Case Law and Reform of the Civil Code Regarding Security Interests in Movable Property

Establishing Priority between Retention of Title and Mortgages

Abstract

Japanese business practice has developed two methods to create security interests in movable property without transferring possession. One is a mortgage (譲渡担保 jōto tanpo) and the other is a retention of title (所有権留保 shoyū-ken ryūho). There is no statutory provision for either mortgage or retention of title. For this reason, the rights and obligations of creditors and debtors have been clarified by case law. An important question is which has priority over the other when a retention of title and a mortgage are set up on the same movable. The author discusses this question by first analysing the decision of Japan’s Supreme Court of 7 December 2018. In its decision the Supreme Court recognized that a retention of title has priority over a mortgage. However, the author qualifies the judgment as being not broadly applicable to all cases where there is a conflict between a retention of title and a mortgage because the decision’s outcome was shaped by the very specific circumstances of the case. The second half of the article provides an overview on the current discussion at the Ministry of Justice’s Legislative Council regarding security interests in movable property. Two basic concepts for the introduction of mortgage and retention of title into the Civil Code are under consideration. The first concept holds that entering into a contract of mortgage or a contract of sale with a retention of title clause serves to transfer ownership to the creditor or retain the ownership of the seller, while placing appropriate restrictions on the rights and obligations of the creditor or seller and the debtor or buyer. This option would basically codify the current unwritten rules, with certain modifications. The second concept is to realize the benefits of security aimed at by mortgages and retention of title by creating a new security interest by setting up a filing system. This option would require a fundamental change of the Civil Code.

(The editors)