Japan's 2026 Subcontracting Act Reform: Compliance, Contract Changes and M&A Due Diligence

The Subcontracting Act Japan, formally the Act against Delay in Payment of Subcontract Proceeds, Etc. to Subcontractors (下請代金支払遅延等防止法), underwent its most significant reform in decades when sweeping amendments took effect on January 1, 2026. The revised law expands the categories of businesses and transactions it covers, introduces new prohibited conduct such as refusing to negotiate with subcontractors, imposes stricter payment-timing obligations, and strengthens the sanctions available to the Japan Fair Trade Commission (JFTC). For general counsel, procurement heads, CFOs and M&A teams at multinational companies operating in or transacting with Japan, these changes demand immediate action across contracts, procurement workflows, payment systems and acquisition due diligence.

Executive Summary, What Changed, Who Is Affected, and Immediate Actions

The 2026 amendments to the Subcontracting Act Japan transform supplier protection from a narrowly enforced administrative regime into a broader, more assertive regulatory framework. The Act’s purpose, preventing delay in payment of subcontract proceeds and ensuring fair transactions between larger procuring enterprises and smaller subcontractors, remains unchanged. What has changed is the regime’s reach, the specificity of its prohibitions, and the practical consequences of non-compliance.

Under the revised law, more enterprises now qualify as regulated “main subcontracting enterprises” (親事業者, oya-jigyōsha), additional types of outsourced work fall within the Act’s scope, and the list of prohibited acts has been expanded beyond the original enumerated categories. Payment-timing rules have been tightened, and the JFTC has signalled that enforcement will be more proactive, including public disclosure of violators’ names. Industry observers expect the practical effect to be a marked increase in compliance burden for both domestic companies and foreign-owned entities that subcontract work to Japanese suppliers.

In-house teams should prioritise the following actions immediately:

• Board / General Counsel. Commission a gap analysis comparing current procurement and subcontracting practices against the 2026 requirements; report findings to the board within 60 days.
• Procurement. Audit all active subcontracting relationships to determine which now fall within the Act’s expanded scope; update approval workflows and negotiation record-keeping protocols.
• Finance. Verify that payment cycles for all covered subcontract transactions comply with the tightened timing rules; configure automated alerts for approaching deadlines.
• M&A Teams. Add Subcontracting Act compliance to every Japan-related due diligence checklist; request supplier payment histories and corrective-action records from targets.
• Legal Operations. Initiate a contract redlining programme to update payment, negotiation-cooperation, audit and termination clauses in template and active agreements.

Background and Legislative Timeline

Original Subcontract Act, A Quick History

The Act against Delay in Payment of Subcontract Proceeds was enacted as Act No. 120 of 1956 as a companion statute to the Antimonopoly Act. Its purpose was to protect small and medium-sized subcontractors from exploitative practices by larger procuring enterprises, particularly delayed payments, forced price reductions and unreasonable returns of goods. The JFTC was designated as the primary enforcement body, with authority to issue recommendations and, where necessary, corrective orders.

2025–2026 Legislative Process and Effective Date

The bill to amend the Subcontracting Act was submitted to the Diet and enacted during the 2025 legislative session. The JFTC issued a press release outlining the policy objectives behind the reform, emphasising the need to modernise supplier protection in response to evolving supply-chain structures. The amended Act took effect on January 1, 2026, giving regulated enterprises a limited transition window.

What Changed Under the Subcontracting Act 2026, Core Legal Reforms

Expanded Scope and Covered Entities

The 2026 reform widens the net of regulated relationships. Under the prior law, the Act applied primarily where a “main subcontracting enterprise” (a larger entity measured by capital or employee thresholds) outsourced manufacturing, repair, information-processing or certain service work to a smaller “subcontractor.” The amendments lower certain employee and capital thresholds and bring additional categories of outsourced services within scope. The likely practical effect is that mid-sized companies, including foreign-owned subsidiaries, that previously fell below the regulatory threshold now qualify as regulated procuring enterprises. Sector-specific notes indicate particular attention to IT services, content creation and logistics outsourcing.

New Prohibitions, Refusing Negotiations, Payment-Timing Rules and Beyond

The original Act listed specific prohibited acts, including delayed payment, forced price reductions, unreasonable returns and coerced purchases. The subcontracting act 2026 amendments add new categories of prohibited conduct. Among the most significant is an explicit prohibition on refusing to negotiate with subcontractors regarding pricing, delivery terms or contract modifications. This targets a long-standing industry practice in which procuring enterprises unilaterally imposed terms without meaningful discussion. Payment to suppliers Japan rules have also been tightened: the maximum permissible period between receipt of goods or services and payment has been reinforced, and the Act now more clearly mandates that payment must be made within 60 days of the date of receipt, with interest accruing on late payments at prescribed statutory rates.

Stronger Sanctions and Enforcement Tools

The sanctions regime has been materially strengthened. The JFTC now has broader authority to issue corrective orders (勧告, kankoku) with enhanced procedural teeth, and the revised Act contemplates the public disclosure of violating enterprises’ names, a significant reputational sanction in the Japanese business context. Industry observers expect these tools to be deployed more frequently than under the prior regime, where enforcement was largely based on administrative guidance and voluntary compliance.

Comparison Table: Prior Law vs. 2026 Reform

Who Is Covered, Thresholds, Transaction Types and Cross-Border Reach

Categories of Protected Suppliers

The Act protects “subcontractors” (下請事業者, shitauke-jigyōsha), generally small and medium-sized enterprises that receive outsourced work from larger procuring enterprises. Supplier protection Japan under the Act extends to manufacturers, repairers, information-processing service providers and service providers in designated categories. The 2026 amendments broaden the definition of covered services, capturing additional forms of outsourced professional and technical work.

How the Law Treats Foreign Companies, Compliance for Foreign Companies

The Act applies to any enterprise that falls within the statutory definition of a “main subcontracting enterprise” and outsources covered work within Japan. This includes Japanese subsidiaries and branches of foreign corporations. Where a foreign parent company directly contracts with a Japanese subcontractor for covered work, for example, commissioning software development or manufacturing components, the foreign entity may itself be subject to the Act’s obligations. The practical trigger is not nationality but the nature and location of the subcontracting relationship. In-house teams at multinational companies should assess every Japan-facing procurement arrangement against the revised thresholds. Early indications suggest the JFTC intends to apply the Act without distinction based on the procuring enterprise’s country of incorporation.

Examples and Hypothetical Scenarios

• Foreign manufacturer with a Tokyo subsidiary. The subsidiary outsources component assembly to a smaller Japanese firm. The subsidiary meets the employee threshold as a regulated procuring enterprise. All payment-timing, document-delivery and negotiation obligations apply.
• Cross-border IT outsourcing. A European headquarters contracts directly with a Japanese IT firm for software customisation. If the relationship falls within the Act’s definition of information-processing subcontracting and the European entity meets applicable thresholds, the Act’s prohibitions, including the new obligation not to refuse negotiations, apply.
• Private-equity portfolio company. A Japan-based portfolio company that outsources logistics to small carriers must now comply with expanded scope rules. The PE fund’s M&A team should flag this as a compliance risk during post-acquisition integration.

Compliance Checklist for In-House Teams Under the Subcontracting Act Japan

Procurement Process Changes

Procurement departments must revise approval workflows to capture every subcontracting relationship that now falls within the Act’s expanded scope. This means maintaining contemporaneous records of price negotiations, delivery-term discussions and any counterproposals from subcontractors. The Act requires the delivery of prescribed documents (書面交付義務, shomen kōfu gimu) containing specified items, including work description, price, payment date and delivery terms, at the time of placing an order. Under the 2026 amendments, these documentation obligations are enforced more rigorously.

Payment Systems and Finance Actions

Finance teams must ensure that payment to suppliers Japan complies with the statutory 60-day maximum period. Payment systems should be configured to flag any invoice where the gap between receipt of goods or services and scheduled payment exceeds this limit. Late-payment interest at the prescribed statutory rate accrues automatically, and failure to pay interest is itself a violation. Automated notifications, triggered when a payment approaches the 60-day threshold, are a practical safeguard.

Recordkeeping, Reporting and Supplier Communications

The Act requires procuring enterprises to retain records of all subcontracting transactions, including the prescribed documents delivered to subcontractors, for a specified retention period. The 2026 amendments place additional emphasis on retaining records of negotiations and any changes to originally agreed terms. Supplier communications should be documented in writing, and any unilateral changes to price or delivery terms should be flagged for legal review before implementation.

12-Point Compliance Checklist

• 1. Scope audit (Procurement). Identify all subcontracting relationships that now fall within the revised Act.
• 2. Threshold review (Legal). Confirm whether the enterprise meets the capital or employee thresholds as a regulated procuring enterprise.
• 3. Document delivery (Procurement). Verify that prescribed documents are issued for every covered transaction at the time of order placement.
• 4. Payment-timing check (Finance). Audit all payment cycles to confirm compliance with the 60-day rule.
• 5. Interest calculation (Finance). Configure systems to calculate and pay statutory late-payment interest automatically.
• 6. Negotiation records (Procurement / Legal). Implement a protocol for recording all price and term negotiations with subcontractors.
• 7. No-refusal-to-negotiate policy (Legal). Issue internal guidance prohibiting unilateral refusal to negotiate with subcontractors.
• 8. Prohibited-acts training (Legal / HR). Train procurement and project-management staff on the full list of prohibited acts.
• 9. Record retention (Legal / Compliance). Update document-retention policies to meet the Act’s requirements for subcontracting records.
• 10. Supplier communication templates (Procurement). Prepare standardised, compliant templates for order documents and price-change notices.
• 11. Complaint-response protocol (Legal). Establish an internal procedure for responding to subcontractor complaints or JFTC inquiries.
• 12. Board reporting (GC / CFO). Schedule periodic compliance reporting to the board on subcontracting-act risk.

Contract Redlines and Clause Library, What to Change Now

Key Clause Types to Update

Every template agreement and active contract involving covered subcontracting relationships should be reviewed for the following clause types:

• Payment timing. Clauses must align with the 60-day maximum. Any clause permitting payment beyond 60 days from receipt of goods or services is non-compliant and potentially unenforceable.
• Negotiation obligations. Contracts should include a cooperation-in-negotiation clause reflecting the Act’s prohibition on refusing to negotiate. A clause that purports to give the procuring enterprise sole discretion over pricing or terms is a compliance red flag.
• Termination and suspension. Termination-for-convenience clauses should be reviewed to ensure they do not operate as de facto prohibited acts (e.g., retaliating against a subcontractor that requests a price negotiation).
• Indemnities and cost allocation. Clauses that shift costs back to the subcontractor (e.g., requiring the subcontractor to bear the cost of materials supplied by the procuring enterprise at inflated prices) may constitute prohibited “coerced purchases” under the Act.

Sample Redlines and Drafting Notes

The following sample redlines are provided for negotiation purposes only and should be reviewed by qualified counsel before adoption.

• Payment clause (before): “Payment shall be made within 90 days of invoice date.” → Redline: “Payment shall be made within 60 days of the Procuring Enterprise’s receipt of the goods or services, in accordance with Article 2-2 of the Act against Delay in Payment of Subcontract Proceeds. Interest on late payment shall accrue at the rate prescribed by the Act.”
• Negotiation clause (new insertion): “Neither party shall unreasonably refuse to engage in good-faith negotiations regarding the price, delivery terms or other material conditions of this Agreement. For the avoidance of doubt, this obligation reflects the requirements of the Act against Delay in Payment of Subcontract Proceeds as amended.”
• Termination clause (redline): “Termination for convenience by the Procuring Enterprise shall not be exercised in a manner that constitutes retaliation against the Subcontractor’s exercise of rights under applicable supplier-protection legislation, including the Act against Delay in Payment of Subcontract Proceeds.”

Note: These model clauses are illustrative and must be adapted to the specific transaction. Mandatory statutory requirements under the Act cannot be waived by contract.

M&A Due Diligence Implications and Transaction Playbook, Contract Due Diligence Japan

Due Diligence Questions for Data Rooms and Vendor Representations

Acquirers of Japanese businesses must now incorporate Subcontracting Act compliance into their standard due diligence protocols. The 2026 reforms increase the potential exposure for targets that have historically relied on informal payment practices or unilateral pricing. Key questions to add to data room requests and vendor questionnaires include supplier payment history, records of JFTC inquiries or corrective orders, and evidence of document-delivery compliance. Vendor representations should cover the target’s status as a regulated procuring enterprise, the completeness of its subcontracting records, and the absence of pending or threatened JFTC enforcement actions.

Purchase Agreement Adjustments and Disclosure Schedules

Purchase agreements for Japan targets should be adjusted to include specific representations and warranties regarding Subcontracting Act compliance. Disclosure schedules should list all subcontracting relationships that fall within the Act’s scope, any known instances of non-compliance, and any corrective actions taken or pending. Where material non-compliance is identified, acquirers should consider escrow holdbacks, indemnity provisions or purchase-price adjustments to cover remediation costs.

M&A Due Diligence Checklist (15 Items)

• 1. Confirm target’s classification as a regulated procuring enterprise under the revised thresholds.
• 2. Request a complete list of all subcontracting relationships within the Act’s scope.
• 3. Obtain copies of prescribed documents (order forms, specifications) for a representative sample of transactions.
• 4. Audit payment-timing records for the past three years against the 60-day rule.
• 5. Review records of any JFTC inquiries, inspections, recommendations or corrective orders.
• 6. Assess whether the target has implemented a no-refusal-to-negotiate policy.
• 7. Verify that late-payment interest has been calculated and paid where applicable.
• 8. Examine standard contract templates for compliance with the Act’s mandatory requirements.
• 9. Interview procurement and finance personnel regarding awareness of the 2026 amendments.
• 10. Review supplier complaint logs and any internal investigation reports.
• 11. Assess document-retention practices against statutory requirements.
• 12. Identify any subcontractor relationships where pricing was set unilaterally without negotiation.
• 13. Evaluate exposure to back-payment liability for historically non-compliant transactions.
• 14. Review insurance coverage for regulatory fines, penalties and remediation costs.
• 15. Prepare a post-closing compliance remediation plan with timeline and budget.

Enforcement, Complaints and Likely Remedies, What to Expect

Who Enforces and the Likely Enforcement Approach

The JFTC is the principal enforcement body for the Subcontracting Act Japan, with authority to conduct investigations, issue corrective recommendations and, under the 2026 amendments, impose stronger administrative sanctions. The Small and Medium Enterprise Agency (中小企業庁) also plays a supporting role, particularly in receiving complaints from subcontractors. The JFTC has signalled a shift toward more proactive enforcement, including sector-wide audits and increased reliance on public disclosure of violating enterprises, a reputational sanction that carries significant weight in Japanese commercial relationships.

Practical Remediation Steps If a Target or Counterparty Breaches

If a JFTC investigation reveals a breach, the typical remediation sequence involves immediate corrective action (e.g., paying overdue amounts with statutory interest), followed by the implementation of compliance systems and, potentially, public acknowledgement of the violation. For M&A teams, the discovery of a target’s non-compliance during due diligence should trigger a remediation cost estimate, updated representations and warranties, and, in serious cases, a reassessment of deal economics.

Quick Reference, Actions to Take in the First 90 Days

• Days 1–15 (Legal): Commission a scope audit of all subcontracting relationships against revised thresholds.
• Days 1–15 (GC): Brief the board and senior management on the 2026 amendments and compliance risks.
• Days 15–30 (Procurement): Update order-document templates to include all prescribed items under the Act.
• Days 15–30 (Finance): Audit payment cycles and configure 60-day compliance alerts in payment systems.
• Days 30–45 (Legal): Issue internal guidance on the prohibition against refusing negotiations.
• Days 30–45 (HR / Legal): Schedule prohibited-acts training for all procurement and project-management staff.
• Days 45–60 (Legal): Begin redlining active contracts, prioritise high-value and high-risk subcontracting agreements.
• Days 45–60 (Compliance): Update document-retention policies to meet enhanced recordkeeping requirements.
• Days 60–75 (Procurement): Communicate compliance changes to key subcontractors and invite feedback.
• Days 75–90 (GC / CFO): Submit first compliance status report to the board with identified gaps and remediation timeline.

Conclusion

The 2026 reform of the Subcontracting Act Japan is not a marginal adjustment, it is a structural expansion of supplier protection that imposes immediate, concrete obligations on procuring enterprises of every size and nationality. General counsel, procurement heads and M&A teams that delay compliance risk regulatory action, reputational damage and transaction complications. The priority now is to audit existing subcontracting relationships, redline contracts, update payment systems and embed the Act’s requirements into every Japan-related due diligence process. Qualified Japan-based legal counsel should be engaged early to guide these efforts and to ensure that compliance programmes are calibrated to the JFTC’s evolving enforcement posture.

Sources

1. Japan Fair Trade Commission (JFTC), Act against Delay in Payment of Subcontract Proceeds (guidance PDF)
2. Japan Law Translation, Act against Delay in Payment of Subcontract Proceeds (official English translation)
3. Japan Law Translation, Act on Preventing Delay in Payment to Small and Medium Entities
4. JFTC Press Release, Passage of Amendment Bill and Policy Objectives (May 2025)
5. e-Gov Laws of Japan, Official Law Database