Personal and Joint and Several Guarantees: What to Check Before Joining a Franchise in Japan

Joining a franchise through a company does not necessarily separate your personal assets entirely from your business liabilities. If your agreement with the franchisor includes a personal guarantee, you may face demands for debts the company cannot pay. Before committing to a franchise, look beyond the initial franchise fee and establish who is guaranteeing which debts, and to what extent.

1. Treat the franchise agreement and guarantee agreement as separate commitments

Start by identifying who will be the franchisee and who will act as guarantor. If a company is the franchisee and its representative gives a joint and several guarantee, that representative takes on personal liability under the guarantee, separate from the company’s payment obligations. If you join as a sole trader, you are already the debtor under the agreement. Incorporating a business does not automatically remove personal liabilities you have already incurred.

Guarantee clauses may appear not only in a separate agreement, but also at the end of the franchise agreement, in an application form or in a separate consent document. Obtain the complete set of relevant documents rather than simply checking the signature pages.

Drawing up the following checklist can help you spot overlapping guarantees.

Agreement to check	Who to ask	Key points to check
Franchise agreement	Franchisor	Identity of the franchisee and guarantor; debts covered by the guarantee
Agreement for payment of goods	Franchisor or supplier	Whether a separate guarantee is required in addition to the franchise agreement
Lease of business premises	Landlord	Guarantees covering rent and reinstatement costs
Equipment lease or loan agreement	Leasing company or financial institution	Scope of the guarantee and conditions for release

Even if one agreement requires no guarantee, another may do so. A security deposit paid to the franchisor is also distinct from a personal guarantee. Do not assume that the deposit limits any further claims: check how it will be applied and who can be pursued for any outstanding balance.

2. Read the scope and liability cap carefully

Under Japan’s Civil Code, a guarantee agreement must be made in writing or in a prescribed electronic form. A further rule applies to an individual’s revolving guarantee—known in Japanese as a kojin nehoshō keiyaku—covering unspecified debts within a defined category: it is ineffective unless a maximum liability amount is specified.

For example, a clause under which an individual guarantees payments for goods, royalties and other debts arising from an ongoing trading relationship may qualify as an individual revolving guarantee. However, not every guarantee falls into this category. The assessment depends on the debts covered, not simply the title of the agreement.

The maximum liability amount is the cap on the guarantor’s responsibility. For an individual revolving guarantee, it covers not just the principal debt but also interest, contractual penalties, damages and other amounts. Paying that maximum does not, however, mean that the franchisee company’s own remaining debts are extinguished.

Ask the franchisor at least the following questions:

• Does the guarantee cover only unpaid amounts, or also contractual penalties and damages?
• Does it cover debts under separate agreements signed in future, or debts relating to additional outlets?
• Where is the maximum liability amount stated in the agreement, and what is the amount?
• If there are several guarantee agreements, does each have a separate cap?
• If there are several guarantors, how much can be claimed from each?

For example, if a separate guarantee is required for each outlet, the cap for the first outlet alone will not tell you your total exposure. List the scope and cap of each agreement to establish the liability you could face personally.

3. Understand the implications of joint and several guarantees and disclosure to guarantors

Under an ordinary guarantee, certain conditions allow a guarantor to require the creditor to demand payment from the principal debtor first, or to seek enforcement against the principal debtor’s assets first. A joint and several guarantor does not have these defences. Crucially, you cannot assume that the creditor must exhaust recovery efforts against the company before pursuing you.

Do not skip an explanation of the guarantee simply because the proposed guarantor is a family member. Under Japan’s Civil Code, when a principal debtor asks an individual to guarantee debts incurred for business purposes, the debtor must provide information about their assets, income and expenditure, other debts and repayment status, and security. Inadequate disclosure does not automatically make the guarantee cancellable: statutory requirements must be met to rescind it.

A guarantor acting at the principal debtor’s request may also ask the creditor for information about the status of performance of the principal debt and related matters. Before signing, it is useful to ask who will handle such enquiries once the agreement is in force and how the guarantor’s identity will be verified.

If a family member is proposed as guarantor, give them time to take away the agreement and financial documents and seek independent advice. There may be scope to discuss whether a guarantee is necessary, narrowing its coverage, reducing the cap or offering alternative security. However, you have no automatic right to require the franchisor to agree.

4. Confirm the conditions for ending the guarantee in writing

Do not assume that resigning as the company’s representative ends your guarantee, or that transferring the outlet automatically transfers the guarantee to the new owner. A change in company representative and release from a personal guarantee are separate matters. Before joining, establish what procedures will be needed if circumstances change.

In particular, ask two distinct questions about when the guarantee ends. First, from what date will newly arising debts fall outside its scope? Second, when will liability under the guarantee for debts arising before that date end? Even if you stop guaranteeing new debts, responsibility for existing debts may remain.

You are more likely to obtain useful answers if you put specific scenarios to the franchisor:

• If the company’s representative changes, what assessment and conditions apply to releasing the former representative from their guarantee?
• If the outlet is transferred, who is responsible for arranging a change of guarantor?
• After the franchise agreement ends, does the guarantee remain in place for claims whose amounts have not yet been determined?
• What written document will confirm that release from the guarantee has been approved?

A verbal assurance that “we can discuss it at the time” does not secure a future release. Have any agreed terms on the scope of the guarantee or conditions for release incorporated into the contract or a written agreement confirmed by both parties.

5. Review the documents against Japan’s legal framework before signing

Japan has no single comprehensive statute governing all franchise agreements uniformly. However, specified chain businesses meeting certain criteria are subject to pre-contract written disclosure and explanation requirements under Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business. Even for retail and food-service franchises, applicability depends on whether the statutory criteria are met.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act also address dealings between franchisors and franchisees across sectors. They set out desirable pre-contract disclosures and conduct that may raise concerns under the Act. The validity and scope of a guarantee are assessed under the Civil Code and other relevant laws; requiring a guarantee does not, by itself, automatically breach the Antimonopoly Act.

Receiving disclosure documents does not mean that the appropriateness of each guarantee clause has been verified. Gather the complete set of agreements, a list of the debts covered and liability caps, and a record of the franchisor’s answers, then ask a lawyer familiar with business-to-business contracts to review them. Loan guarantees may also be subject to additional rules, so do not assume they can be treated in the same way as guarantees given to the franchisor.

Practical takeaway: Before signing, summarise the guarantors, debts covered, liability caps and conditions for release on a single page. If any gaps remain, obtain written answers from the franchisor and make your decision only once you understand the extent of your liability.