Background and overview of the amendments
In recent years, there has been a sharp increase in labor, raw material and energy costs. In order for businesses to make wage increases that exceed the rate of inflation, they need to secure the necessary funds. This makes it crucial that businesses establish "structural price pass-through" across their entire supply chains based on a balanced relationship between contractors and subcontractors. To achieve this, it is important that businesses eliminate practices that hinder price pass-through and impose burdens on subcontractors. Legal measures have been considered to more fairly structure and protect the interests of subcontractors. The amendments to the Subcontract Act aim to ensure proper price pass-through and fair transactions by supporting initiatives that involve collaboration among multiple transaction parties.
Main contents of the amendments
The amendments to the Subcontract Act include the following major changes:
- Review of regulations under the Subcontract Act
- Prohibition of unilateral determination of payment amounts without proper negotiation1
Parties to the relevant transactions are prohibited from unilaterally determining payment amounts by refusing to engage in negotiations regarding payment or by failing to provide necessary explanations or information during negotiations. This aims to create a transaction environment where appropriate price pass-through is ensured amid rising costs.
- Prohibition of payment by promissory note, etc.2
Parties to the relevant transactions are prohibited from paying by promissory note. Additionally, electronically recorded monetary claims and factoring are also prohibited if it will be difficult to obtain the full amount equivalent to the payment by the due date. This aims to protect the cash flow of small and medium-sized subcontractors by ensuring that they are paid in a timely manner.
- Addition of transportation commission to relevant transactions3
The amendments bring transactions where the consignor commissions the transportation of goods to a transportation business operator under the Subcontract Act, addressing issues between consignors and logistics business operators.
- Addition of employee standard4
The amendments add a business' number of employees to the standards determining applicability of the Subcontract Act, expanding the scope of its protection. This is intended to allow regulation of businesses that are substantial in scale but were previously not subject to the Subcontract Act due to low initial capital or a capital reduction.
- Strengthening of comprehensive enforcement5
The amendments establish provisions enabling the relevant administrative agencies to share information among themselves and provide advice and guidance to contracting businesses. Specifically, the competent ministers of the ministries overseeing various businesses have been granted new authority to provide advice and guidance to contracting businesses. This is intended to strengthen enforcement by making it easier for small and medium-sized contractors to file complaints by making the competent ministers of the ministries overseeing various businesses eligible to receive complaints related to the "prohibition against retaliatory measures" in addition to the current complaint recipients (i.e., the Japan Fair Trade Commission and the Director-General of the Small and Medium-sized Enterprise Agency).
- Review of terms such as "subcontracting"6
The term "subcontractor" will be revised to "small and medium-sized contractor," while the term "large procuring enterprise" will be revised to "contracting business." Additionally, the title of the "Act on Prevention of Delay in Payment of Subcontract Proceeds, etc." will be revised to the "Act on Prevention of Delay in Payment to Small and Medium-sized Contractors in Manufacturing, etc."7
- Other amendments
- Wooden molds and jigs used exclusively for the creation of products will be eligible for manufacturing consignment in the same manner as metal molds. When the manufacturing of such wooden molds and jigs is consigned, the relevant transactions will be subject to the Subcontract Act.8
- The Subcontract Act obligates main contractors to deliver certain documents. Electronic methods could be used instead of physical delivery only when prior consent was obtained from a subcontractor. The amendments allow electronic delivery of necessary information regardless of whether a small or medium-sized contractor consents.9
- Reduction has been added to the scope of delayed interest. If a contracting business reduces the payment amount for any reason not attributable to the small or medium-sized contractor, the contracting business must pay delayed interest on the amount of the reduction for the period in days from 60 days after the start date until the actual payment date.10
- Provisions have been established related to recommendations when violations are no longer occurring. Even if a contracting business has taken corrective action by the time that recommendations are made, measures to prevent recurrence can still be recommended.11
Summary
The upcoming amendments to the Subcontract Act aim to protect the interests of subcontractors (now referred to as small and medium-sized contractors) and promote fair transactions. They are scheduled to take effect on 1 January 2026. The significance of these amendments and their expected widespread impacts make it crucial that potentially affected businesses fully understand them. Potentially affected businesses will also need to revise their operational practices — including by making changes in their payment flows to small and medium-sized contractors.
1 "Response to Fixed Price Transactions," New Article 5, paragraph 2, item 4.
2 New Article 5, paragraph 1, item 2.
3 New Article 2, paragraphs 5 and 6.
4 New Article 2, paragraphs 8 and 9.
5 New Article 5, paragraph 1, item 7, Article 8 and Article 13.
6 The term "subcontracting" has been reviewed due to criticism that it implies that the relationship between a client and a contractor is not equal. Even large client companies have stopped using the term "subcontracting" for this reason.
7 The title of the "Act on the Promotion of Subcontracting Small and Medium-sized Enterprises" will be changed to the "Act on the Promotion of Contracting Small and Medium-sized Enterprises."
8 Related to new Article 2, paragraph 1.
9 Related to new Article 4.
10 Related to new Article 6, paragraph 2.
11 Related to new Article 10.
