Recently, it has been reported that the Japan Fair Trade Commission (JFTC) has issued a notice of violation of the Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors (Subcontract Act) to an affiliate of a large corporation.
　Since the Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors regulates parent companies that meet certain requirements, it is important for the party placing the order (the parent company) to understand whether the Act applies to it and what it must comply with if it does apply to it.
　On the other hand, for the party receiving the order (subcontractor), understanding the Act against Delay in Payment of Subcontract Proceeds allows the party to confirm whether its transactions are subject to the protection of the Act and whether it has received any disadvantageous orders that would violate the Act.
　In this issue, we will introduce basic knowledge of the Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors that businesses should be aware of.

1 What is the Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors?
　The official name of the Act against Delay in Payment of Subcontract Proceeds, Etc.
　The purpose of the Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors is to ensure fairness in transactions between the main subcontracting entrepreneur and the subcontractor and to protect the interests of the subcontractor.
2 Features of the Act against Delay in Payment of Subcontract Proceeds.
　The main features of the Act against Delay in Payment of Subcontract Proceeds are as follows
(1) Uniformity of applicable subjects
　 The applicable scope of the Act against Delay in Payment of Subcontract Proceeds is uniformly defined by
①the nature of the transaction and ② the category of capital.
　Since the capital of a company can be confirmed through commercial registration, a business can clearly determine
whether or not its transactions are subject to the Act against Delay in Payment of Subcontract Proceeds.
(2) Clarification of business relationships
　In the case of oral or customary transactions, it is difficult to ascertain what kind of agreement existed (or did not exist) and which party is responsible for what, if any, in the event of trouble later on.
　The Act against Delay in Payment of Subcontract Proceeds stipulates the obligation to deliver documents containing prescribed items and the obligation to prepare and preserve documents in order to avoid such adverse effects and to clarify the business relationship.
(3) Enumeration of compliance items
　The Act lists the items that must be included in the documents that must be delivered and the documents that must be prepared and preserved by the regulated main subcontracting entrepreneur, as well as what the main subcontracting entrepreneur must not do (prohibited items), and clearly indicates what must be observed.
(4) Strengthened monitoring system
　The Act against Delay in Payment of Subcontract Proceeds provides for monitoring from time to time by the government and a recommendation system that encourages the main subcontracting entrepreneur to take voluntary corrective measures.

　The applicable scope of the Act against Delay in Payment of Subcontract Proceeds is uniformly determined, and is specifically determined by (A) the nature of the transaction and (B) the category of capitalization.
1 About (A) Contents of Transactions
　(1) Transactions to which the Act against Delay in Payment of Subcontract Proceeds is applied are as follows
　　(a) Manufacture of goods
　　　　This refers to an entrepreneur who is contracted to sell or manufacture goods consigns the manufacture or
　　　processing of goods to another entrepreneur, specifying standards, etc.
　　(b) Repair of goods
　　　　This refers to the case where a business operator who is contracted to repair goods consigns the repair to another
　　　business operator, or where a business operator repairs goods used by its own company, and consigns a part of
　　　the repair to another business operator.
　　(c) Creation of information deliverables
　　　　A business entity that provides or creates information deliverables (including all design and design-related
　　　productions, such as software, visual content, and various designs).
　　(d) Provision of services
　　　　A business entity that provides various services (e.g., transportation, warehousing of goods, information
　　　processing, maintenance of buildings and machinery, and customer service agents such as call center operations)
　　　outsources the provision of contracted services to other business entities.
　(2) Transactions described in (1) (a) through (d) above are classified into the following two categories.
　　[Consignment transaction A]
　　(a) Manufacture of goods
　　(b) Repair of goods
　　(c) Creation of a program among “creation of information deliverables
　　(d) Transportation, warehousing of goods, and information processing, which are included in “provision of services.
　　[Outsourcing Transaction B]
　　(c) Creation of information deliverables, excluding creation of programs
　　(d) “Provision of services” other than transportation, warehousing of goods, and information processing
2 About (B) Classification of capital
　For each type of consignment transaction, the amount of capital shall be determined as follows.
　In each case, the capital of the main subcontracting entrepreneur must be 10 million 1 yen or more, and an entrepreneur with capital of 10 million yen or less is not considered a “main subcontracting entrepreneur” subject to regulation under the Subcontract Act.
　(1) [Consignment Transaction A]
　　　The Act against Delay in Payment of Subcontract Proceeds shall apply in the following cases
　　(a) When a main subcontracting entrepreneur with capital of ¥301 million or more places an order for [Consignment
　　　Transaction A] with a company or sole proprietor with capital of ¥300 million or less.
　　(b) When a company or sole proprietor with capital of 10 million yen or less places an order for [Consignment
　　　Transaction A] with a company or sole proprietor with capital of 10 million yen or less when the parent company
　　　has capital of 10 million yen to 300 million yen.
　(2) [Consignment Transaction B]
　　The Act against Delay in Payment of Subcontract Proceeds shall apply in the following cases
　　(a) When a main subcontracting entrepreneur with capital of 50 million yen or more places an order for
　　　“Consignment Transaction B” with a company or sole proprietorship with capital of 50 million yen or less.
　　(b) When a company or sole proprietor with capital of 10 million yen or less places an order for “Consignment
　　　Transaction B” with a company or sole proprietor with capital of 10 million yen or less when the capital of
　　　the parent company is between 10 million yen and 50 million yen.

1 Obligation to Deliver a Document (Article 3 Document)
　　When a main subcontracting entrepreneur intends to conduct a transaction to which the Act against Delay in Payment of Subcontract Proceeds applies, it is obligated to deliver a document called an Article 3 document to the subcontractor.
　　The items required to be included in the Article 3 document are ①through ⑫ below.
　　①Name of the main subcontracting entrepreneur and the subcontractor
　　②Date of order
　　③Details of the order (goods, quantity, etc.)
　　④Delivery date (in the case of services, the date or period)
　　⑤Place of delivery
　　⑥(In the case of inspection of the contents of delivery) Date of completion of inspection
　　⑦Amount of subcontract proceeds (calculation method is also acceptable)
　　⑧Date of payment of subcontract proceeds
　　⑨(In the case of payment by bill) Amount of bill, maturity date of bill
　　⑩(In the case of payment by lump-sum settlement method) Name of financial institution, settlement date, etc.
　　⑪(In the case of payment by electronically recorded receivables) Amount, settlement date, etc.
　　⑫(When raw materials are supplied for a fee) Item name, quantity, consideration, settlement method, etc.
2 Obligation to prepare and preserve documents (Article 5 documents)
　　When a main subcontractor enters into a transaction with a subcontractor subject to the Act against Delay in Payment of Subcontract Proceeds, the main subcontractor is obliged to prepare documents called “Article 5 documents” and preserve them for two years after the transaction is completed. The required entries in the Article 5 documents are ① through ⑰ below.
The following items are required for Article 5 documents
　　①Name of the subcontractor
　　②Date of order
　　③Details of the order (goods, quantity, etc.)
　　④Date of delivery (in the case of provision of services, date or period)
　　⑤Description of benefits received and date of receipt of benefits
　　⑥(In case of inspection) Date of completion of inspection, result of inspection, and handling of rejected inspection.
　　⑦(In the case of making changes or redoing the contents of the delivery) details and reasons
　　⑧Amount of subcontract proceeds (calculation method is also acceptable)
　　⑨Payment date of subcontract proceeds
　　⑩(In case of change in subcontract proceeds) Amount of increase or decrease, and reason
　　⑪Amount of subcontract proceeds paid, date of payment, and means of payment.
　　⑫(In the case of payment by bill) Amount of bill, date of delivery, and maturity date
　　⑬(Payment by lump-sum settlement method) Name of financial institution, settlement date, etc.
　　⑭(In the case of payment by electronically recorded receivables) Amount, settlement date, etc.
　　⑮(When raw materials are supplied for a fee) Item name, quantity, consideration, settlement method, etc.
　　⑯(In the case of partial payment of subcontract proceeds or deduction of consideration for raw materials, etc.)
　　　Remaining amount of subcontract proceeds
　　⑰(In the case of payment of interest for delay) amount, date of payment 3 Obligation to fix the time of payment of
　　　subcontract proceeds
(1) With respect to the date of payment of subcontract proceeds, the main subcontracting entrepreneur is obliged to fix
　the date of payment so that it will be within 60 days after the receipt of the subcontractor's benefits by the main
　subcontracting entrepreneur and as short a period as possible.
(2) Previously, the Fair Trade Commission set the guideline standard for the bill period when using a bill as a means of
　payment for subcontract proceeds as “90 days for the textile industry and 120 days for other industries.
　However, on April 30, 2024, the Fair Trade Commission revised the above guideline and changed it to “60 days
　regardless of the type of business.
4 Obligation to Pay Interest on Delayed Payment
　　In the event of a delay in payment of subcontract proceeds, the main subcontracting entrepreneur is obliged to pay interest on the delay (14.6% per annum).

The following 1 through 11 are enumerated as prohibited by the Parent Entity.
1 Refusal to receive
　　Refusal to receive goods, etc. ordered when the subcontractor is not responsible for them.
2 Delay in payment of subcontract proceeds
　　Failure to pay subcontract proceeds by the payment date (maximum 60 days from the date of receipt of goods, etc.).
3 Reduction of subcontract proceeds
　　Reduction of the amount of subcontract proceeds that was determined at the time the order was placed, even though
　　the subcontractor is not responsible for the reduction.
4 Unjustified return of goods
　　Return of goods, etc. after receipt of an order without the subcontractor being responsible for the return.
5 Bidding
　　Unjustly determining an amount of subcontract proceeds that is significantly lower than the consideration normally
　　paid.
6 Compulsion to purchase or use
　　Forcing a subcontractor to purchase or use goods or services designated by the main subcontracting entrepreneur
　　without justifiable reason.
7 Retaliatory measures
　　Reduction in the volume of transactions, suspension of transactions, etc., when a main subcontracting entrepreneur
　　performs a prohibited act, on the grounds that the subcontractor has notified the Fair Trade Commission,
　　etc. of such fact.
8 Early Settlement of Materials Supplied for a Price
　　In cases where a subcontractor manufactures goods, etc. using materials, etc. supplied for a fee, having the
　　subcontractor pay for the materials, etc. earlier than the date of payment of the subcontract price for the goods
　　in which the materials, etc. were used, even though the subcontractor is not responsible for the payment.
9 Delivery of notes that are difficult to discount
　　When paying subcontract proceeds in the form of a bill, delivering a bill that is difficult to obtain a discount at
　　a general financial institution.
10 Request to provide unfair economic benefits
　　Requesting a subcontractor to provide economic benefits (cash, services, etc.) for the company's (the main
　　subcontractor's) benefit.
11 Unreasonable change or redo of benefits
　　To cause a subcontractor to cancel, change the contents of, or redo an order without incurring any costs, even
　　though the subcontractor is not responsible for the cancellation, change, or redo of the order.

　The Fair Trade Commission and the Small and Medium Enterprise Agency are authorized to issue reporting orders to the main subcontracting entrepreneur and subcontractor to report on subcontracting transactions and to conduct on-site inspections at their offices and other locations.
　In addition, when a main subcontracting entrepreneur engages in prohibited acts, the JFTC recommends that the main subcontracting entrepreneur restore the situation to its original state and prevent recurrence, and publicizes the facts of the violation and a summary of the recommendations.
　Furthermore, if the parent company violates the obligations of the Act against Delay in Payment of Subcontract Proceeds, the company and the individual may be fined up to 500,000 yen each, depending on the nature of the violation.

　Since the Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors is a uniform rule, the decision itself is objectively clear as to whether or not the parent company is subject to the Act.
　As for compliance requirements, the Fair Trade Commission has posted pamphlets and explanations on its website, which provide specific examples of what must and must not be done.
　It is useful for a business operator that serves as a main subcontractor to inspect and review its business and business relationships within the company, prepare rules, forms, and manuals regarding transactions to which the Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors applies, and make them known to its officers and employees through training and other means.
　Business operators that become subcontractors may be able to eliminate disadvantages by checking with each business partner whether the Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors applies to them and, if so, whether the prescribed matters are stated in the documents delivered, whether they are treated unfavorably in violation of the Act, and so on.
　We suggest that both the party placing the order (the parent company) and the party receiving the order (the subcontractor) take this opportunity to check whether the Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors is applicable to them and whether they are operating in accordance with the Act.
　If you have any questions or concerns, please contact our lawyers.