Current Status of Electronic Signatures Law and Presumption of Authenticity in Japan: Can a Handwritten Signature or “Hanko” Be Omitted?

Tokyo was O’Melveny’s first international expansion destination, and we have offered robust Japan related Corporate and Dispute Resolution services for our clients for more than 30 years.

オメルベニー・アンド・マイヤーズの東京事務所は、オメルベニーで最初の米国国外の国際的な拠点として開設され、30年以上にわたってコーポレート及び紛争解決のいずれにおいても、歴史に残るような案件、影響力の大きな案件を手がけてきました。

Although Japan has so far been relatively mildly affected by the Covid-19 pandemic in terms of actual numbers of cases and fatalities, many Japanese companies have for the first time instituted partial or complete “work from home” systems for much of 2020 and into 2021. These new circumstances have brought into sharp focus the Japanese business world’s reliance upon original paper documents and the requirements to apply a handwritten signatures or to seal a “hanko” (Japanese stamp such as the images below) on documents, and have led Japanese companies to reconsider the need for sealed originals in many circumstances.

International companies that do business with or manage subsidiaries in Japan have long chafed at Japanese requirements for such paper original documents, and the pandemic has only exacerbated the situation. Immigration restrictions, quarantine requirements, and reductions in international flights have made what until recently were routine business trips to and from Japan extremely rare. Even international mail delivery has experienced delays at times.

Indeed, Kono Taro, the Minister for Administrative and Regulatory Reform in the cabinet of Prime Minister Suga Yoshihide, announced a proposal for the government to drop seal requirements for approximately 800 different government applications or procedures^[1].

Digitization has progressed in Japan and electronic signatures are gradually becoming common in government applications and corporate registration applications. However, electronic signatures are not widespread today, especially when signing contracts. Given this environment, we thought it would be useful to summarize the laws and regulations related to use of the handwritten signatures or seals with a “hanko” on contract documents in Japan.

Why does this practice remain unchanged, even as information has been largely digitized and is typically transmitted via the Internet? We introduce the current status of the Electronic Signatures Law, on which the Japanese government has modified its view, as well as the presumption of authenticity afforded to such paper original documents in civil lawsuits.  We hope to explain why this customary practice remains widespread in Japan. In addition, given the significant difficulties around use of handwritten signatures and hanko during the pandemic, we hope this explanation will help you to determine whether, depending on specific circumstances, your company may wish to consider omission of a handwritten signature or hanko even under current law.

1. Under Japanese law in many cases contracts are valid even without a handwritten signature or a hanko on paper.

Under the Japanese Civil Code, in many cases there is no restriction on the method of establishing a contract or manifesting intention. Since there is no limitation on method, a contract does not need to be printed out on paper, and it does not need to have handwritten signatures or be sealed by a hanko. In other words, the contract is valid even if made verbally, and it is also valid if assent is shown by digital methods such as clicking the consent button, signing by hand on terminals such as tablets or smartphones, or pasting an image of a handwritten signature or a hanko onto a PDF file^[2].

2. However, credibility as evidence is another matter. At present, there are still many situations in Japan where it is easier and safer to use a handwritten signature or a hanko on paper.

If any method is valid to establish a contract, some may argue that more contracts should be digitized. However, in Japan today, when using a document as evidence in a civil lawsuit or government application, it is much easier and more reliable if there is a handwritten signature or a hanko on the paper, compared to a digitally executed document.

A typical scenario from a Japanese civil trial offers an example.

In a Japanese civil lawsuit, in order for a paper-based document to be used as evidence, the party asserting that the document submitted represents a contract must prove that the document was made based on the intention of both parties. For example, when demanding payment based on a contract, the creditor submits the contract document as evidence. The creditor claims that the contract was created based on the intentions of both parties. If there is no dispute over this, the court will proceed to review the content of the document.

The problem arises when the other party argues that  there is no such fact that it created such document. For the party who intends to prove that the contract was created based on the intention of the other party, the Japanese Code of Civil Procedure and judicial precedents have afforded a presumption of authenticity for more than 50 years, in favor of the party submitting a paper-based document with a handwritten signature or a hanko on it. Above all, a stronger presumption works with a document with a hanko. To put it very simply, a court compares the imprint of the hanko (the characters and figures left on the paper by pressing the hanko with ink on the paper) and the engraved part of the hanko itself owned  by the party who is said to have executed the document. If they are identical, it is presumed that the document was created based on the intention of the hanko holder. Even if the other party does not remember sealing his/her hanko on it, once a contract document is submitted with a hanko imprint that matches his/her hanko, that contract is presumed to have been created based on his/her intention. If the other party wants to disprove this, he/she must assert specific facts (for example, someone stole his/her hanko and sealed it on the contract) and provide supporting evidence.

Therefore, in practice, the more important the document is, the more likely it is to be printed out, and a handwritten signature or a hanko applied, so that it can be more easily accepted in court in the event of a future dispute.

The use of a hanko also has a long history and is a cultural aspect in Japan. Since ancient times, the culture and practice has been to seal hankos on official documents, as shown by the example of excavation of gold seals dating from around 57 AD. Almost all companies and individuals in Japan own hankos and use them not only on contracts, but also in various situations such as acknowledging receipt of courier packages and for banking transactions. In addition, Japanese people use different hankos according to the formality and importance of the transaction. Many Japanese may feel a lack of formality or gravitas if a document lacks a hanko.

3. Although Japan has an Electronic Signatures Law, its requirements are complicated and unclear. Thus, when signing contracts, electronic signatures in accordance with the law are not a widespread practice in Japan.

As with a paper-based document, in order to use an electronic document as evidence in a lawsuit, it must be proven that the document was created based on the intention of the creator. The so-called Electronic Signatures Law (Act on Electronic Signatures and Certification Business, enforced from April 1, 2001) provides for this. This law defines certain types of recognized “electronic signatures” among the various possible forms, and sets out additional requirements in order for it to be presumed that the signature was created based on the intention of the creator (referred to as the “Article 3 Presumption”).

However, there are many inadequate points in the current Electronic Signatures Law, and when executing contracts, electronic signatures based on this law are not widespread in Japan.

The requirements are as follows:

“Any electromagnetic record that is made in order to express information…shall be presumed to be established authentically if the Electronic Signature (limited to that which can be performed by the principal through appropriate management of codes and properties necessary to perform this) is performed by the principal with respect to information recorded in such electromagnetic record.” (Article 3)^[3]

• First, users need to take very complicated steps to be able to enjoy the Article 3 Presumption.

Upon the enactment of this law, it was assumed that mainly “public key encryption” would be used. Put simply, the creator of the electronic document encrypts the data using a “private key” that only that person knows, and the encrypted data works as an electronic signature. The creator sends the electronic signature along with the electronic document and “public key” to the recipient. Using the public key which constitutes a pair with the private key, the recipient verifies that the electronic document has not been falsified. In addition, the creator sends the recipient an “electronic certificate” issued by a “Certification Business Operator” under the law, for identity confirmation of the creator^[4].

Actually, the typical flow that the law originally assumed is something like the following:  a person who wants to use an electronic signature receives a USB token or IC card containing a necessary key and electronic certificate from a Certification Business Operator in advance. After creating an electronic document, the above-referenced USB token or IC Card is inserted into the personal computer, and his / her electronic signature is added. As it is obvious from this example, before using this method, the user must confirm his / her identity with the Certification Business Operator, and receive the USB token or IC card. Depending on the operator, it may be necessary to install an IC card reader as well. In the case of a multi-party contract, each party must make such preparations. From a transactions standpoint, this is very complicated and not a realistic practice for signing all documentation.

• Second, the requirements for the Article 3 Presumption are unclear.

Due to the complexity of the process described above, new electronic signature services have emerged. For example, at the instruction of a user, a business operator that provides electronic signature services (hereinafter referred to as “Vendor”) affixes an electronic signature using public key encryption in its own name, rather than that of the user.

Taking cloud-based service providers such as DocuSign^[5] and CloudSign^[6] as examples, the actual flow changes as follows:  the user logs into the Vendor’s website and uploads the PDF file of the document to the Vendor’s server; asks the counterparty to confirm the document file through the Vendor’s system; the counterparty confirms the content on the Vendor’s website, and clicks the consent button. At this time, the electronic signature is given by the Vendor’s own signature key. According to this method, it is the Vendor who makes the electronic signature, and the Vendor performs the required preparatory work for the use of the electronic signature in accordance with the law for Certification Business Operator, which greatly reduces the parties’ administrative burden.

However, since these new services differ from what the law originally assumed in various ways, it has been unclear whether or not the Article 3 Presumption will apply. For example, since the document creator (user) does not affix an electronic signature, it has been unclear whether it falls under the definition of the "Electronic Signature" under the law. On this point, recently, the government announced new guidance that it is possible for these new services to receive the benefit of the Article 3 Presumption if certain requirements are met. By this announcement, the government has taken a step forward in showing that these new services are able to enjoy the Article 3 Presumption. However, even when referred to as a “service provider”, the details differ widely depending on the provider, in terms of the degree of identity verification processes for the user, the procedure for issuance of the electronic signature, security standards, and so on. The relevant stakeholders have just begun to consider more specifically what kind of service will meet these requirements expected by the government.

As the above example shows, there are still many unclear points in the interpretation of the Electronic Signatures Law. In response to the government’s announcement, cloud-based services such as DocuSign or CloudSign published its view regarding its security standards or compliance with the new requirements. However, since there are no judicial precedents at this time in which Article 3 was directly at issue, clearer guidelines by the government are still awaited. Without clear guidelines, if one wants to use an electronic signature in a corporate transaction, the person in charge will have to determine which service providers to use, understand what kind of preparation will be required to use the service, and analyze the service provider’s technical safety standards. The person in charge also has to obtain internal approval before using the service, and as a matter of course, it is necessary to obtain consent from the other party or parties to use the service.

In such a situation, even though it takes time to print and secure a storage place, it is easier and more reliable to use the conventional paper and seal with a hanko that the company originally owns. At least, it is quite natural for the person in charge to think that way.

4. Even under the current law, methods other than handwritten signatures and hankos can be considered in many circumstances.

So far, we have introduced one of the reasons electronic signatures based on the Electronic Signatures Law are not widespread in Japan today. However, we do not generally recommend sticking to the old practice of affixing handwritten signatures or sealing hankos on every type of document. Especially in the midst of the COVID-19 pandemic, there is an urgent need to reduce the use of handwritten signatures and hankos. If examined individually, handwritten signatures and hankos may be omitted for many documents, even under the current Japanese law.

• Even if the Article 3 Presumption is inapplicable, the practical effect may be limited, and alternative proof methods may be available.

If we take a second look at the practical effect of failing to meet the requirements of the Article 3 Presumption, this only means that the party submitting a document in civil litigation will have the burden of proving that the document represents the intention of the other party. In Japanese civil lawsuits, there are various methods, other than signatures, to prove that the document was created based on a person’s intention. For example, a party may submit records of consensus-building negotiations with the other party (transmission / reception records including the email address, text, date and time, etc.), or the actual execution of the contract by the other party. As described above, even if the Article 3 Presumption does not apply to a particular electronic signature service, the practical effect may be limited. By carefully storing related information that can be used as evidence in case of civil lawsuits, the service may offer great benefits to the parties by reducing contract execution cost.

• If the contract is classified as lower risk, either because it is highly unlikely to be submitted in litigation or because the consequences of failure to be accepted as representing the intent of the counterparty are low, it is more suitable for electronic signature.

We can select certain types of contracts that are more suitable for electronic signatures. For example, if a transaction has very limited impact on the company’s business due to transaction type or amount, the risk may be small even if the Article 3 Presumption does not apply. If a friendly relationship with a stable counterparty has already been developed through long-term business, a dispute over whether the written document reflects the intention of the creator may be very unlikely and the risk would also be small. If the content of a contract is standardized or typical, execution cost may be greatly reduced by use of electronic signatures. It may be pragmatic to introduce electronic signatures starting from such categories. In fact, some major Japanese companies have done so, starting with contracts such as non-disclosure agreements and routine service and consulting agreements.

Depending on the nature and content of the document, companies may conclude that it is not necessary to stick to the conventional handwritten signature or seal by hanko, but rather may consider electronic signatures. We hope this discussion will be of use as you consider the use of electronic signatures in Japan, and we are happy to discuss further should you have questions.

[1] Source available here.

[2] Exceptionally, certain types of contracts such as fixed term lease agreement need to be written on paper.

[3] Source available here.

[4] Source available here.

[5] Source available here.

[6] Source available here.

O’Melveny & Myers gaikokuho kyodojigyo horitsujimusho is the registered office in Japan of O’Melveny & Myers LLP, and operates as a joint enterprise among our U.S. and Japanese licensed attorneys resident in Tokyo as permitted under Article 49 3 of Japan’s Special Measures Law Concerning the Handling of Legal Business by Foreign Lawyers.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Yoji Maeda, an O’Melveny partner licensed to practice law in Japan and New York, Scott Sugino, an O’Melveny partner licensed to practice law in California and a registered foreign lawyer in Japan, David G. Litt, an O’Melveny of counsel licensed to practice law in California, District of Columbia, and a registered foreign lawyer in Japan, and Emiko Morisato (Ogino), an O’Melveny counsel licensed to practice law in Japan and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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