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Shaping and Re-shaping the Duty of Loyalty in Japanese Law

Published online by Cambridge University Press:  15 August 2019

Eriko TAOKAOpen the ORCID record for Eriko TAOKA[Opens in a new window]
Eriko TAOKA*
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National University of Singapore, Singaporeeriko_taoka12@yahoo.co.jp
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Abstract

The duty of loyalty has been notoriously vague since its introduction into Japanese law. The vagueness of the duty becomes particularly problematic because although the duty overlaps with the duty of care, a breach of each of the duties is subject to different remedial rules. By focusing primarily on duties owed by a trustee and agent, this article attempts to re-define the duty of loyalty and clarify the conceptual relationship between the duties of loyalty and care in Japanese law. The article first explains the current complexity in the scope and nature of the duty of loyalty, and the relationship between the duties of loyalty and care in corporate, trust, and agency laws in Japan. Second, borrowing ideas from Lionel Smith's account of the fundamental nature of the fiduciary duty, this article attempts to re-shape the concept of the duty of loyalty while properly differentiating it from the duty of care in Japanese law.

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Article
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Asian Journal of Comparative Law , Volume 14 , Supplement S1 , October 2019, pp. S119 - S146
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Copyright © National University of Singapore, 2019 

The duty of loyalty has been a notoriously ambiguous concept since its introduction into Japanese law. Given its ambiguity in meaning, the scope of the duty of loyalty overlaps with the duty of care, and as a result, the conceptual relationship between the two duties has remained unclear as well. Despite the fact that the duty of loyalty has long been recognized as one of the core obligations owed by a trustee, agent, and corporate director, confusion still reigns. This is particularly problematic in trust law because a breach of each of the duties is subject to different remedial rules. Therefore, this article will attempt to clarify the meaning of the duty of loyalty by re-defining it, and clarify the conceptual relationship between the duties of loyalty and care.

First, the article will explain the development and current understanding of the duty of loyalty in corporate, trust, and agency law in Japan. The explanations reveal the equivocal meanings of the duty and the confusing relationship between the duties of loyalty and care. Questions that must be answered in order to clarify the complex duty of loyalty will be also identified in Part I. Second, the article will introduce in Part II Lionel Smith'sFootnote 1 theory of fiduciary duty in Commonwealth jurisdictions, because his theory can show the way to re-defining the duty of loyalty in Japanese law. Last, the article will show in Part III how his ideas can help us understand the duty of loyalty and properly differentiate the duty of loyalty from the duty of care in Japanese law.

Throughout the discussion, the article will primarily focus on the duties owed by a trustee and agent in Japanese law. The duties of a corporate director will be addressed to the extent that the development of their duties in Japan has influenced the duties of a trustee and agent.Footnote 2

I. COMPLEXITY IN THE MEANINGS OF DUTY OF LOYALTY IN JAPANESE LAW

A. Corporate Director's Duty of Loyalty

The duty of loyalty first appeared in an express provision as a director's duty in the Commercial Code of 1899 (Commercial Code)Footnote 3 in 1950. Prior to 1950, although the Commercial Code had had a provision concerning a director's duty of care, there was no provision that addressed the duty of loyalty.Footnote 4 The relevant provision was Article 265, which had required a company director to acquire permission from the auditor when engaging in a self-dealing transaction with the company. However, this provision did not expressly use the phrase ‘duty of loyalty (chūjitsugimu)’. The Commercial Code was amended in 1950 during the Allied Forces’ occupation of Japan. Upon the amendments, Article 254–2 was inserted, which provided that ‘[a] director owes a duty to comply with laws, the articles of association, and decisions of the general meeting of shareholders, and to loyally execute his entrusted affairs for the benefit of the company’. One of the characteristics of the 1950 amendments was the introduction of the American-style board of directors as a mandatory institution in a stock company in order to strengthen directors’ management powers in corporate governance. The introduction of the duty of loyalty was a response to this change: as directors have become vested with stronger management powers, they should be subjected to stricter duties.Footnote 5 However, as the amendments were made in accordance with the guidance of the Allied Forces, there had not been case law or scholarly discussions that had called for the introduction of the duty of loyalty into Japanese corporate law prior to the amendments. There was no provision in the Commercial Code that specified the meaning of ‘loyally (chūjitsusei)’ as well. The only clue as to the meaning of ‘loyally’ in Article 254–2 was that the Article was intended to impose a heavier obligation on directors. Since the main obligation a director had owed before 1950 was the duty of care, the following questions were raised soon after the amendments: What is the significance of introducing the duty of loyalty in addition to the duty of care? What does it mean to impose a heavier obligation upon a director than the duty of care?

The dominant school of thought concluded that the introduction of the duty of loyalty did not have any practical significance. Since the Commercial Code does not require any special knowledge, skills, or qualification for a director, anyone is capable of becoming a director. Accordingly, the law should only require a director to do what a reasonable person would do in the given circumstances – which is what is already required under the duty of care. Any additional requirements would be unnecessary and inappropriate. As a result, Article 254–2 was interpreted in the following way. The first part of the Article requiring a director to follow ‘laws, the articles of association, and decisions of the general meeting of shareholders’ is redundant since it states the obvious, and the remaining portion of the Article that mentions ‘loyally’ is meaningless as well, since it does not impose any additional duties beyond what is already covered by the duty of care. However, since the Article was already inserted in the Code, it should have some purpose insofar as it is present in the Code. The dominant approach was to treat the Article as merely stating the effect of complying with the duty of care: since the duty of care requires a director to take reasonable care when dealing with corporate affairs, the director should do so by following ‘laws, the articles of association, and decisions of the general meeting of shareholders’, as well as ‘loyally’ acting ‘for the benefit of the company’ as stated in the Article.Footnote 6

This is how the duty of loyalty was first established in Japan. According to the majority school of thought, since the duty of loyalty is a mere articulation of a result of the application of the duty of care, the duty of loyalty is essentially the same as the duty of care. The former is simply a specific duty derived through the application of the duty of care, just as a car driver has a specific duty to stop at a red traffic light because he has an overarching duty of care when driving on the road.

By contrast, there was a minority school of thought arguing that the duty of loyalty was a distinct duty from the duty of care. Due to the historical background of the 1950 amendments, they argued that the duty of loyalty in Article 254–2 should be understood in the same way as its counterpart in American corporate law. Accordingly, the duty of loyalty provided in the Article was thought to be a duty to refrain from pursuing one's self-interest and receiving benefits from one's position as a director, whereas the duty of care required a director to take reasonable care when executing corporate affairs.Footnote 7 However, given that the Supreme Court had taken an approach consonant with the majority school of thought in 1970,Footnote 8 the minority school of thought never acquired the same level of recognition or prominence. Another reason is that there was, in fact, no great distance between the two schools of thought because the majority came to recognize the existence of the proscriptive duty of loyalty – the exact position taken by the minority. The difference between the two schools of thought lay only in the way the duty is derived – either through the application of the duty of care, or directly from Article 254–2 and independently of the duty of care.

Since there was a consensus on the existence of a proscriptive duty of loyalty, the more pertinent task was to clarify specific rules for the proscriptive aspect of the duty, rather than the nature and place of origin of the duty, or the conceptual relationship between the duties of loyalty and care. This shift in academic attention was understandable because the then-existing regulations on directors’ conflicts of interest still required clarification to a great extent. The Commercial Code had Article 265, which only regulated a director's self-dealing with his company. It was not clear what other types of transactions that could cause a conflict of interest were to be regulated. Greater detail on the legal consequences of the regulated transactions if being performed without the permission of the board of directors, as well as the available remedies, also needed to be provided. Accordingly, these issues were discussed, and the rules specified, through which proscriptive regulation on directors’ conflict of interest were developed.

In 2005, the chapter of the Commercial Code addressing corporate law was excised from the Code and enacted as the Companies Act of 2005 (Companies Act). Regulations on directors’ conflicts of interest are currently found in specific provisions of the Companies Act. Article 356(1) of the Companies Act regulates the following situations: (i) if a director intends to carry out, for themselves or for a third party, any transactions in the same line of business as his company, (ii) where a director intends to engage in a transaction with the company for himself or a third party, and (iii) if the company intends to guarantee the debts of a director or otherwise carry out any transaction with a person other than the director that results in a conflict of interest between the company and such director. In these situations, the director must disclose the material facts of the relevant transactions, and obtain permission from the board of directors, or the general meeting of the shareholders if the company does not have a board of directors (Articles 356(1) and 365).Footnote 9

These developments created a perplexing relationship between the duties of loyalty and care. On the one hand, rules governing directors’ conflict of interest are currently often categorized as within the duty of loyalty. Therefore, to the extent that the duty of loyalty means a duty to refrain from engaging in a conflict of interest and taking benefits from one's position as a director, there is a scholarly consensus on the term ‘duty of loyalty’.Footnote 10 Consequently, to the extent that the duty of loyalty is considered to be a proscriptive obligation, it is distinct from the duty of care. However, on the other hand, the majority school of thought that considers the duty of loyalty to be part of the duty of care, as well as the Supreme Court's decision, have not been abandoned. Accordingly, such a proscriptive duty of loyalty is often thought to be a specific obligation derived through the application of the duty of care, and therefore, the two duties are essentially the same. It is often said that using different terms for the two duties is useful for facilitating discussions, but that it is unnecessary to consider the duty of loyalty to be different from the duty of care,Footnote 11 and that one should not emphasize the difference between the two duties.Footnote 12 In fact, it is not surprising to find a court's decision describing the same director's act as breaches of the duties of care and loyalty.Footnote 13 As a result, it remains unclear exactly how the two duties are differentiated.

One reason for leaving the two duties commingled is that it does not pose a practical problem. Apart from cases involving the specific conflict of interest regulated in Article 356(1) of the Companies Act, directors’ liabilities are subjected to the same rules regardless of their breach of the duty of loyalty or care.Footnote 14 Therefore, the current discussions involving the two duties have gone only as far as to say that the specific conflict-of-interest regulations can be categorized as the duty of loyalty and differentiated from the duty of care. However, this conflation of the two duties has created further confusion in trust law and agency law, as concepts from corporate law have been influential in these two areas.

B. Trustee's Duty of Loyalty

1. Duty of loyalty in the 1922 Trust Act

In Japanese trust law, there was no express provision concerning a trustee's duty of loyalty until the amendments to the Trust Act in 2006 (2006 Trust Act). Prior to 2006, the old Trust Act, which was enacted in 1922 (1922 Trust Act), contained provisions on a trustee's duty of care and specific conflict-of-interest situations, such as the prohibition of self-dealing and receipt of benefits from the trust, without referencing the duty of loyalty.Footnote 15 Although the exact reason for lacking any general provision on the duty of loyalty is unclear, it is understandable given that the old Trust Act was modeled based on English trust law, the Indian Trust Act, and the California Civil Code 1872 during a time when the trustee's duty of loyalty in those countries was not yet fully conceptualized as a single obligation.Footnote 16

In the 1960s, a leading scholar of civil law and trust law, Kazuo Shinomiya, proposed a fundamental structure of the duty of loyalty. Referring to Section 170 of the Restatement (Second) of the Law of Trust, as well as the German legal concept of ‘Treupflicht’, he offered an account of a trustee's duty of loyalty in Japanese law as an obligation to act in the best interests of the beneficiary, and not to place oneself in a situation where their interest was in conflict with an obligation they owed to the beneficiary. According to Shinomiya, the duty of loyalty contains two aspects: the positive aspect, which is to act in the best interests of the beneficiary; and the negative aspect, which is to refrain from acting in a conflict-of-interest situation. Shinomiya further classified the negative aspect into the following three sub-principles: (a) the trustee is prohibited from putting himself or herself in a situation where their interest conflicts with the interests of the trust; (b) the trustee is prohibited from receiving benefits from managing the trust; and (c) the trustee is prohibited from advancing a third party's interests in the course of managing the trust. As for the legal basis of the duty, Shinomiya argued that Article 22(1) of the 1922 Trust Act, which prohibits self-dealing, proved the existence of the duty of loyalty as an underlying notion.Footnote 17 Shinomiya's approach to the duty of loyalty soon became widely accepted as the fundamental structure of the duty.

The subsequent development of the trustee's duty of loyalty was made mainly with respect to the negative aspect of the duty, and mostly through examining English and American trust law. With regards to the negative aspect, given that a trustee does not usually advance a third party's interests unless the trustee stands to gain personally from doing so, (a) and (c) of the negative aspect are combined into the so-called conflict principle that prohibits a trustee from acting in a situation where their interests (including their interest in furthering a third party's interests) conflicts with their duty. The negative aspect (b) is often described as the profit principle that prohibits a trustee from acquiring benefits from managing the trust.Footnote 18

2. Duty of loyalty in 2006 Trust Act

When the Trust Act was amended in 2006, three new provisions – Articles 30 to 32 – were created to address the trustee's duty of loyalty. The provisions reflect developments of the duty up to that point in time. Articles 31 and 32 are the specific provisions covering the negative aspect of the duty, or the conflict and profit principles, respectively. Article 30 is the general provision on the duty and is intended to apply to cases that are not covered by the other two Articles.

(a) Article 31: Article 31 covers the conflict principle. Article 31(1) prohibits the following acts by a trustee: (i) a self-dealing transaction with the trust; (ii) a transaction between trusts under their management (eg transferring assets from one trust to another administered by the trustee); (iii) a transaction between the trust and a third party while acting as the trustee and the agent of the third party at the same time; and (iv) placing a mortgage on a trust property to secure a trustee's personal debt, and any other transaction that a trustee makes for the trust and which creates a conflict of interest between the trustee and the trust. These acts are not prohibited only if the trustee discloses the material information to the beneficiary about the prohibited act that the trustee intends to perform, and acquires permission from the beneficiary (Article 31(2)(ii)), or if the act is permitted under the terms of the trust (Article 31(2)(i)). In addition, even without permission from the beneficiary or authorization under the terms of the trust, a trustee is still not held liable for performing the prohibited act if the trustee proves that (a) the act ‘is considered reasonably necessary for achieving the purpose of the trust, and it is clear that the act at issue … will not harm the interests of the beneficiary’, or (b) ‘there are justifiable grounds for the trustee to carry out the act in light of the impact of the act on the trust property, the purpose and manner of the act, the status of a substantial relationship between the trustee and the beneficiary which makes the trustee an interested party, and other relevant circumstances’ (Article 31(2)(iv)). Allowing a trustee to be exempted from their breach of Article 31(1) by proving the justifiability of the transaction at issue – that is, proving (a) and (b) – is one characteristic of the conflict principle in Japanese trust law.

(b) Article 32: Article 32(1) provides that ‘With regard to an act that a trustee may carry out in the course of administering trust affairs based on their powers, if the trustee's failure to carry out such an act would be contrary to the interests of the beneficiary, the trustee may not conduct such act on the account of the trustee or an interested party thereof’. There are three conditions for the Article to be applicable: (i) that a trustee did not perform a certain act for the trust when it could have been performed for the trust; (ii) that the trustee, instead, did the act for himself or herself; and (iii) that the trustee's failure to act for the trust was contrary to the beneficiary's interests. A typical example is a case where a trustee has appropriated an opportunity to make a contract for himself or herself while the trustee could and should have entered into the contract for the trust (eg where a trustee bought for himself or herself a piece of land that they found in the course of managing the trust even though the trustee was supposed to buy it for the trust). We might also say that the trustee has profited from their position as a trustee or done so with the information they acquired as a trustee; in this sense, the Article is often viewed as a statement of the profit principle.

However, the profit principle in Japanese trust law has a more limited scope of application than that in Commonwealth jurisdictions. To highlight one difference from the Commonwealth approach to the profit principle, consider Keech v Sanford.Footnote 19 Suppose it were indeed possible for a trustee to renew a lease for the benefit of the trust, but the trustee instead chose to take the lease for himself or herself. This instance would be considered a breach of Article 32(1) because the trustee's decision not to renew the lease for the benefit of the trust would be considered contrary to the beneficiary's interests. By contrast, if a trustee took the lease contract for himself or herself as the trustee was unable to renew the contract for the trust, they would be permitted to do so under Japanese law because the Article is applicable only to a case where a trustee chose not to act for the trust when they could ‘carry [it] out in the course of administering trust affairs.’ The Article is drafted in this manner because it is only intended to apply to scenarios where the trustee benefitted himself or herself at the beneficiary's expense.

A case discussed during the drafting process of the Article was one where a trustee made an investment (eg purchasing a company's stock) for himself or herself based on the information the trustee had acquired in the course of managing the trust.Footnote 20 Considering the situation where the trustee also made the same investment for the trust (so that the trustee did not cause any loss to the trust), members of the Legislative Council, which was responsible for drafting the 2006 Trust Act,Footnote 21 questioned why the trustee should be prohibited from using the information for himself or herself despite the fact that the trustee's management of the trust was not influenced by the trustee's use of that information.Footnote 22 Even in the situation where the trustee only made the investment for himself or herself, such an act should not necessarily result in liability because the trustee's actions would not automatically cause the trust to suffer loss. For example, the trustee can make another investment for the trust which is equally profitable. Thus, conditions (i) and (ii) alone were thought to be inadequate, and condition (iii) was added in order to properly delineate the scope of the profit principle to only capture the cases where the trust has been negatively affected by the trustee's act of making a profit.

Further, the Article is thought to be only applicable where the trustee deliberately benefits himself or herself at the trust's expense. In the abovementioned investment scenario, suppose the trustee made a profit through the investment while not making the same investment for the trust, and as a result the trust sustained a loss. Even in such a case, the trustee's failure to make the investment for the trust would not constitute a breach of the duty of loyalty insofar as the trustee carelessly passed on capitalizing on the investment opportunity for the trust's benefit. If the trustee's failure to make the investment for the trust was due to sheer negligence, it would have been deemed a breach of the duty of care. An application of the Article is, therefore, limited to a case where a trustee chose to perform an act for himself or herself while in so doing deliberately disregarding the beneficiary's interests.Footnote 23 Under the Article, whether a trustee deliberately disregarded the beneficiary's interests in order to pursue the trustee's own interests is determined by examining whether condition (iii) is satisfied, taking into account the purpose of the act the trustee performed for himself or herself, the motivation behind the failure to act for the trust, the resulting effect on the trust, the relationship between the trustee and beneficiary that makes the trustee an interested party in relation to the act at issue, and other circumstances that led the trustee to act the way they did.Footnote 24

Since the Article is intended to capture only the case where a trustee faces a decision of whether to perform a certain act for himself or herself or the trust, the Article is applicable where the decision gives rise to a conflict of interest between the trustee and the beneficiary. Putting it differently, cases covered by the Article are those where the trustee made a profit in breach of the conflict principle. This highlights two features of the duty of loyalty in Japanese trust law. First, while it is sometimes said that the Article establishes the profit principle, the profit principle in Japanese law is not actually an independent principle but rather merely a subset of the conflict principle because it does not have an independent scope of application, and does no more than to describe a situation where the conflict principle is applicable.Footnote 25 This is because of the policy behind the profit principle, which is that the trustee should not be liable for making personal use of information acquired in the course of managing the trust unless the trustee deliberately places their interests before the interests of the trust. Second, since the profit principle itself is merely a subset of the conflict principle, the Article is also part of the conflict principle. Therefore, even though there is literature that makes reference to the profit principle, it arguably does not exist as a principle independent of the conflict principle as a matter of Japanese trust law.

As to exceptions to the prohibition laid down by Article 32(1), a trustee may perform the prohibited act if the trustee discloses material information about the act and acquires permission from the beneficiary (Article 32(2)(ii)), or if the act is permitted under the terms of the trust (Article 32(2)(i)). Unlike Article 31(1), there is no provision that allows a trustee to avoid the consequences of breaching Article 32(1) by showing that the act is justified without the necessary permission from the beneficiary. The lack of any justifiability exemption is reasonable considering that the Article is applicable to a case where the trustee intentionally sacrificed the beneficiary's interests in order to profit himself or herself. Since the trustee's motivation for their act at issue falls under condition (iii), there would virtually be no case where sacrificing the beneficiary's interests could be later justified even if condition (iii) is satisfied.

(c) Article 30: The remaining provision is Article 30. The Article states, ‘A trustee shall loyally administer trust affairs and perform other acts for the beneficiary’. This provision is intended to be a catch-all provision for the duty of loyalty; even if a trustee's act is not covered by Article 31(1) or 32(1), an act would still be a breach of the duty insofar as Article 30 is applicable. The question is what kind of acts is covered by Article 30 as the scope of the Article is left open for future interpretation. Commentaries to the Article are not helpful because they merely state that considerations would have to be given to each individual case without elaborating on the exact factors to be taken into consideration.Footnote 26

The question becomes difficult to answer particularly in relation to the positive aspect of the duty since the meaning of the positive aspect remains unclear. According to current law (2006 Trust Act), a trustee owes (a) an obligation to ‘administer trust affairs in line with the purpose of the trust’ (Article 29(1)). This is the trustee's main obligation arising from the agreement between the trustee and the settlor of the trust. When performing this obligation, (b) a trustee is required to take reasonable care (Article 29(2)). Since a trustee's act is deemed as an act for the benefit of the trust insofar as their act is in compliance with their obligation to administer trust affairs with due care, the positive aspect of the duty of loyalty is, in reality, another way of describing obligations (a) and (b).Footnote 27 In other words, if the duty of loyalty includes the positive aspect, the duty of loyalty overlaps with the duty of care's positive aspect, because the former duty encompasses the latter.

This overlap leads to a practical problem in relation to Article 30, because if the duty of loyalty includes the positive aspect, a trustee's breach of the Article may also involve a breach of the duty of care. This is problematic because the remedial rules for breaches of the two duties are different. In the case of a breach of the duty of loyalty, which means a breach of Article 30, 31(1), or 32(1), the beneficiary may claim damages, and the damages are presumed to be the profits that the trustee earned from the breach of the duty (Article 40(3)). The presumption as to damages is applicable only to a breach of the duty of loyalty.Footnote 28 In the case of a breach of the duty of care, the beneficiary is required to prove that the trust has sustained damage due to the breach. Therefore, the scope of Article 30, or the contents of the duty of loyalty, should not overlap with the duty of care.

Further, the development of the duty of loyalty in trust law has complicated both trust law and corporate law. On the one hand, there is a majority school of thought in corporate law taking the position that it is the duty of care that is conceptually larger than the duty of loyalty (which is how the duty of loyalty is derived through the application of the duty of care). On the other hand, according to Shinomiya's framework, it is actually the duty of loyalty that is conceptually larger than the duty of care, since the positive aspect of the duty of loyalty encompasses the duty of care. Although these two approaches are contradictory, Shinomiya's idea of duty of loyalty is thought to be applicable to a director because the duty of loyalty should be uniformly applied to parties who voluntarily undertake to manage other people's affairs, such as trustees, agents, and directors. The majority school of thought in corporate law has also begun to dominate trust law for the same reason. Thus, the conceptual relationship between the duties of loyalty and care have become even more unclear. Although it is commonly understood that the two duties are different in trust law and corporate law, we simply do not know exactly how they differ.

C. Agent's Duty of Loyalty

Agency in Japanese law only refers to the external relationship between an agent and principal, on the one hand, and a third party on the other hand. Since the internal relationship between an agent and principal is governed as a contract of mandate in the Civil Code of 1897 (Civil Code), an agent's duty toward his principal is addressed as a mandatary's duty. As is usually the case in civil law countries, the Japanese Civil Code does not have an express provision addressing an agent's (or mandatary's) duty of loyalty, while it has a provision concerning an agent's duty of care.Footnote 29

Shinomiya argued that his idea of duty of loyalty was also applicable to an agent, and referred to two provisions in the Civil Code as the basis of the duty. One is a provision regulating an agent's self-dealing and dual-employment,Footnote 30 and the other is one regulating a parent's exercise of parental authority in conflict-of-interest situations.Footnote 31 While Shinomiya's approach has been acknowledged in the civil law scholarship, little attention has been paid to the agent's duty of loyalty.Footnote 32 This is partly because the Civil Code lacks a provision that could be used as the basis for illuminating the contents of the duty other than the abovementioned two provisions.Footnote 33 Consequently, the general approach to an agent's duty of loyalty has been to apply rules in trust law to agents mutatis mutandis.Footnote 34 This approach is reinforced by the idea that the duty of loyalty should be uniformly applied to both trustees and agents. This means that an agent's duty of loyalty has been developed only as much as its counterpart in trust law. Accordingly, while the negative aspect of the duty has been clarified to the extent that rules stipulated in Articles 31 and 32 of the 2006 Trust Act are shared in agency law, the meaning of the positive aspect of the duty remains unclear. The paradox of the duties of loyalty and care created in trust law and corporate law has also been brought into the civil law sphere without being resolved.

Unfortunately, the situation changed for the worse when Tamar Frankel's scholarship on expanding notions of fiduciary relationships and duties in American law was introduced into Japan in the 1990s.Footnote 35 At the same time, there was considerable debate over professional liability in Japan (eg civil liability of doctors to their patients, and those of lawyers, real estate agents, and investment advisors to their clients).Footnote 36 In this context, Frankel's idea of expanding fiduciary relationships was positively received in Japan, and sometimes even viewed as a panacea for imposing desirable liability on so-called professionals. This view was reinforced by the false impression that various obligations could arise from a relationship insofar as the relationship is labeled as a fiduciary one, and the obligation at issue could be described as an obligation to act for another person's benefit. As a result, it was argued that various relationships which were often called fiduciary relationships in American law (eg doctor-patient, attorney-client, and investment advisor-client relationships) should be categorized as fiduciary relationships under Japanese law as well. It was argued that various obligations, such as duties to provide information, give advice, and act in good faith, which were sometimes viewed as fiduciary obligations in American law should also be called as such in Japanese law.Footnote 37 It was as if the expansion of fiduciary relationships and obligations in common law jurisdictions, the US in particular, had come to Japanese law, so much so that a Japanese scholar once described the Japanese ‘fiduciary craze’ as ‘a common-law monster stomping over Japanese law.’Footnote 38 Since Shinomiya himself called the duty of loyalty a fiduciary duty, and furthermore, the positive aspect of the duty of loyalty in his approach was indeed described as an obligation to act in the best interests of another person, the abovementioned obligations were pushed into the positive aspect of the duty of loyalty in the name of ‘obligations to act for another person's benefit’. Consequently, the positive aspect of the duty of loyalty was expanded – but with little improvement in clarity.Footnote 39

The complexity surfaced during the process of amending the Civil Code.Footnote 40 A new provision concerning an agent's duty of loyalty was once proposed to the drafting committee, the Legislative Council. The proposed provision contained only one sentence stating that a mandatary (or an agent) ‘shall loyally administer the entrusted affairs’. The proposal sparked a heated and baffling debate in the Legislative Council – which revealed that every member of the Council attached different meanings to the duty. Some believed that the duty of loyalty only consisted of its negative aspect; others took the position that it had both positive and negative aspects; some believed that the duty also included a duty to disclose information, and so on.Footnote 41 The proposal was ultimately dismissed for the reason that there was no consensus on the meaning of the duty of loyalty.

D. Current State of the Duty of Loyalty and Issues to Be Resolved

To summarize the current state of the duty of loyalty in Japanese law, the negative aspect of the duty has been clarified throughout corporate, trust, and agency laws. Rules stipulated in Articles 31 and 32 of the 2006 Trust Act reflect the current understanding of the negative aspect. To the extent that the duty of loyalty contains the negative aspect, or the conflict principle, there is a common understanding throughout these three areas of law. The problem lies in the positive aspect of the duty, because its meaning is simply left unclear.

How about, then, discarding the positive aspect of the duty of loyalty and defining the duty only to mean the negative aspect? The positive aspect essentially means that one owes the duty to carry out the entrusted affairs with due care, which is already recognized as part of the duty of care under Japanese law. Therefore, discarding the positive aspect and reframing the duty of loyalty to refer only to the negative aspect would not result in a practical change in the obligations that a trustee and agent owe. This approach might even be appropriate. Firstly, since there is already a consensus on the meaning of the negative aspect of the duty of loyalty, discarding the positive aspect could clarify the meaning of the duty. Secondly, if the duty of loyalty means only the negative aspect, the duty in Japanese law would become similar to that in common law jurisdictions, which would enable the duty in Japanese law to develop further in line with existing common law jurisprudence on the conflict principle (although the profit principle in Japanese law is quite different). This itself might also be desirable, since the duty of loyalty originated from common law jurisdictions. Lastly, if the duty of loyalty contains only the negative aspect, it might be possible to clarify the relationship between the duties of loyalty and care as well, because the duty would be differentiated from the duty of care in basically the same way as in common law jurisdictions. The remaining issue would be whether the duty of loyalty in this understanding should still be deemed as an obligation derived through an application of the duty of care as is argued in corporate law.

However, since Shinomiya established his framework of the duty of loyalty, the positive aspect of the duty has persisted to this day. This is because there has always been the strong conviction among Japanese scholars that ‘loyalty’ should mean something more positive than merely refraining from performing certain acts. This explains why the expanding notion of fiduciary duty was once well received by Japanese scholars, although this has only led to further confusion. If the duty of loyalty contains something more than the negative aspect, what would that be?Footnote 42 In addition, how would the duty of loyalty be differentiated from the duty of care? Shinomiya's framework would not be able to provide an answer, because his conception of the duty of loyalty overlaps with the duty of care in the positive aspect, which causes practical problems, especially in trust law. Therefore, the positive aspect, if there is to be one, would have to be re-defined in a way to properly differentiate itself from the duty of care and the other duties a trustee and agent owe. Furthermore, the positive aspect would have to be identified in a way that all the existing rules relating to the duty of loyalty can be logically explained, so that the re-defined duty of loyalty would not cause greater confusion, or be incongruent with other laws. If that is impossible, the positive aspect of the duty should be reconsidered and perhaps discarded. We should thus reconsider if the duty should be confined to its negative aspect, and examine whether this conception of the duty of loyalty could fully explain all relevant rules.

The starting point, therefore, is whether the duty of loyalty should only mean the negative aspect, or if it should also contain the positive aspect. If the latter is to be the approach, what would the positive aspect be? Which definition of the duty can aptly explain all the existing rules concerning the duty in Japanese law?

II. LIONEL SMITH'S RE-DEFINITION OF THE FIDUCIARY DUTY

When looking into common law jurisdictions, particularly England, Australia, and Canada (ie Commonwealth jurisdictions), one can actually find scholarship that offers insight into the above questions.

Starting particularly from the 1980s, due to the elusive nature of the concepts of fiduciary duty, the duty expanded to encompass various obligations in the above jurisdictions.Footnote 43 This prompted questions about what the fiduciary duty really is and how it is differentiated from other obligations owed by a fiduciary. While the precise scope of fiduciary duties can still be a matter of debate, there are scholars who equate the fiduciary duties with the duty of loyalty and attempt to clarify the nature and content of the fiduciary duty. In this line of scholarship, there are two notable works. One is Lionel Smith's attempt to identify the ‘essence’ of the fiduciary duty.Footnote 44 The other is Matthew Conaglen's analysis of the nature and function of the fiduciary duty.Footnote 45

It is true that neither Smith nor Conaglen draw on Japanese law in their scholarship. However, interestingly enough, they offer useful insights for Japanese law because Conaglen provides in-depth analysis and a clear picture of how the duty of loyalty would operate if it were confined to its negative aspect. On the other hand, Smith's view shows a whole new way to define the positive aspect of the duty in Japanese law while rationalizing existing rules. Since this article argues that Smith's idea can be applied to the duty of loyalty in Japanese law, his idea will be the central subject of the discussion below. Conaglen's analysis will be examined as a counterpoint. In addition, while Smith and Conaglen analyze both the conflict and profit principles, the article focuses only on their views on the conflict principle given that the profit principle in Japanese law is only recognized as a subset of the conflict principle.

A. Smith's Idea of Fiduciary Duty in Contrast with Conaglen's View

Primarily focusing on trustee and director duties, Smith takes a unique approach by arguing that the fiduciary duty, or duty of loyalty, should be defined as an obligation to make decisions with the motivation to advance the interests of the beneficiary.Footnote 46 According to Smith, the fiduciary duty is not an obligation to direct a fiduciary's action, but rather an obligation to regulate their decision-making process. The duty is applied to both a fiduciary's action and inaction, and says to them, ‘you must act (or not) in what you perceive to be the best interests of the beneficiary’.Footnote 47 This unique notion of the duty is proposed based on the following considerations.

Smith analyzes the prophylactic nature of the fiduciary duty because the prophylactic rule to avoid conflicts of interests is considered to be the essence of fiduciary duty. The prophylactic nature is expressed by the conflict and profit principles.Footnote 48 Take the conflict principle as an example. The principle is described as that a fiduciary owes a duty (duty 1) to avoid a situation where their self-interest is in conflict with their duty (duty 2). If duty 1 and duty 2 are the same duty, the conflict principle would not make sense. Therefore, the two duties should be different.Footnote 49 Considering that the fiduciary duty is generally acknowledged as a proscriptive duty in Commonwealth jurisdictions, many would deem duty 1 as the fiduciary duty, such that duty 2 represents another duty.

In fact, Conaglen takes this view as well. Since duties applied peculiarly to a fiduciary can reveal the nature and function of the fiduciary duty, Conaglen first distinguishes duties peculiar to a fiduciary from among the duties that a fiduciary owes, and concludes that the conflict and profit principles are peculiarly fiduciary duties.Footnote 50 Accordingly, Conaglen considers the two principles to be fiduciary duties, and calls the rest of the duties that a fiduciary owes the non-fiduciary duties. Based on this analysis, Conaglen attempts to clarify the nature and function of peculiarly fiduciary duties by examining how the two principles operate in judicial decisions. As for the conflict principle, since the conflict principle itself is a fiduciary duty in his analysis, the fiduciary duty is duty 1 – that is, to avoid a situation where the fiduciary's self-interest comes into conflict with another duty (ie duty 2). Conaglen deems duty 2 as the non-fiduciary duty.Footnote 51 The non-fiduciary duty is essentially the duty to perform what is undertaken with due care. Accordingly, ‘a fiduciary owes a fiduciary duty to avoid conflicts between his non-fiduciary duty and his personal interest’.Footnote 52 For instance, the prohibition of a trustee's self-dealing is explained as follows: While a trustee's non-fiduciary duty (ie the duty to administer the trust with due care) requires the trustee to ‘get the best price for property to be sold’,Footnote 53 their self-interest tempts them to neglect the non-fiduciary duty. The fiduciary duty prohibits the trustee from placing himself or herself in a situation where the trustee is exposed to the risk of neglecting the non-fiduciary duty. ‘By requiring the fiduciary to eschew situations that involve temptation not to perform properly his non-fiduciary duties, fiduciary duties make proper performance of those non-fiduciary duties more likely.’Footnote 54 In this manner, the fiduciary duty protects the non-fiduciary duty from being breached.Footnote 55

However, Smith rejects this view for the following reasons. According to Conaglen's approach, the fiduciary duty protects another duty, which is the non-fiduciary duty. However, this explanation does not explain why the non-fiduciary duty deserves such special protection by another duty because the non-fiduciary duty is, as the name suggests, not a special duty. One might argue that the special protection is necessary because a beneficiary is vulnerable to the fiduciary's power. However, since the non-fiduciary duty is equivalent to one's duty to perform what one undertakes in a contractual or non-contractual relationship, the fundamental nature of the non-fiduciary duty is the same as a car driver's duty to drive carefully. The driver's duty does not deserve additional protection, even though pedestrians are generally vulnerable to drivers.Footnote 56 Another justification might be deterrence: if the law makes a person liable for having been tempted to breach their obligation even if they, in fact, did not breach the duty, other people who would be in the same situation as theirs would be discouraged from breaching their own obligations. However, Smith considers this reasoning inadequate, because general deterrence is outside the purpose of private law.Footnote 57

Thus, Smith takes the view that duty 2 is the fiduciary duty, and duty 1 is not a duty, but rather a rule. Accordingly, the conflict principle means that a fiduciary is subjected to a rule to avoid a conflict between one's self-interest and the fiduciary duty.Footnote 58 Since the conflict principle is a rule that prohibits a trustee from being in a situation where the trustee is tempted to breach their fiduciary duty, the conflict principle does not constitute the fiduciary duty, but rather stands as a separate rule to protect the fiduciary duty from being breached. Consequently, one cannot understand the fiduciary duty simply by looking at the conflict principle, as the conflict principle only shows that it protects something called the fiduciary duty. The next question is what the fiduciary duty is.

Smith states that one possible answer is to define the fiduciary duty as a duty to act for the beneficiary's benefit. Smith endorses the idea that the fiduciary duty should mean something prescriptive because ‘[t]here is more to loyalty than avoiding things’.Footnote 59 However, he does not agree with defining the fiduciary duty as the duty to act to advance beneficiary's interests for the following reasons. Under this definition, the conflict principle would become a rule that prevents a fiduciary from putting himself or herself in a situation where their self-interest comes into conflict with their fiduciary duty to act in the beneficiary's interests. In this manner, the conflict principle would protect this fiduciary duty. However, the fiduciary duty to act in the beneficiary's interests is fundamentally the same as one's duty to perform what one undertakes.Footnote 60 Therefore, such a duty does not possess any feature that justifies special protection by the conflict principle.Footnote 61

These findings lead Smith to conclude that the fiduciary duty cannot be explained either as a duty to act (in the best interests of the beneficiary) or to not act (in a conflict-of-interest situation). Here, Smith takes a radically different approach. Since a legal obligation is generally described as a duty to act or not to act in a certain manner, it is understandable that when the contents of the fiduciary duty came to be questioned, attempts have been made to explain the duty as a duty to act or not act. However, if the fiduciary duty cannot be explained in either way, this duty is not a duty that regulates one's action or inaction. Rather, this duty regulates one's motives.Footnote 62 According to Smith, the fiduciary duty requires a fiduciary's decision-making process to be guided by the motivation to advance the beneficiary's interests. The conflict principle stands to prevent a breach of this fiduciary duty. In the case of the prohibition of self-dealing by trustees, for instance, the fiduciary duty requires a trustee to decide what to do in the beneficiary's interests. However, there is a risk that the trustee's decision-making might be swayed by their self-interest.Footnote 63 The conflict principle prohibits a trustee from being in such a situation. In this manner, the conflict principle protects the fiduciary duty from being breached. According to Smith, the fiduciary duty has a prophylactic nature, in the sense that it can protect itself from being breached by having the conflict principle as the protector.

With Smith's definition, the reason for the fiduciary duty to carry such special protection by the conflict principle can be justified by the very nature of the duty. Since the fiduciary duty is breached when a fiduciary's action or inaction is based on a motive other than advancing the beneficiary's interests, a beneficiary is required to prove a fiduciary's motivation behind the fiduciary's action or inaction at issue in order to prove that the fiduciary breached the duty. The difficulty of proving one's motivation, which arises from the nature of the fiduciary duty, is the justification for the conflict principle. The conflict principle is intended to ease the onerous burden of proving a fiduciary's motive.Footnote 64 With the conflict principle, a beneficiary ‘only has to prove that the fiduciary was in a conflict’. Furthermore, with the conflict principle, a beneficiary would safely rely on their fiduciary because the beneficiary does ‘not have to wonder about the fiduciary's motive’.Footnote 65

Smith admits that defining a legal duty as a duty to direct one's motive is unique particularly in common law jurisdictions. However, he reinforces the acceptability of such a duty by arguing that a duty to regulate one's motive is not foreign to civil law tradition. He references rules in the Civil Code of Quebec that inquire into one's motives.Footnote 66

B. From the Perspective of Japanese Law

Smith and Conaglen present contrasting views of the fiduciary duty, or the duty of loyalty, as well as the role the conflict principle plays. According to Conaglen, the fiduciary duty is the conflict principle itself and stands to protect the non-fiduciary duty. In contrast, Smith presents the fiduciary duty as a positive duty to regulate a fiduciary's motive. With his idea of fiduciary duty, the conflict principle stands separately and protects the non-fiduciary duty.

From the viewpoint of Japanese law, Conaglen's analysis presents a picture of how the relevant rules would be viewed if the duty of loyalty contains only the negative aspect. In contrast, Smith offers a way to re-define and keep the positive aspect of the duty along with the conflict principle. As was presented earlier, since the duty of loyalty in Japanese law remains contested, the contents of the duty of loyalty in Japanese law could be understood in accordance with either Smith's or Conaglen's view. The conflict principle in Japanese law could also be understood from either Smith's or Conaglen's perspective. Their analyses into the conflict principle enlighten one on how vague the principle in Japanese law actually is. While the conflict principle in Japanese trust law is also explained as one prohibiting a trustee from being in a situation where their self-interest conflicts with their duty, common explanations are that the conflict principle is intended to prevent a trustee from ‘violating his duty’,Footnote 67 ‘neglecting his responsibility’,Footnote 68 ‘acting against beneficiary's interests’,Footnote 69 or ‘causing loss to the trust’.Footnote 70 Since the ‘duty’ or ‘responsibility’ in these explanations are not articulated, they can mean a breach of any duty, or ‘losses’ caused by a breach of any duty. What is to be prevented by the conflict rule in Japanese law, therefore, could mean a breach of the non-fiduciary duty as Conaglen suggests, or that of the fiduciary duty as Smith argues. However, closer examination reveals that the duty of loyalty in Japanese law can and should be defined according to Smith's view, because the re-definition of the duty in accordance with Smith's ideas can clarify the meaning of the duty while properly explaining the conflict principle in a coherent manner, as well as properly differentiating the duty from the duty of care in Japanese law.

III. RE-SHAPING THE DUTY OF LOYALTY IN JAPANESE LAW

In this part, this article will first explain why the duty of loyalty in Japanese law cannot be fully explained purely by reference to its negative aspect by drawing on Conaglen's analysis. Second, this article will consider how Smith's idea can be used not only to clarify the meaning of the duty of loyalty, but also to explain the conflict principle, and furthermore draw a proper distinction between the duty of loyalty and the duty of care in Japanese law.

A. Re-defining the Duty of Loyalty

1. Duty of loyalty: only the negative aspect?

If the duty of loyalty only contains the negative aspect, or the conflict principle, the duty would, as Conaglen would argue, serve the function of protecting the non-fiduciary duty in Japanese law. In Japanese trust law, the non-fiduciary duty would be the obligation to ‘administer trust affairs in line with the purpose of the trust’ (Article 29(1) of the 2006 Trust Act), and the duty to take ‘due care’ when administering the trust (Article 29(2)). However, considering that an obligation in private law is generally not accompanied by another duty to protect itself, a criticism made by Smith is convincing: if one duty protects another duty, such a protective function should be the character of the duty that is being protected, rather than that of the duty doing the protecting. However, the duties that would be protected by the duty of loyalty in Japanese law do not possess any character deserving special protection by another duty. The trustee's duty as provided in Article 29(1) is an obligation to perform what one voluntarily promises to do, and the duty of care is the reasonableness standard that can be imposed upon parties in various contractual and non-contractual contexts.Footnote 71

Moreover, confining the duty of loyalty to its negative aspect cannot fully explain the rules surrounding the duty in Japanese law. As Conaglen's analysis shows, if the duty of loyalty only means the negative aspect, the purpose of the duty would be to prevent the risk that a trustee might breach their obligation to administer trust affairs with due care. If so, it should be recognized as a breach of the duty of loyalty insofar as such a risk exists, and for the very reason that such a risk should be avoided.Footnote 72 However, that is not the way the duty of loyalty operates in Japanese trust law and agency law. An example involves a transaction between two trusts under the management of the same trustee. While such a transaction is, in principle, prohibited (Article 31(1)(ii) of the 2006 Trust Act), the transaction becomes permissible if a trustee acquires permission to do so from the beneficiaries of both trusts (Article 31(2)(ii)). However, even if the trustee acquires the necessary permission, the trustee is still deemed to have breached the duty of loyalty owed to one of the beneficiaries if the trustee intentionally favours the other beneficiary in the transaction (Case I). In contrast, if the transaction turned out to be favourable to one of the beneficiaries and the trustee did not intend that to happen, that is not considered a breach of the duty of loyalty, although the trustee may be held liable for their breach of the duty of care in relation to the beneficiary of the trust that has sustained loss because of the transaction.Footnote 73 The same rule is applicable to a case of an agent's dual-employment: an agent may act on behalf of two principals in a transaction if the agent acquires permission from both principals (Article 108 of the Civil Code). However, the agent is deemed to have breached the duty of loyalty if the agent intentionally favoured one principal over the other in the transaction. If the transaction turned out to be favourable to one of the principals, it could only be dealt with as the agent's breach of the duty of care. In these instances, a breach of the duty of loyalty is found not because a trustee or agent places himself or herself in a situation that posits the risk of neglecting their duty, but rather because of their intention to favour one of the beneficiaries or principals. This rule cannot be explained if the duty of loyalty only means the negative aspect, because a breach of the duty would occur regardless of the trustee's or agent's intention insofar as a conflict-of-interest situation exists.Footnote 74

Consider a scenario covered by Article 32 of the 2006 Trust Act. As explained earlier, the Article is applicable only to a case where a trustee appropriates benefits in the knowledge that doing so would cause loss to the trust. The basis for the trustee's liability as trustee under the Article also lies in their motivation to not act in the beneficiary's interests, and not merely their decision to place himself or herself in a certain situation. Therefore, the duty of loyalty presupposed by the Article cannot be explained if the duty only means the negative aspect.

2. Duty of loyalty as a duty to regulate one's motive

Rather, the above scenarios show that the duty of loyalty in Japanese law can be consistent with Smith's ideas because it is a trustee's motivation that determines whether the trustee has breached their duty of loyalty, and the breach occurs when their motivation behind the act at issue was not to advance the beneficiary's interests.

Furthermore, one can find one more instance in Japanese agency law that is consistent with Smith's idea. Suppose an agent with the authority to sell certain goods indeed sold the goods to another person on behalf of the principal with the intention to embezzle the purchase money (Case II).Footnote 75 A scenario where an agent acts within the scope of their power for their own benefit has long been considered a typical case of breach of the duty of loyalty.Footnote 76 In this case, a breach of the duty is also acknowledged for the reason that an agent's decision to exercise their power is not motivated by their intention to further their principal's interests. This instance also indicates the existence of the duty that directs an agent to make decisions to further their principal's interests. While this concept of duty of loyalty has long been acknowledged in Japanese law, it has been somewhat isolated from the overall development of the duty of loyalty because it was formulated in the area of agency. Since agency in Japanese law deals with the external relationship, this idea of duty of loyalty was created as a factor that affects the scope of an agent's power, and therefore, the validity of a contract concluded by an agent.Footnote 77 It has not been incorporated into the internal relationship well enough to be recognized as a duty an agent owes toward their principal.

In relation to this, Smith addresses an illuminating aspect. He refers to rules in Commonwealth jurisdictions reviewing a trustee's exercise of their fiduciary powers in light of their motives, as well as the ‘proper purposes’ doctrine that reviews a director's exercise of their powers in light of their motive, and argues that these rules attest to the existence of an obligation to regulate a fiduciary's motive.Footnote 78 Japanese law has also been developing various rules to properly control powers vested in an agent in terms of both external and internal regulation: external regulation determines the validity of a contract concluded by an agent with their power, while internal regulation examines the same exercise of agents' powers in relation to the principal and provide the principal necessary remedies. External and internal regulation should be designed in a coherent manner. Since the duty of loyalty to inquire into an agent's motive is already recognized in external regulation, the same duty should also be recognized in internal regulation.

In addition, ever since Shinomiya established his framework for the duty of loyalty, the positive aspect of the duty has persisted to this day.Footnote 79 A problem with the Japanese legal concept of duty of loyalty is that Shinomiya's positive aspect of the duty overlaps with the duty of care because the duty of loyalty is defined as an obligation to act in the beneficiary's interests. If the duty of loyalty cannot be described as a duty to act (in the beneficiary's interests) or not to act (in a conflict-of-interest situation), another way to resolve the issue might be – as Smith suggests in the common law context – to change the way the duty is defined in Japanese law.

It is true that a duty to regulate one's motive seems unique because legal obligations in Japanese law are generally defined as a duty to act or refrain from acting in a certain manner. However, rules that inquire into one's motives are no more foreign to the Japanese Civil Code than the Civil Code of Quebec that Smith refers to. The Japanese Civil Code indeed has many rules that inquire into subjective motivations, especially where the principles of good faith and abuse of right are involved (Article 1(2) and (3)).Footnote 80 There are also schools of thought devising rules specifically applicable to intentional tort cases and arguing that intentional tortfeasors should receive harsher legal treatment than negligent ones.Footnote 81 Strictly speaking, all these rules are not intended to impose an obligation upon a person to regulate their motivation. They merely inquire into a person's motive and provide different legal treatment if malevolent intent is present. However, one can also say that these rules attest to the acceptability of a legal obligation to regulate one's motive, because the law does indeed take a harsh stance against certain motives in certain situations.

Furthermore, obligations recognized in Japanese law are not limited to duties to perform or refrain from performing an act. The duty of care is a key example. The duty of care is neither a duty to act nor to not act. It is a standard to evaluate a person's performance of their obligation from the perspective of whether the subject's acts are in accordance with what a reasonable person would do in the same circumstances.Footnote 82 If the reasonableness standard that evaluates one's act or inaction can be called a ‘duty’, the standard that considers one's act and inaction based on the actor's motivation can also be called a ‘duty’. Even if this argument fails, the existence of the standard that requires one to make decisions with the motive of advancing another person's interests is undeniable in trustee-beneficiary and agent-principal relationships. This is because trustees and agents voluntarily undertake to administer another person's affairs based on that motivation.Footnote 83 Therefore, the duty of loyalty, or the standard of loyalty, in Japanese law should be defined as a duty to make decisions with the motivation of advancing the interests of a beneficiary (or principal).

To be more precise, the duty of loyalty should be re-defined in the following manner. Take a trustee's duty as an example. The duty requires a trustee to make decisions concerning the administration of the trust in furtherance of the beneficiary's interests. Article 30 of the 2006 Trust Act, which is the general provision on the duty of loyalty, provides for this duty. Since the duty regulates the trustee's decision-making process, a breach of the duty occurs when a trustee's administration of the trust, which includes both action and inaction, is consciously guided by a motivation other than advancement of the beneficiary's interests. As far as a trustee's conscious decision-making is concerned, their decision could be based on a motivation (a) to advance the interests of the trust, (b) to cause loss to the trust, (c) to further the trustee's own interests, and (d) to further a third party's interests. Among these possibilities, the duty of loyalty requires a trustee's motivation to be (a), and the duty would be breached if (b) and (c) occurs. Case (d) would also constitute a breach of the duty. However, given that one generally does not act in the interests of a third party unless one has a personal interest in doing so, case (d) is dealt with as a subset of case (c). Both (Case I) and (Case II) mentioned earlier are treated as breaches of the duty of loyalty, because a trustee's and agent's motivations in these cases fall under (b) and/or (c).

B. The Conflict Principle and Its Relationship with the Duty of Loyalty

With the proposed definition of the duty of loyalty, the current state of the conflict principle in Japanese law can also be rationalized.

As was shown earlier, the conflict principle is reflected in Articles 31(1) and 32(1) of the 2006 Trust Act. Under Article 31(1), for instance, self-dealing by a trustee is prohibited because it poses the risk that the trustee might make a decision concerning the transaction in a way that benefits himself or herself. A trustee's transfer of an asset from one trust to another trust they manage is also prohibited because it also involves the risk that the trustee might breach the duty of loyalty owed toward one of the beneficiaries by making a decision regarding the transfer based on the motivation to advance the other beneficiary's interests. By prohibiting a trustee from placing himself or herself in a situation where they might breach their duty of loyalty, the conflict principle protects the duty from being breached. Prohibitions on self-dealing and dual-employment applicable to agents may be similarly rationalized.

The justification for attaching the conflict principle to the duty of loyalty lies in the very nature of the duty to regulate one's motivation, as Smith argues. Due to the nature of the duty, a beneficiary is required to prove their trustee's motive behind the trustee's action or inaction at issue in order to prove the trustee's breach of duty. The difficulty of proving someone else's motive calls for the conflict principle. The conflict principle is intended to lift the burden of proof from a beneficiary by enabling the beneficiary to seek remedies so long as the beneficiary proves that their trustee placed himself or herself in a prohibited situation.

According to this understanding, the conflict principle is not itself the content of the duty of loyalty, but rather stands as a separate rule that accompanies the duty of loyalty. Therefore, a breach of the conflict principle is only a breach of the principle; it does not automatically lead to a breach of the duty of loyalty itself. A breach of the principle only suggests a strong likelihood of a breach of the duty. Hence, a logically consistent framework would be one in which, if a beneficiary proves a trustee's breach of the conflict principle, the trustee is presumed to have breached the duty of loyalty. The trustee may rebut the presumption by proving that the trustee was in fact motivated to act in furtherance of the beneficiary's interests. In other words, the conflict principle should shift the burden of proof to the trustee. While this is not the way the conflict principle in Commonwealth jurisdictions works, it is exactly how the duty of loyalty operates in Japanese trust and agency laws.Footnote 84 As was outlined earlier, even if a transaction prohibited by Article 31(1) of the 2006 Trust Act was carried out without the beneficiary's permission or was not permitted by the terms of the trust, the trustee is not considered to have breached the duty of loyalty if the trustee proves the transaction was actually carried out in the interests of the trust (Article 31(2)(iv)). This would be similarly applicable to an agent's self-dealing and dual-employment. Therefore, under Japanese law, it indeed makes sense to separate the conflict principle from the duty of loyalty itself, and to treat the principle as an independent rule that accompanies the duty.

As for Article 32(1), there is no justifiability exception to that Article like Article 31(2)(iv). Nonetheless, the Article may be seen as part of the conflict principle, playing the role of lifting the burden of proof from a beneficiary. As was outlined earlier, in the case of a trustee making profits using their status as a trustee, the case is viewed as problematic only where the trustee chose not to do something for the trust, and instead chose to do it for himself or herself, in the knowledge that this choice is contrary to the beneficiary's interests. The applicability of the conflict principle is limited to such a case, because if the trustee's choice was made in sheer negligence, the case would be addressed as a case of the trustee's breach of the duty of care, rather than the duty of loyalty. Since the conflict principle under the Article is applied only to a case where a trustee intentionally places their own interests before the interests of the trust, the case covered by the Article inevitably overlaps with that of a trustee's breach of the duty of loyalty. This explains the lack of any justifiability exemption. Therefore, the lack of any justifiability exemption would not change the character of the Article as the conflict principle. And as the conflict principle, the Article is also intended to lift the burden of proof from a beneficiary. In fact, it is often said that the purpose of the Article is to enable a beneficiary to establish only facts that can be objectively ascertained because it would be too onerous for the beneficiary to prove their trustee's intention.Footnote 85

To summarize, the duty of loyalty under Japanese law should be defined as a duty to direct a trustee (or agent) to make decisions to advance the interests of the beneficiary (or principal) when administering the entrusted affairs. Due to the nature of the duty, the duty is accompanied by the conflict principle. The conflict principle stands as a separate rule to protect the duty of loyalty from being breached by prohibiting the trustee (or agent) from placing himself or herself in situations posing a risk that a trustee (or agent) might breach the duty. The conflict principle is reflected in Articles 31(1) and 32(1) of the 2006 Trust Act. Since the conflict principle is a separate rule from the duty of loyalty, a breach of the principle does not mean a breach of the duty, but rather leads to a presumption of a breach of the duty. Therefore, in the case where a trustee breached the conflict principle, the trustee may rebut the presumption by proving that the trustee's act at issue was in fact based on the motivation to further the beneficiary's interests, which is expressed in Article 31(2)(iv). Even though Article 32 does not contain a justifiability exemption clause, that does not change the character of Article 32(1) as an expression of the conflict principle. That is simply an inevitable result of typifying the conflict-of-interest situation involving a trustee's usage of information acquired as a trustee as an invocation of the conflict principle. Since Articles 31 and 32 express the conflict principle, there are still cases that would be treated as breaches of the duty of loyalty if a beneficiary proves that the trustee's action or inaction was based on a motivation other than the furtherance of the beneficiary's interests. Such cases – including Case I and Case II – would be covered by Article 30.

C. The Duty of Loyalty and Duty of Care Re-defined

Lastly, with this re-defined duty of loyalty, the duty of loyalty can be properly differentiated from the duty of care while maintaining its positive aspect. Thus, the duty of care reviews a trustee's (agent's) act and inaction based on whether the trustee (agent) took reasonable care, while the duty of loyalty evaluates the same act or inaction based on whether it was motivated by the intention to advance the interests of the beneficiary (principal). In this manner, the duties of care and loyalty can work in tandem to ensure the proper performance of a fiduciary's duties.

IV. CONCLUSION

Considering that the duty of loyalty is generally understood as the conflict and profit principles in Commonwealth jurisdictions, Smith's idea may not represent the general understanding of the duty in those jurisdictions. However, there is nothing that requires the duty of loyalty in Japanese law to be interpreted in the same way as is generally understood in other jurisdictions even though the duty was imported from them. Rather, just like a plant planted in foreign soil, a legal concept transplanted to another country's law can and should change its shape in response to the surrounding rules in the recipient country. In this manner, the transplant grows sound roots and develops on its own in the recipient country's law.Footnote 86 The Japanese legal concept of duty of loyalty is one such concept. Since the duty of loyalty was once foreign to Japanese law when it was first transplanted from common law jurisdictions, it created confusion, and was arguably incongruent with existing rules. However, over the course of the development of Japanese law, rules surrounding the duty developed and created the soil for the duty to take root and grow on its own. To further develop rules concerning the duty, the duty should be shaped in harmony with other existing rules.

It is true that the duty of loyalty proposed in this article is merely a starting point. More detailed investigation into existing rules and case law involving the duty is required. However, the proposed idea has great potential to become the definitive statement of the duty of loyalty in Japanese law for the very reason that the re-defined duty can exist in harmony with the relevant existing rules in Japanese law.Footnote 87

Lastly, it must be acknowledged that it is Conaglen's work that provided great insight into how current rules involving the duty of loyalty in Japanese law could be analyzed, and that it is Smith's views that ultimately provided the foundations that are key to a sound interpretation of the duty of loyalty in Japanese law, notwithstanding the fact that both scholars’ theoretical concerns are completely different from the issues concerning the duty of loyalty in Japanese law.

Footnotes

*

PhD candidate, Faculty of Law, National University of Singapore (NUS), Singapore. Former Associate Professor, Faculty of Law, Kokushikan University, Japan. All texts, save as expressly indicated otherwise, are translated by the author. Translated English texts of Japanese legislation referred to in this article are sourced from ‘Japanese Law Translation’ <www.japaneselawtranslation.go.jp/?re=02> accessed 13 June 2019 and edited for clarity. My thanks to the Centre for Asian Legal Studies (CALS) and the Asian Law Institute (ASLI) at NUS for supporting my participation at the conferences entitled ‘The State of Comparative Law in Asia’ and ‘Teaching Comparative Law in Asia’ on 27 and 28 September 2017 which led to this article and this special issue.

1. Professor Lionel Smith holds the Sir William C Macdonald Chair at the Faculty of Law of McGill University in Montreal, Canada.

2. An elaborated version of this article was published as Taoka, Eriko, ‘Jutakusha no chūjitsugimu no honshitsu-teki naiyō to shintakujimusuikōgimu, zenkanchūigimu tono gainenteki kankei ni tsuite no ichishiron [The Duty of Loyalty and Its Conceptual Relationship with the Duty to Perform Entrusted Business and the Duty of Care]’ in Dōgauchi, Hiroto (ed), Shintaku no Rinen to Katsuyō [Doctrines and Practical Usage of Trusts] (Torasuto Mirai Fōramu 2015) 103.

3. Shōhō [Commercial Code], Act 48 of 1899.

4. Art 254(3) of the Commercial Code (repealed in 2005) provided that a relationship between a company and director was subjected to provisions of the Civil Code that governed a mandate contract. The same provision is currently found in Kaishahō [Companies Act], Act 86 of 2005, art 330. As art 644 of the Civil Code (Minpō, Act 89 of 1897) provides, ‘A mandatary shall assume a duty to administer the mandated business with the care of a good manager and in compliance with the main purport of the mandate’, a director owes the duty of care in accordance with this Article. The duty of care is defined as a duty to take reasonable care (or to act in the way a reasonable person would do) when executing entrusted affairs.

5. Okazaki, Joichi, Kaisei Kaishahō [Amended Corporate Law] (Nihonkeizaishinbunsha 1950) 99; Hoshikawa, Chōshichi, ‘Torishimariyaku no chūjitsugimu to sekinin ni tsuite no ichikōsatsu [Director's Duty of Loyalty and Their Liability to a Corporation]’ (1963) 38(3–4) Waseda Hōgaku 1, 1. For more details about the 1950 amendments, see Saegusa, Kazuo, ‘Shōwa 25-nen shōhō kaisei no rekishiteki igi [The Historical Significance of the Amendments to the Commercial Code in 1950]’ (1973) 46(1) Hōritsu Ronsō 69; Ikeno, Chiaki, ‘Sengo kaishahō e no dai-ippo [The First Step toward Post-War Corporate Law]’ in Hamada, Michiyo (ed), Nihonkaisha rippō no rekishiteki tenkai [Historical Development of Japanese Corporate Law] (Shōjihōmukenkyūkai 1999) 206; Nakahigashi, Masafumi, Shōhōkaisei (Shōwa 25-nen･26-nen) GHQ/SCAP Bunsho [GHQ/SCAP Records on the 1950 and 1951 Amendments to the Commercial Code] (Shinzansha 2003). With the introduction of the board of directors, the corporate organ from whom permission must be sought for a self-dealing transaction was changed from the statutory auditor to the board of directors.

6. Ōsumi, Kenichirō and Ōmori, Tadao, Chikujō kaiseikaishahō kaisetsu [Article-by-article Commentaries on the Amended Companies Act] (Yūhikaku 1951) 235; Morimoto, Shigeru, ‘Torishimariyaku no zenkanchūigimu to chūjitsugimu [Director's Duties of Care and Loyalty]’ (1980) 81(4) Minshōhō Zasshi 483; Akahori, Mitsuko, ‘Torishimariyaku no Chūjitsugimu (4) [Director's Duty of Loyalty (4)]’ (1968) 85(4) Hōritsu Kyōkai Zasshi 532; Suzuki, Takeo, Shinpan Kaishahō [New Edition on Corporate Law] (5th edn, Kōbundō 1994) 193.

7. Yoshinaga, Eisuke, ‘Torishimariyaku no ippanteki-gimu [The General Obligations of a Director]’ (1953) 29(4) Hitotsubashi Ronsō 227; Yamaguchi, Kōgoro, ‘Torishimariayku no kyōgyōhishigimu [The Director's Duty to Not Compete]’ (1954) 4 Kōnan Ronshū 4, 45; Osakaya, Kimio, ‘Torishimariyaku no chūjitsugimu [Director's Duty of Loyalty]’ in Tanaka, Kōtarō (ed), Kabushikigaishahō kōza 3 [Lectures on Corporate Law 3] (Yuhikaku 1956) 116; Sakamaki, Toshio, ‘Torishimariyaku no kaisha ni taisuru sekinin – Shōhō 266-jō no kenkyū [Responsibilities of Directors to the Corporation – A Study of Article 266 of the Commercial Code]’ (1965) 41(1) Waseda Hōgaku 23; Hoshikawa, Chōshichi, ‘Torishimariyaku no chūjitsugimu no hōteki kiso narabi ni hatsugen keitai [Legal Basis and Patterns of Corporate Director's Fiduciary Duty]’ (1966) 41(2) Waseda Hōgaku 113.

8. Supreme Court Grand Bench Judgment 24 June 1970, 24(6) Minshū 625. In this case, a shareholder contested the validity of a political donation made by the company. The central issue was whether the donation fell within the scope of the articles of association of the company, and accordingly, whether the company had the legal capacity to make the donation. The Supreme Court stated that art 254–2 was a mere articulation of the application of the duty of care. However, it is debatable as to whether this decision should be considered a precedent defining the relationship between the duties of loyalty and care, because the Court's statement was only for the purpose of dismissing the plaintiff's argument that the Article imposed a ‘higher’ obligation than the duty of care. A director's conflict of interest was not relevant to the case, nor was the possible meaning of the duty of loyalty an issue.

9. As for directors’ liability in cases where the regulated transactions have caused loss to the companies, see Companies Act, arts 423 (2) and (3), and 428.

10. Fujita, Tomotaka, ‘Chūjitsugimu no kinō [Functions of the Duty of Loyalty]’ (2000) 137(2) Hōgaku Kyōkai Zasshi 283, 305; Tanaka, Wataru, ‘Chūjitsugimu ni kansuru ichikōsatsu [Some Thoughts on the Duty of Loyalty]’ in Kozuka, Sōichirō and Tanaka, Mika (eds), Shōjihō e no Teigen [Suggestions for Commercial Law] (Shōjihōmu 2004) 225, 229; ‘Kinyūtorihiki ni okeru Fiduciary’ ni kansuru hōritsumondai kenkyūkai, ‘Kinyūtorihiki no tenkai to shinnin no shosō [Development of Financial Transactions and Various Aspects of the Fiduciary Concept]’ (2010) 29(4) Kinyū Kenkyū 179, 200.

11. Ikuma, Yoshiyuki, ‘Torishimariyaku no shinningimu to “sōtei kabunushi” [The Director's Fiduciary Duty and the Envisioned Shareholder]’ (2010) 60 Meijō Hōgaku 149, 154; Egashira, Kenjirō, Kabushikigaishahō [Corporate Law] (7th edn, Yūhikaku 2017) 434–435.

12. Morimoto, Shigeru, ‘Kaishahō no moto ni okeru torishimariyaku no sekinin [Directors’ Liabilities under the Companies Act]’ (2008) 1841 Kin'yū Hōmu Jijō 12.

13. See eg Supreme Court 2nd Petty Bench Judgment 28 January 2008, 1997 Hanrei Jihō 143. The issue was whether directors should be held liable for their careless decision to finance a third party in the situation where at the time of the decision it would have been easy to discover that the third party would become unable to pay back the loan. The Court held that the directors’ decision to provide finance constituted breaches of the duties of loyalty and care, despite the fact that the financing had nothing to do with the directors’ conflict of interest.

14. See Companies Act, art 423.

15. Art 20: A trustee shall administer trust affairs with the due care of a prudent manager.Art 9: A trustee shall not receive benefits from the trust in anyone's name, provided however, this shall not apply if he is one of the beneficiaries.

Art 22(1): A trustee shall not acquire any property of the trust for himself in anyone's name, or acquire any right against the trust, provided however, this shall not apply to a case where he acquires permission from the court to acquire property of the trust for an unavoidable reason.

16. For the history of the Trust Act 1922, see Yamada, Akira, Shintakurippōkatei no Kenkyū [Studies on the Enacting Process of the Trust Act] (Keisōshobō 1981); Tamaruya, Masayuki, ‘Transformation of Trust Ideas in Japan: Drafting of the Trust Act 1922’ (2013) 88 Rikkyō Hōgaku 218.

17. Shinomiya, Kazuo, Shintaku no Kenkyū [Studies on the Trust] (Yūhikaku 1965) 213; Shinomiya, Kazuo, Shintakuhō Shinpan [Trust Law New Edition] (Yūhikaku 1989) 231.

18. Arai, Makoto, Shintakuhō [Trust Law] (3rd edn, Yūhikaku 2008) 249.

19. (1726) Sel Cas Ch 61, 25 ER 223; also available at [1726] EWHC J31 (Ch).

20. ‘The Fourth Trust Law Sectional Meeting of the Legislative Council of the Ministry of Justice (9 November 2004)’ <www.moj.go.jp/shingi1/shingi_041109-1.html> accessed 13 June 2019. As for the details of the discussions in the Legislative Council, see Yoshinaga, Kazuyuki, ‘Chūjitsugimu-ron ni nokosareta kadai ni kansuru ichikōsatsu – Hōseishingikai shintakuhōbukai ni okeru giron no seiri to bunseki wo tsūjite [A Study on Unresolved Issues in Duty of Loyalty]’ in Yonekura, Akira (ed), Shintakuhō no Shintenkai [New Developments in Trust Law] (Shōjihōmu 2008) 158.

21. In accordance with the request of the then Minister of Justice, the Legislative Council tasked to amend the 1922 Trust Act was formed in the Civil Affairs Bureau of the Ministry of Justice in 2004. The Legislative Council produced the draft of the amendments of the Act in 2006. The draft is the basis of 2006 Trust Act.

22. In practice, a related case is a situation where the banking division of a trust bank uses the information and know-how acquired by the trust division of the trust bank.

23. Riekisōhankenkyukai, (ed), Kinyūtorihiki ni okeru Riekisōhan (Kakuronhen) [Conflicts of Interest in Financial Transactions (Specific Topics)] (129 Bessatsu NBL, Shōjihōmu 2009) 71–72; Okino, Masami, ‘Kyūsai – jutakusha no “rieki no hakidashi” sekinin ni tsuite [Remedies – On the Liability of the Trustee to “Disgorge Gains”]’ (2004) 791 NBL (New Business Law) 44, 54.

24. Teramoto, Masahiro, Chikujō kaisetsu atarashii shintakuhō (Zōhoban) [Article-by-article Commentaries on the New Trust Act (Enlarged Edition)] (Shōjihōmu 2008) 129.

25. See Conaglen, Matthew, Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties (Hart Publishing 2010) 120 (discussing the relationship between the conflict and profit principles in Commonwealth jurisdictions and concluding that the profit principle, when applied in a situation where the conflict principle is also applicable, is simply a ‘subset of the conflict principle’).

26. eg Teramoto, Chikujō kaisetsu (n 24) 118.

27. Arai (n 18) 244. The same is true of the agent's duties: Taniguchi, Tomohei, Ikuyo, Toru, and Hironaka, Toshio (eds), Shinpan chūshaku minpō (16) [Commentaries on Civil Law New Edition (16)] (Yūhikaku 1989) 222.

28. One notable difference from common law jurisdictions is that Japanese trust law does not recognize profit-stripping remedies. Although the introduction of profit-stripping remedies for a breach of the duty of loyalty was discussed during the amendment process of the 2006 Trust Act, it was dismissed because such remedies were thought to be incompatible with the principle of loss-based compensation adopted under Japanese civil law.

29. See Civil Code, art 644.

30. Civil Code, art 108: An agent may not be the agent of the other party or the agent of both parties in the same juristic act; provided, however, that this shall not apply where the act constitutes the performance of an obligation, or the act is authorized by the principal in advance.

31. Civil Code, art 826: If an act involves a conflict of interests between a person who exercises parental authority and a child, the person… shall apply to the family court to have a special representative for the child appointed. (2) In the case where a person exercises parental authority for more than one child and an act creates a conflict of interests between the children, the person… shall apply to have a special representative for that child appointed.

32. Notable works include Yasunaga, Masaaki, ‘Dairi inin ni okeru dairinin juninsha no kōdōjunsoku [Rules of Conduct for Agents and Mandataries]’ in Zaisankanri ni okeru jutakusha oyobi sore ni ruisuisuru mono no kōdōkijun [Rules of Conduct on Trustees and Similar Parties] (TRUST 60 1995) 5; Dōgauchi, Hiroto, Shintakuhōri to shihōtaikei [Trust Law Doctrines and the Private Law System] (Yūhikaku 1996) 147; Iwadō, Michiko, ‘Doitsuhō ni okeru jimushorisha no seijitsugimu [The Mandatary's Treupflicht in German Law]’ (1998) 48(3) Kobe Hōgaku 609; Iwadō, Michiko, ‘Ininkeiyaku ni okeru juninsha no chūigimu [The Mandatary's Duty of Care under the Mandate Contract]’ (2002) 64 Shihō 152.

33. The lack of academic attention to an agent's duty of loyalty is perhaps also attributable to the fact that Japanese laws concerning agency and mandate contract have been heavily influenced by German and French laws. The two countries’ laws have been much studied for the purpose of improving Japanese laws on agency and mandate contract. However, laws of common law jurisdictions have hardly ever been examined for the same purpose.

34. eg Yasunaga (n 32); Dōgauchi, Shintakuhōri to shihōtaikei (n 32).

35. Frankel, Tamar, ‘Fiduciary Law’ (1983) 71 California Law Review 795; Higuchi, Norio, ‘Shintakutekikankei to jutakusha no sekinin [The Fiduciary Relationship and the Trustee's Responsibilities]’ (1992) 170 Shintaku 99; Higuchi, Norio, Fiduciary (shinnin) no jidai shintaku to keiyaku [The Age of the Fiduciary, Trust and Contract] (Yūhikaku 1999).

36. Kawai, Takeshi (ed), Senmonka no sekinin [Professional Liability] (Nihonhyōronsha 1993); ‘Zadankai “Senmonkasekininhōri” no kadai (Round-table Discussion on Issues in “Professional Liability” Doctrine)’ (1995) 67(2) Hōritsu Jihō 30.

37. As for financial service providers' duties to provide information and advice, see Shutō, Megumi, ‘Kojintōshika wo meguru mondai [Issues Relating to Individual Investors]’ (2000) 38(1) Shōken Anarisuto Journal 54; Imagawa, Yoshifumi, ‘Shinningimu to jikosekiningensoku [Fiduciary Duty and the Principle of Personal Responsibility]’ (2003) 33(3) Kobe Gakuin Hōgaku 47; Onosato, Mitsuhiro, ‘Kinyusābisu ni okeru kōiruikei to shinningimu Framework [Behavioral Patterns in Financial Services and the Fiduciary Obligation Framework]’ (2006) 2 Kyōto Gakuen Hōgaku 177. In relation to a bank's obligation to provide information to its customers, see Honda, Junichi, Keiyakukihan no seiritsu to han'i [Establishment of Contractual Regulation and its Scope] (Hitotsubusha 1999) 137–140. As for doctors’ obligations, see Higuchi, Fiduciary (shinnin) no Jidai (n 35).

38. Dōgauchi, Hiroto, ‘“Fiduciary” ga yattekita [The “Fiduciary” Has Come]’ (2000) 38(1) Shōken Anarisuto Journal 46, 46–47.

39. As for problems associated with the introduction of the fiduciary duty and relationship into Japanese law, see Taoka, Eriko, ‘Shinninkankeigainen to sono kakudaigenshō no bunseki (1) (2) [The Concept of Fiduciary Relationship and Its Ongoing Expansion (1) (2) – Do We Really Need the Concept of Fiduciary Relationship?]’ (2008) 59(1) Waseda Hōgakukaishi 259, (2009) 59(2) Waseda Hōgakukaishi 313.

40. The Legislative Council Subcommittee to amend the Civil Code was established in 2009. The bill to amend the Civil Code was passed by the Diet in May 2017. The 2017 amendments are the first extensive reforms of the Code since its enactment in 1896.

41. ‘The Seventeenth Meeting of the Civil Code (Law of Obligations) Subcommittee of the Legislative Council of the Ministry of Justice’ (16 October 2010) <www.moj.go.jp/content/000058430.pdf> accessed 13 June 2019.

42. Since the author previously argued against the introduction of the fiduciary duty into Japanese law, the author rejected the expansion of the positive aspect of the duty of loyalty to include various duties mentioned in relation to the Japanese ‘fiduciary craze’: see Taoka, ‘Shinninkankeigainen to sono kakudaigenshō no bunseki (1) (2)’ (n 40). Accordingly, the issue of the positive aspect of the duty of loyalty that the author has yet to address is whether the positive aspect as argued by Shinomiya should be recognized as part of the duty of loyalty.

43. eg Hayward v Bank of Nova Scotia (1984) 45 OR (2d) 542 (Ontario High Court of Justice); Woods v Martins Bank Ltd [1959] 1 QB 55; Commonwealth Bank of Australia v Smith [1991] FCA 481, 102 ALR 453; Plaza Fiberglass Manufacturing Ltd v Cardinal Insurance Co (1990) 68 DLR (4th) 586 (Ontario High Court of Justice); Hodgkinson v Simms [1994] 3 SCR 377. As for the obligations that the fiduciary duty once encompassed and the related discussions, see n 50.

44. Smith, Lionel, ‘The Motive, Not the Deed’ in Getzler, Joshua (ed), Rationalizing Property, Equity and Trusts (LexisNexis 2003) 53.

45. Conaglen, Fiduciary Loyalty (n 25).

46. Smith (n 44) 73, 77. As for terminology, the fiduciary duty and duty of loyalty mean the same duty. Smith sometimes refers to the duty of loyalty instead of fiduciary duty for the reason that the former is contextually neutral as it is used also in civil law jurisdictions: Smith (n 44) 54.

47. Footnote ibid 73.

48. Although Smith uses the terms no-conflict rule and no-profit rule, the conflict and profit principles are used throughout this article because the counterparts in Japanese law are translated as such.

49. Footnote ibid 56.

50. Conaglen, Fiduciary Loyalty (n 25) 39–40, 61. The following obligations are examined: the duty to perform the task undertaken; duties of care and skill; the conflict and profit principles; duty of good faith; duties referred to in the application of the proper purposes doctrine; duty to consider the exercise of fiduciary powers; and duty to act in good faith in the principal's best interests: ibid 32–58.

51. Footnote ibid 66–67.

52. Footnote ibid 67.

53. Footnote ibid 72, 127.

54. Footnote ibid 63.

55. Footnote ibid 65, 269. As for the conflict principle, Conaglen divides it into the duty-interest doctrine and duty-duty doctrine, stating that the two doctrines play different functions. The duty-interest doctrine covers a situation involving the risk that a trustee might breach his non-fiduciary duty due to their self-interest, such as a case of self-dealing, and prohibits a fiduciary from placing himself or herself in such a situation: ibid 114. In contrast, the duty-duty doctrine prohibits the fiduciary from placing himself or herself in a situation where the fiduciary might breach the non-fiduciary duty owed to the beneficiary for the sake of performing the non-fiduciary duty that is owed to another beneficiary. An agent's dual-employment is a typical example. While the source of the risk of breaching the non-fiduciary duty is different (ie a fiduciary's self-interest or non-fiduciary duty owed to another beneficiary), the two doctrines ultimately serve the same purpose – protecting the non-fiduciary duty from being breached: ibid 146–150. See also Conaglen, Matthew, ‘Fiduciary Regulation of Conflicts between Duties’ (2009) 125 Law Quarterly Review 111.

56. Smith (n 44) 61.

57. Footnote ibid 60–61.

58. Footnote ibid 63, 73.

59. Footnote ibid 60.

60. Footnote ibid 64.

61. Footnote ibid.

62. Footnote ibid.

63. Footnote ibid 73–74.

64. Footnote ibid 74.

65. Footnote ibid 75.

66. Smith refers to arts 6, 7, and 1375 of the Civil Code of Quebec: ibid 66.

67. Shinomiya, Shintaku no Kenkyū (n 17) 209, 220; Totsuka, Noboru, ‘Torishimariyaku no chūjitsugimu – Zenkangimu to wa seishitsu wo koto ni suru – [The Director's Duty of Loyalty – Different from the Duty of Care]’ (1967) 387 Juristo 66, 66.

68. Yamada, Akira, Nihon rippōshiryō zenshu 2 Shintakuhō shintakugyōhō [Japanese Law Draft Records 2 Trust Act and Trust Business Act] (Shinzansha 1991) 255; Henshūbu, Bessatsu NBL (ed), Shintakuhōkaisei yōkōshian to kaisetsu [Draft Amendments to the Trust Act: Text and Commentary] (104 Bessatsu NBL, Shōjihōmu 2005) 104.

69. Teramoto, Chikujō kaisetsu (n 24) 118; Teramoto, Shintō, Kaisetsu Shin-shintakuhō [Commentaries on the New Trust Law] (Kōbundō 2007) 68; Hoshino, Yutaka, Shintakuhōriron no keisei to ōyō [Formation and Application of Trust Law Doctrines] (Shinzansha 2004) 242–243.

70. Dōgauchi, Hiroto, Shintakuhō nyūmon [Introduction to Trust Law] (Nihonkeizaishinbunsha 2007) 152.

71. For example, a seller owes a duty to take due care when storing sales goods when the goods are specified ones: Civil Code, art 400.

72. See Conaglen, Fiduciary Loyalty (n 25) 65–66.

73. Dōgauchi, Shintakuhō nyūmon (n 70) 156, 162.

74. Conaglen analyzes the ‘inhibition principle’ that underlies the same rule in Commonwealth jurisdictions as the ones in Japanese trust and agency laws outlined in the main text, and admits that the inhibition principle does not fit squarely with his idea of prophylactic fiduciary obligation: Conaglen, Fiduciary Loyalty (n 25) 150–155.

75. Supreme Court First Petty Bench Judgment 20 April 1967, 21(3) Minshū 697 (in the case described in the main text, the validity of the sales contract concluded by the agent became an issue. The Court stated that the contract was in principle valid; however, it would have become invalid if the other party knew or had a reason to know the agent's motivation to benefit himself).

76. kaiseikentōiinkai, Minpō (saikenhō) (ed), Shōkai saikenhōkaisei no kihonhōshin I [Commentaries on Policies Concerning the Amendments to the Law of Obligations I] (Shōjihōmu 2009) 238–239.

77. Footnote ibid.

78. Smith (n 44) 68–73. In trust law contexts, Smith refers to cases such as Barr's Settlement Trusts, Re Abacus Trust Co (Isle of Man) Ltd v Barr [2003] EWHC 114 (Ch), [2003] Ch 409; Klug v Klug [1918] 2 Ch 67. As for the proper purposes doctrine, see Teck Corporation v Millar (1972) 33 DLR (3d) 288 (British Columbia Supreme Court).

79. Smith (n 44) 60.

80. While there are numerous examples, one is a case of breaking off negotiations for a contract. A person is held liable for loss incurred by another party if the former refused to conclude a contract with the latter without justification while letting the latter hold the expectation that the contract would be concluded. See Honda, Junichi, Keiyakuteiketsujō no kashitsuriron ni tsuite [On the Doctrine of Culpa in Contrahendo] (Hitotsubusha 1999) 211; Hirano, Hiroyuki, ‘Iwayuru “Keiyakujō no kashitsu” sekinin ni tsuite [On the So-called Liability in “Culpa in Contrahendo”]’ (1989) 61(6) Hōritsu Ronsō 61). Another instance is the case of a lease contract where a lessor's exercise of his termination right is barred as an abuse of the right. See Supreme Court Third Petty Bench 29 March 1966, 446 Hanrei Jihō 43 (a lessor attempted to terminate the lease contract for the reason that the amount of rent paid by a lessee was only slightly less than the promised amount).

81. Hirai, Yoshio, Songaibaishōhō no riron [Doctrines on Laws on Damages] (Tōkyōdaigakushuppankai 1971) 457–459; Goto, Takanori, Gendai songaibaishō-ron [Modern Doctrines on Damages] (Nihonhyōronsha 1982) 187–195.

82. Dōgauchi, Hiroto, ‘Zenkanchūigimu wo megutte [On the Duty of Care]’ (2006) 305 Hōgaku Kyōshitsu 37, 44.

83. Smith also states that a fiduciary's ‘undertaking issues directly in the fiduciary duty to act in what he perceives to be the best interests of the beneficiary’: Smith (n 44) 76.

84. Although Smith also acknowledges the possibility of having a regulatory framework where the burden of proof is shifted to the trustee, he dismisses that possibility because ‘this is clearly not the law’ of Commonwealth jurisdictions: ibid 75.

85. Bessatsu NBL Henshūbu (n 68) 107; Teramoto, Chikujō kaisetsu (n 24) 129; Riekisōhankenkyukai (n 24) 71.

86. Fujioka, Yasuhiro, ‘Hō no kokusaika to hikakuhō no kadai [Internationalization of Law and the Tasks of Comparative Law]’ in Waseda University Institute of Comparative Law (ed), Hikakuō to Hōritsugaku [Comparative Law and Legal Scholarship] (Seibundō 2010) 299.

87. For a recent discussion of a trustee's duty of loyalty drawing on earlier work by the author, see Dōgauchi, Hiroto, Shintakuhō [Trust Law] (Yūhikaku 2017) 225 (discussing a trustee's duty of loyalty and citing Taoka, ‘Jutakusha no chūjitsugimu’ (n 2)). In this book, which is one of the most recent major scholarly works on trust law written by a leading scholar of civil law and trust law, Dōgauchi (of the University of Tokyo) adopts the approach as proposed in this article by the author to the trustee's duty of loyalty.

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