is limited to direct damages"
[Problem]: The definition of direct damages is unclear

[After improvement]
"Direct damages are limited to the following
(1) Actual costs incurred for defect repair
(2) Direct costs for securing alternative measures
(3) Additional development costs up to the contract value as an upper limit"

Abuse of Joint Guarantee Clauses

Clauses requiring the representative's personal guarantee in contracts with sole proprietors who are not organized as corporations are also problematic.

• Guarantee liability disproportionate to the contract value
• Excessive impact on the individual's livelihood
• Possible qualification as abuse of superior bargaining position under the Subcontract Act

Conflating Intellectual Property Rights with Non-Conformity

In website production and design work, clauses that confuse the risk of intellectual property rights infringement with non-conformity liability are often seen.

[Problematic example] "Party A shall bear full responsibility for infringement of third-party intellectual property rights"
[Improvement proposals]:
- Clarify the scope of the receiving party's investigation obligations
- Make anything other than obvious infringement the ordering party's responsibility
- Specify the response procedure when infringement is discovered

To avoid these design errors, contract clauses must have reasonable content appropriate to the actual work, and one-sided shifting of liability or excessive exemption should be avoided.

Implement practical improvements to respond to non-conformity liability on both the existing contract and new contract fronts.

Emergency Review Checklist for Existing Contracts

For currently active service agreements, confirm the following items and respond with supplementary memoranda or additional agreements as necessary.

1. Confirming Liability Clauses

   • Contracts with "defect warranty liability" language require re-reading as non-conformity liability
   • Is the liability period specified? (if not stated, civil law principle of 5 years applies)
   • Is there an upper limit setting on damages?

2. Clarifying Work Scope

   • Is the deliverable specification specifically stated?
   • Is the scope of the receiving party's investigation and confirmation obligations appropriate?
   • Is the boundary of liability between the receiving party and third-party tools and services clear?

3. Risk Assessment and Response

   • Is the potential liability burden reasonable relative to the contract value?
   • Is it within the scope covered by liability insurance?
   • Is it possible to secure the budget and time for repair response?

Essential Items to Include in New Contracts

1. Clause Clarifying Non-Conformity Liability

Article [X] (Non-Conformity Liability)
1. If the deliverable under this agreement does not conform to the content of this agreement, Party B bears the following liability
2. Party A may exercise the following rights by notifying Party B within 1 year of becoming aware of the non-conformity
 (1) Repair claim right: limited to an upper limit of [X] hours per month
 (2) Price reduction claim right: calculated by objective criteria
 (3) Damages claim right: limited to [X]% of contract value, limited to direct damages
3. The liability period in the preceding paragraph shall be [X] months from the delivery date

2. Staged Liability Reduction Clause

Reduce the scope of liability in stages over time, appropriate to the nature of the work.

[Example for system development]
- Period 1 (within 3 months after delivery): Liability for all functions
- Period 2 (after 3 months and within 6 months): Only serious defects in basic functions
- Period 3 (after 6 months and within 12 months): Only fatal defects such as data corruption

Practical Response on the Ordering Party Side

Appropriate contract management is also important for ordering parties.

1. Elaborating the Specifications Document

   • Convert subjective evaluation criteria to objective indicators
   • Clarify operating environment and test conditions
   • Quantify performance requirements

2. Building an Acceptance System

   • Assign staff with specialized knowledge
   • Utilize third-party verification bodies
   • Build an early detection system through staged acceptance

3. Risk Management

   • Evaluate the receiving party's technical capability and creditworthiness
   • Spread risk across multiple vendors
   • Secure alternative measures in the event of non-conformity

Existing Contracts Requiring Emergency Response

Consider adding clauses via supplementary memoranda for contracts that fall into any of the following categories:

• No liability period stated (civil law principle of 5 years applies)
• No upper limit on damages (full damages risk)
• Still on old defect warranty liability clauses (inadequate response to repair claims etc.)

These revisions allow building a contract relationship with high predictability and appropriately managing risk for both parties. Response to non-conformity liability has been pending since the legal reform, and urgent practical improvement is required.

References

Explanatory Materials on the Amendment to the Civil Code (Law of Obligations) (2020)

Civil Code (e-Gov Law Database) (2024)

Guidelines for Creating an Environment Where Freelancers Can Work with Peace of Mind (2021)