2025.04.17houmuGeneral Corporate Legal Services
Features and considerations in contracting with local governments
Introduction.
When concluding contracts with local public entities such as prefectures and municipalities, it is beneficial to know their characteristics and points to note in advance, as they are subject to unique rules that differ from those of contracts between private companies.
I myself worked for Oyama City Hall in Tochigi Prefecture for two years from April 2008 to March 2020 as a public official with a license as a lawyer (public official with a specific term of office).
In this article, I will explain the characteristics and points to note when concluding contracts with local public entities, taking into account my experience at that time.
I myself worked for Oyama City Hall in Tochigi Prefecture for two years from April 2008 to March 2020 as a public official with a license as a lawyer (public official with a specific term of office).
In this article, I will explain the characteristics and points to note when concluding contracts with local public entities, taking into account my experience at that time.
1. Fairness and Transparency must be ensured in contracts
Local government contracts require fairness and transparency due to the expenditure of public funds.
As will be discussed in section 2 below, in principle, the contracting parties of local public entities are determined by bidding. In addition, if a bidder is found to be in violation of laws and regulations, to be dishonest, or to have defaulted on a contract, he or she may be barred from participating in the bidding process for a certain period of time.
In addition, as a general rule, the contract amount is to be spent within a predetermined budget. Therefore, even if it becomes necessary to increase the contract amount after the contract has been signed, such an increase may be restricted if the budget does not support the increase.
As will be discussed in section 2 below, in principle, the contracting parties of local public entities are determined by bidding. In addition, if a bidder is found to be in violation of laws and regulations, to be dishonest, or to have defaulted on a contract, he or she may be barred from participating in the bidding process for a certain period of time.
In addition, as a general rule, the contract amount is to be spent within a predetermined budget. Therefore, even if it becomes necessary to increase the contract amount after the contract has been signed, such an increase may be restricted if the budget does not support the increase.
2. Check the legal basis of the contract
(1) Principle of “Administration by Law
a. Local governments and other administrative bodies are governed by the principle of “administration by law. In accordance with this principle, the activities of local public entities are basically required to have a legal basis and backing.
b. Much of the information on what rules are established for the local public body that intends to conclude a contract can be obtained via the Internet.
For laws, cabinet orders, and ministerial ordinances, you can check the text of the Local Autonomy Law, the Local Autonomy Law Enforcement Order, and the Local Autonomy Law Enforcement Regulations at the “e-gov Law Search”.
In many cases, ordinances and regulations are published as a “collection of rules and regulations” on the website of each local government. For example, if you enter the name of the municipality you wish to know about and search for “●● city rules and regulations,” you can check the ordinances and regulations of the municipality in question.
On the other hand, internal regulations, which are called “internal rules,” that stipulate the operation of the system and handling procedures, etc., which are subordinate to the rules, are generally not made public.
(2) Principles of Contract Procedures - In principle, bidding. Negotiated contracts are exceptional-.
a. When concluding a contract with a local public entity, the local public entity is required to comply with the Local Autonomy Law and other laws and regulations, as well as the ordinances and rules of each local public entity.
One of the characteristics of contracts with local public entities is that, in principle, the contracting party is selected through general competitive bidding (Article 234 of the Local Autonomy Law).
General competitive bidding” is a method in which an unspecified number of people are invited to participate in the bidding process, and the party that offers the most favorable price is selected as the counterparty to the contract.
b. In addition to general competitive bidding, there are “nominated competitive bidding,” in which a local government selects a specified number of competitive subscribers to bid, and “negotiated contracts,” in which a local government concludes a contract directly with a specific party without bidding or other competition, both of which are allowed only when specific conditions are met.
c. Specific conditions under which “negotiated contracts” are allowed include cases in which the estimated contract price is small (generally several hundred thousand yen to around one million yen for a municipality, depending on the type of contract and the size of the municipality), and cases in which the nature and purpose of the contract are not suitable for competitive bidding. These conditions are also stipulated by law (Article 167-2 of the Local Autonomy Law Enforcement Order). In response to the recent sharp rise in prices, the Local Autonomy Law Enforcement Ordinance was revised on April 1, 2025, and the standard amount for small negotiated contracts was raised. Based on this revision, it is expected that each local government will also revise its rules to raise the standard amount in the future.
Examples of “cases in which the nature or purpose of the contract is not suitable for competitive bidding” include cases in which the purchase of specific real estate or procurement of specific goods is required.
In other cases, when the direction of the work (e.g., construction of a new building) has been decided, but not yet what the contents of the contract will be, it may be more appropriate to receive proposals from companies and contract with the company that offers the best proposal, which is called the “proposal method” (plan competition method). (3) Principles of Contracting Procedures Part 2.
(3) Principle of Contract Procedures #2 -Council Resolution (Certain Large-Scale Contracts)
For certain large-scale contracts, it is necessary to pass a resolution of the local government council (Article 96, Paragraph 1, Items 5-8 of the Local Autonomy Law, etc.).
Last year, it was discovered and reported in the press that several local governments had concluded large-scale contracts without a resolution of their assemblies, despite the fact that such contracts were legally required to be approved by the assemblies. Since any act that lacks a legally required resolution by the council is considered invalid in principle, companies that are the counterparty to a contract need to be careful about this.
(4) In light of the above, when concluding a contract with a local public entity, it is appropriate to confirm the content of the contract and the legal basis for the contract procedures in advance.
a. Local governments and other administrative bodies are governed by the principle of “administration by law. In accordance with this principle, the activities of local public entities are basically required to have a legal basis and backing.
b. Much of the information on what rules are established for the local public body that intends to conclude a contract can be obtained via the Internet.
For laws, cabinet orders, and ministerial ordinances, you can check the text of the Local Autonomy Law, the Local Autonomy Law Enforcement Order, and the Local Autonomy Law Enforcement Regulations at the “e-gov Law Search”.
In many cases, ordinances and regulations are published as a “collection of rules and regulations” on the website of each local government. For example, if you enter the name of the municipality you wish to know about and search for “●● city rules and regulations,” you can check the ordinances and regulations of the municipality in question.
On the other hand, internal regulations, which are called “internal rules,” that stipulate the operation of the system and handling procedures, etc., which are subordinate to the rules, are generally not made public.
(2) Principles of Contract Procedures - In principle, bidding. Negotiated contracts are exceptional-.
a. When concluding a contract with a local public entity, the local public entity is required to comply with the Local Autonomy Law and other laws and regulations, as well as the ordinances and rules of each local public entity.
One of the characteristics of contracts with local public entities is that, in principle, the contracting party is selected through general competitive bidding (Article 234 of the Local Autonomy Law).
General competitive bidding” is a method in which an unspecified number of people are invited to participate in the bidding process, and the party that offers the most favorable price is selected as the counterparty to the contract.
b. In addition to general competitive bidding, there are “nominated competitive bidding,” in which a local government selects a specified number of competitive subscribers to bid, and “negotiated contracts,” in which a local government concludes a contract directly with a specific party without bidding or other competition, both of which are allowed only when specific conditions are met.
c. Specific conditions under which “negotiated contracts” are allowed include cases in which the estimated contract price is small (generally several hundred thousand yen to around one million yen for a municipality, depending on the type of contract and the size of the municipality), and cases in which the nature and purpose of the contract are not suitable for competitive bidding. These conditions are also stipulated by law (Article 167-2 of the Local Autonomy Law Enforcement Order). In response to the recent sharp rise in prices, the Local Autonomy Law Enforcement Ordinance was revised on April 1, 2025, and the standard amount for small negotiated contracts was raised. Based on this revision, it is expected that each local government will also revise its rules to raise the standard amount in the future.
Examples of “cases in which the nature or purpose of the contract is not suitable for competitive bidding” include cases in which the purchase of specific real estate or procurement of specific goods is required.
In other cases, when the direction of the work (e.g., construction of a new building) has been decided, but not yet what the contents of the contract will be, it may be more appropriate to receive proposals from companies and contract with the company that offers the best proposal, which is called the “proposal method” (plan competition method). (3) Principles of Contracting Procedures Part 2.
(3) Principle of Contract Procedures #2 -Council Resolution (Certain Large-Scale Contracts)
For certain large-scale contracts, it is necessary to pass a resolution of the local government council (Article 96, Paragraph 1, Items 5-8 of the Local Autonomy Law, etc.).
Last year, it was discovered and reported in the press that several local governments had concluded large-scale contracts without a resolution of their assemblies, despite the fact that such contracts were legally required to be approved by the assemblies. Since any act that lacks a legally required resolution by the council is considered invalid in principle, companies that are the counterparty to a contract need to be careful about this.
(4) In light of the above, when concluding a contract with a local public entity, it is appropriate to confirm the content of the contract and the legal basis for the contract procedures in advance.
3. Special characteristics of the contract
When entering into a contract with a local government, the following special provisions may be included
(1) Provisions for contract deposit
When concluding a contract with a local public entity, in order to ensure the proper performance of the contract, a contract bond must, in principle, be stipulated and paid (Article 167-16 of the Local Autonomy Law Enforcement Order).
For this reason, contracts with local public entities often include a clause regarding contract security deposits.
However, in some cases, due to the nature of the contract, there is no need to require payment of a contract bond, and in such cases, the contract will include a clause that the contractor is exempted from paying the contract bond. The waiver of the contract security deposit is usually stipulated in the contract rules and financial regulations of each local government.
(2) The budget for each fiscal year is fixed in advance, and the contract is in principle for a single fiscal year.
a. The fiscal year of a local public entity begins on April 1 and ends on March 31 of the following year (Article 208, Paragraph 1 of the Local Autonomy Law). (Article 208, Paragraph 1 of the Local Autonomy Law). Expenditures (expenditures) in a fiscal year must, in principle, be funded by the revenue (income) of that year (Article 208, Paragraph 2) (Principle of Independence of Fiscal Year).
In addition, all revenues and expenditures for a fiscal year must be incorporated into the budget, which must be approved by the Diet before the start of the fiscal year (Articles 210 and 211 of the Local Autonomy Law).
b. Thus, as a general rule, local governments have decided what they can spend and how much they can spend during the fiscal year at the time before the fiscal year begins.
Therefore, when concluding a contract with a local government, even if it is an ongoing contract, it is in principle a single fiscal year contract.
In addition, concluding a new contract in the middle of a fiscal year that was not planned at the time the budget was prepared, or changing the content of a planned contract by increasing the amount significantly, are hurdles that are higher than those encountered when contracting with private companies.
(3) Exceptional Long-Term Continuing Contracts and their Cautions
As an exception to (2) above, there are cases in which long-term, multi-year contracts are possible (Article 234-3 of the Local Autonomy Law).
This applies to contracts for the supply of electricity, gas, and water, the provision of telecommunications services, the leasing of real estate, and the borrowing of goods that would otherwise interfere with the handling of business operations, and which are stipulated by ordinance (Article 167-17 of the Local Autonomy Law Enforcement Order).
Even in this case, however, local governments are only allowed to make expenditures within the scope of their budgets for each fiscal year. For this reason, it is customary for the contract of a long-term continuing contract to include a clause that grants the local government the right to terminate the contract and that the local government is not liable for damages if the budget is reduced or eliminated in the following fiscal year or later.
(4) Special provisions for statute of limitations
Although not a contract clause, there are special provisions regarding the statute of limitations on the rights and obligations of local public entities.
This article will not go into the details, but will introduce one major difference.
Under the Civil Code, the mere filing of a request (demand) for the expiration of the statute of limitations only postpones its completion for six months (Civil Code Article 150, Paragraph 1), and a judicial request must be filed to renew the prescription (Article 147, Paragraph 1).
In contrast, a notice and demand for payment made by a local public entity has the effect of renewing the prescription (Article 236, Paragraph 4 of the Local Autonomy Law), and simply demanding payment within a specified period renews the prescription (Article 171 of the Local Autonomy Law Enforcement Order). Note that this applies to all claims held by local governments.
(1) Provisions for contract deposit
When concluding a contract with a local public entity, in order to ensure the proper performance of the contract, a contract bond must, in principle, be stipulated and paid (Article 167-16 of the Local Autonomy Law Enforcement Order).
For this reason, contracts with local public entities often include a clause regarding contract security deposits.
However, in some cases, due to the nature of the contract, there is no need to require payment of a contract bond, and in such cases, the contract will include a clause that the contractor is exempted from paying the contract bond. The waiver of the contract security deposit is usually stipulated in the contract rules and financial regulations of each local government.
(2) The budget for each fiscal year is fixed in advance, and the contract is in principle for a single fiscal year.
a. The fiscal year of a local public entity begins on April 1 and ends on March 31 of the following year (Article 208, Paragraph 1 of the Local Autonomy Law). (Article 208, Paragraph 1 of the Local Autonomy Law). Expenditures (expenditures) in a fiscal year must, in principle, be funded by the revenue (income) of that year (Article 208, Paragraph 2) (Principle of Independence of Fiscal Year).
In addition, all revenues and expenditures for a fiscal year must be incorporated into the budget, which must be approved by the Diet before the start of the fiscal year (Articles 210 and 211 of the Local Autonomy Law).
b. Thus, as a general rule, local governments have decided what they can spend and how much they can spend during the fiscal year at the time before the fiscal year begins.
Therefore, when concluding a contract with a local government, even if it is an ongoing contract, it is in principle a single fiscal year contract.
In addition, concluding a new contract in the middle of a fiscal year that was not planned at the time the budget was prepared, or changing the content of a planned contract by increasing the amount significantly, are hurdles that are higher than those encountered when contracting with private companies.
(3) Exceptional Long-Term Continuing Contracts and their Cautions
As an exception to (2) above, there are cases in which long-term, multi-year contracts are possible (Article 234-3 of the Local Autonomy Law).
This applies to contracts for the supply of electricity, gas, and water, the provision of telecommunications services, the leasing of real estate, and the borrowing of goods that would otherwise interfere with the handling of business operations, and which are stipulated by ordinance (Article 167-17 of the Local Autonomy Law Enforcement Order).
Even in this case, however, local governments are only allowed to make expenditures within the scope of their budgets for each fiscal year. For this reason, it is customary for the contract of a long-term continuing contract to include a clause that grants the local government the right to terminate the contract and that the local government is not liable for damages if the budget is reduced or eliminated in the following fiscal year or later.
(4) Special provisions for statute of limitations
Although not a contract clause, there are special provisions regarding the statute of limitations on the rights and obligations of local public entities.
This article will not go into the details, but will introduce one major difference.
Under the Civil Code, the mere filing of a request (demand) for the expiration of the statute of limitations only postpones its completion for six months (Civil Code Article 150, Paragraph 1), and a judicial request must be filed to renew the prescription (Article 147, Paragraph 1).
In contrast, a notice and demand for payment made by a local public entity has the effect of renewing the prescription (Article 236, Paragraph 4 of the Local Autonomy Law), and simply demanding payment within a specified period renews the prescription (Article 171 of the Local Autonomy Law Enforcement Order). Note that this applies to all claims held by local governments.
4. Possibility of information disclosure
Each local government has its own information disclosure ordinance.
These ordinances set forth rules for the disclosure of information on public records in order to guarantee the rights of citizens and others to know, and to ensure fairness and transparency through the disclosure of information by local public entities.
When a contract is concluded with a local public entity, the contract and deliverables such as reports delivered under the contract may also become information (public records) of the local public entity concerned and be subject to a request for access to information.
In most cases, the information disclosure ordinance does not disclose personal information or information that may harm the rights, competitive position, or other legitimate interests of a company or other business entity, but it is possible that a contract with a local public entity or some of the deliverables delivered under the contract may be disclosed.
These ordinances set forth rules for the disclosure of information on public records in order to guarantee the rights of citizens and others to know, and to ensure fairness and transparency through the disclosure of information by local public entities.
When a contract is concluded with a local public entity, the contract and deliverables such as reports delivered under the contract may also become information (public records) of the local public entity concerned and be subject to a request for access to information.
In most cases, the information disclosure ordinance does not disclose personal information or information that may harm the rights, competitive position, or other legitimate interests of a company or other business entity, but it is possible that a contract with a local public entity or some of the deliverables delivered under the contract may be disclosed.
5. How to respond and what to do in the event of a dispute
If, after entering into a contract with a local public entity, a dispute arises with the local public entity due to the performance of the contract, the determination of the price, or the occurrence of an accident during the contract, the following points should be noted.
(1) A resolution of the council is required when settling the case or determining the amount of damages.
a. Settlement
In the event of a dispute, the two parties may make adjustments and reach a settlement regarding the resolution of the dispute in terms that are not written in the contract.
In the case of a private company, settlement can be made only by agreement of both parties.
However, if a local public entity wishes to make a settlement, in principle, a resolution of the council is required (Article 96, Paragraph 1, Item 12 of the Local Autonomy Law). In many cases, local assemblies are held four times a year (once every three months) in cities, wards, towns, and villages, etc. In some cases, settlements cannot be reached unless the assembly schedule is met, and it may take time to reach a settlement.
b. Defining the amount of damages
When a local public entity is obligated to compensate for damages, a resolution of the local assembly is in principle required to determine the amount of damages (Article 13, Paragraph 13 of the same article).
Therefore, even if a claim for damages is filed against a local public entity, it may take time to determine the amount of damages, as in (a) above.
(2) Exceptionally, the chief executive officer can make an exclusive decision.
As an exception to (1) above, a resolution of a local public body designating a matter as a minor matter may be made an exclusive disposition by the mayor of a city, ward, town or village, etc. (chief executive officer) (Article 180, Paragraph 1 of the Local Autonomy Law). Even in this case, the mayor who made the exclusive decision is obliged to report to the assembly (Article 180, Paragraph 2).
The amount of settlement or compensation for damages described in (1) above may be determined by each municipality, but in some cases, such as cases involving less than 2 million yen per case, the head of the municipality has the authority to make an exclusive decision.
(1) A resolution of the council is required when settling the case or determining the amount of damages.
a. Settlement
In the event of a dispute, the two parties may make adjustments and reach a settlement regarding the resolution of the dispute in terms that are not written in the contract.
In the case of a private company, settlement can be made only by agreement of both parties.
However, if a local public entity wishes to make a settlement, in principle, a resolution of the council is required (Article 96, Paragraph 1, Item 12 of the Local Autonomy Law). In many cases, local assemblies are held four times a year (once every three months) in cities, wards, towns, and villages, etc. In some cases, settlements cannot be reached unless the assembly schedule is met, and it may take time to reach a settlement.
b. Defining the amount of damages
When a local public entity is obligated to compensate for damages, a resolution of the local assembly is in principle required to determine the amount of damages (Article 13, Paragraph 13 of the same article).
Therefore, even if a claim for damages is filed against a local public entity, it may take time to determine the amount of damages, as in (a) above.
(2) Exceptionally, the chief executive officer can make an exclusive decision.
As an exception to (1) above, a resolution of a local public body designating a matter as a minor matter may be made an exclusive disposition by the mayor of a city, ward, town or village, etc. (chief executive officer) (Article 180, Paragraph 1 of the Local Autonomy Law). Even in this case, the mayor who made the exclusive decision is obliged to report to the assembly (Article 180, Paragraph 2).
The amount of settlement or compensation for damages described in (1) above may be determined by each municipality, but in some cases, such as cases involving less than 2 million yen per case, the head of the municipality has the authority to make an exclusive decision.
6. Finally
As mentioned above, contracts with local public entities differ from those with private companies.
It is important to be aware of the fairness and transparency required of local public entities, the fact that negotiated contracts are an exception to the contracting process, and an understanding of the fiscal year and budget, and to confirm the details of the contract before entering into it, just as in a normal contract. Consulting with a lawyer or other expert before entering into a contract can help identify and reduce risks.
It is also important to understand that if a dispute arises with a local government, it may take time to resolve the dispute due to legal restrictions.
It is important to be aware of the fairness and transparency required of local public entities, the fact that negotiated contracts are an exception to the contracting process, and an understanding of the fiscal year and budget, and to confirm the details of the contract before entering into it, just as in a normal contract. Consulting with a lawyer or other expert before entering into a contract can help identify and reduce risks.
It is also important to understand that if a dispute arises with a local government, it may take time to resolve the dispute due to legal restrictions.