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

Even if you join a franchise in a company’s name, its payment obligations may become a personal liability if the company’s representative signs a joint and several guarantee. When joining a franchise network, you need to consider not only the business’s profitability but also how far your household finances could be exposed. Do not overlook the signature section at the end of the franchise agreement: review the guarantee as a separate issue in its own right.

1. Distinguish the franchisee’s liability from the guarantor’s

First, check whether the franchisee named in the agreement is an individual or a company. If you join as a sole trader, you personally owe the contractual debts. If a company is the franchisee, its representative may still become personally liable by giving a personal guarantee, depending on its terms. It is dangerous to assume that incorporating a business will always protect your personal assets.

Under Japan’s Civil Code, an ordinary guarantor generally has rights such as requiring the creditor to demand payment from the principal debtor first. A joint and several guarantor, however, has neither the defence requiring a prior demand against the debtor nor the defence requiring enforcement against the debtor’s assets first. This means the franchisor may not have to exhaust recovery from the company’s assets before pursuing you personally.

Ask the franchisor specific questions:

• Is a personal guarantee a mandatory condition of joining, or can it be waived following an assessment?
• Are guarantees required from a spouse or other relatives as well as the company’s representative?
• Why is a personal guarantee required in addition to security deposits, other deposits or collateral?
• Can you negotiate a narrower scope or release from the guarantee after establishing a satisfactory trading record?

Being a family member does not automatically make someone a guarantor. Do not rely on descriptions such as ‘just a formality’ or ‘the same as an emergency contact’. Check the capacity in which you are signing against the obligations set out in the agreement.

2. List the debts covered and the limits of liability

If the guarantee clause covers ‘all obligations owed by the franchisee to the franchisor’, you need to establish precisely what that includes. Even if you intend to guarantee only the initial franchise fee, the wording may also cover ongoing payments and debts arising from a breach of contract.

Prepare a table listing the creditor, the agreements covered, the types of debt, the liability cap and the guarantee period. In particular, ask the franchisor to confirm in writing whether the following are included:

• Unpaid royalties and payments for goods
• Expenses paid on the franchisee’s behalf and loans made by the franchisor
• Late-payment damages, contractual penalties and damages liabilities
• Debts relating to additional outlets or separate agreements
• Final settlement amounts determined after the agreement ends

A guarantee given by an individual for an unspecified set of future debts within a defined scope may qualify as an ‘individual revolving guarantee agreement’ under Japan’s Civil Code. If so, it is not effective unless a maximum amount of liability is specified. Guarantee agreements generally must be in writing, although the law also provides for electronic records.

Not every personal guarantee is a revolving guarantee, however. The distinction between this and a guarantee of a specific debt depends on the substance of the agreement, not its title. Do not assume that you can avoid payment simply because no maximum amount is stated. Have a lawyer review the draft agreement.

The maximum amount is a limit on your guarantee liability, not an indication of typical annual costs. If separate guarantees are required for the franchise agreement, borrowing and a lease, review those liabilities side by side. A cap in one agreement does not necessarily impose an overall cap across the other guarantees.

3. Understand the role of disclosure and the law

Japan has no single comprehensive statute governing all franchise agreements uniformly. The Civil Code and other laws apply to franchise agreements and guarantees, while dealings between franchisors and franchisees are subject to the Antimonopoly Act.

Article 11 of the Act on the Promotion of Small and Medium-sized Retail Business requires franchisors falling within its definition of a ‘specified chain business’ to provide prospective franchisees with written information and explanations before signing. However, this requirement does not cover every franchise, and receiving statutory disclosure does not itself establish that a guarantee is safe to give.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act identify conduct that may raise competition-law concerns during recruitment and in subsequent dealings. The mere fact that a guarantee is required does not automatically make the requirement unlawful. The specific terms and commercial relationship need to be examined.

In addition, when an individual is asked to guarantee business debts, the Civil Code’s rules on the principal debtor’s duty to provide the prospective guarantor with information about its assets, income and expenditure may apply. If you join through a company and ask a family member to act as guarantor, remember that the company may also have disclosure obligations. Do not assume that an explanation from the franchisor alone completes the process.

4. Agree the conditions for release before signing

Reviewing a guarantee involves more than checking the liability cap at the outset. Establish which debts you will remain liable for if you step down as the company’s representative, cease to be involved in running the outlet or reach the end of the franchise agreement. A change of company representative does not necessarily end a personal guarantee automatically.

Go beyond asking the franchisor, ‘Will the guarantee continue after I step down?’ Clarify the procedure too. Ask where to submit a request for release, what assessment criteria apply, whether a replacement guarantor is needed, how outstanding debts will be confirmed and when written notice of release will be issued. Also distinguish between ending cover for new debts and being released from liability for debts already incurred.

Possible negotiating points include limiting the guarantee to debts associated with the outlet concerned, reducing the maximum liability and requiring a separate agreement before extending cover to additional outlets. These are not automatic entitlements, but they are options for making your exposure more specific and discussing it with the franchisor.

Before signing, give a professional adviser the franchise agreement, guarantee agreement and related commercial agreements together, and ensure that the guarantor personally receives an explanation. It is also useful to establish how the guarantor will be notified if the company falls behind with payments.

Practical takeaway: Summarise on one page ‘who guarantees what, to whom, up to what amount and for how long’. If any entries remain blank or unclear, ask for explanations and negotiate the terms before signing.