Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980 United Nations Convention, 3rd ed. (1999), pages 335-342. Reproduced with permission of the publisher, Kluwer Law International, The Hague.
§309 This article’s special role is to determine how much the buyer owes the seller for non-conforming goods when special circumstances relieve the seller of liability for "damages.
"If the goods do not conform with the contract and whether or not the price has already been paid, the buyer may reduce the price in the same proportion as the value that the goods actually delivered had at the time of delivery bears to the value that conforming goods would have had at that time. However, if the seller remedies any failure to perform his obligations in accordance with article 37 or article 48 or if the buyer refuses to accept performance by the seller in accordance with those articles, the buyer may not reduce the price."
§310 A. The Special Role of "Price-Reduction"
The issues presented by Article 50 are subtle and complex; an example may help.
Example 50A. On April 1 Seller contracted to sell a $100,000 cargo of No. 1 quality Edam cheese to Buyer, a food processor, with delivery by June 1 "Ex Ship" at a port in Buyer’s country. (Under this delivery term, transit risks were assumed by Seller.) Seller dispatched cheese that conformed to the contract; the time of dispatch and other shipping arrangements would have led, under normal conditions, to timely and safe arrival of the shipment. However, unexpected hostilities led to the interning of the ship for two months during its transit through a canal. Normal refrigeration facilities on the ship could not cope with the hot climate in the canal area; when the ship finally arrived on August 1 the cheese was moldy and graded at only No. 4 quality but the cheese could be used, with [page 335] trimming and other treatment. The price level for No. 1 Edam cheese was the same on August 1 as when the contract was made; the moldy cheese was worth $20,000, one-fifth of the contract price of $100,000. Buyer needed the cheese for its food processing and elected to keep the cheese; the delay in arrival and the added time required to prepare the cheese for processing led to a shut-down of Buyer’s processing plant, with a loss of $15,000.
Article 79, infra at §424, provides that a party is excused from liability for "damages" when his failure to perform is "due to an impediment beyond his control." (Under domestic law the grounds for exemption may be referred to as "impossibility," " force majeure " or "Act of God.") In the circumstances described in the example, we may assume that the unexpected hostilities constituted an "impediment" that excused Seller from "damages." (See §433 n. 17.) Buyer could have avoided the contract (Arts. 25, 49(1), 79(5)) but he elected to accept the cheese. How much must he pay?
In Example 50A, the goods did not "conform with the contract." Although Buyer may not recover "damages," under Article 50 he may "reduce the price in the same proportion as the value that the goods actually delivered had at the time of the delivery bears to the value that conforming goods would have had at that time." The No. 4 quality cheese delivered to Buyer had one-fifth the value of conforming goods. Buyer must pay Seller one-fifth of the price—i.e., $20,000.
The above formula is more significant when the price-level changes between the making of the contract and the delivery of the goods.
Example 50B. The facts are the same as in Example 50A except that, as a result of shortages produced by the hostilities, the price for all grades of this type of cheese doubled between April and August. Consequently, the No. 4 cheese would have sold for $40,000 and No. 1 cheese for $200,000.
Under Article 50 Buyer may reduce "the price" ($100,000) by the prescribed "proportion." Since the No. 4 quality cheese that was delivered was worth one-fifth of the value "that conforming goods would have had [page 336] at that time," Buyer must pay Seller one-fifth of the "price" of $100,000 or $20,000.
Paying only $20,000 for cheese that was worth $40,000 might seem to give Buyer a windfall. However, this advantage to Buyer reflects a portion of the protection that performance would have provided. If the ship had not been interned, Buyer would have received cheese that had increased in value to $200,000 but would have paid $100,000. For reasons noted supra at §311, in Examples 50A and 50B the impediment that prevented performance by Seller exempts it from paying damages; Buyer must bear its shutdown expenses and other consequential damages.
These examples illustrate the narrow scope of Article 50. The price-reduction formula applies only when the buyer accepts and retains non-conforming goods, and plays an important role only when the seller is not liable for the non-conformity. This combination of circumstances is rare. A supervening "impediment" (force majeure) usually prevents the production or delivery of the goods; and in the rare case where the "impediment" causes serious non-conformity of goods that reach their destination, the buyer is not likely to accept the defective goods. (It was not easy to find a plausible example to illustrate the scope of this article.)
Example 50C. The facts are the same as in Example 50A except that by August 1, the market price for all grades of Edam cheese, instead of rising, had dropped to one-half; on August 1, Grade No. 4 sold for $10,000 and Grade No. 1 sold for $50,000.
If Buyer accepts the cheese, under Article 50 he may reduce the price "in the same proportion as the value that the goods actually delivered had at the time of delivery [$10,000] bears to the value that conforming goods would have had at that time [$50,000]." This proportion—one fifth—would call for the Buyer to pay Seller $20,000 for the moldy cheese—the same amount as in Examples 50A and 50B. However, in this case Buyer would probably avoid the contract (reject the moldy cheese) if he could obtain substitute cheese at the low market level prevailing on August 1.
In all three cases we are assuming that under Article 79, infra at §423, the impediment that prevented the delivery of No. 1 quality cheese excused Seller from liability for "damages" for breach of contract. For reasons that will be explained more fully, infra at §313, "price reduction" under Article 50 has its principal significance when the buyer accepts defective goods under circumstances in which (as in Examples 50A-50C) the seller is not liable for "damages." However, Article 50 does not confine "price reduction" to cases where sellers are excused from liability for damages, and in some cases buyers who accept defective goods may [page 337] have a choice between two remedies—price reduction under Article 50 and a claim for damages under Article 74, infra at §403.
It is difficult at this point to compare results under Articles 50 and 74. In brief, if buyer suffers "no consequential" damages (such as shutdown losses), the allowance for defects in the goods will normally be the same under Articles 50 and 74 when (as in Example 50A) there is no change in the market level.
When the price-level rises (as in Example 50B), a buyer normally will claim damages under Article 74, since this approach protects his contractual "expectation interest." Thus, in Example 50B, the right to damages under Article 74 protects the buyer’s right to receive No. 1 cheese that, on the market was worth $200,000 at the time for delivery. Since in Example 50B he received cheese worth only $40,000, a claim for damages might amount to $160,000—a much more favorable result than the price-reduction of $80,000 to $20,000 allowed by Article 50.
The situation is quite different when the price-level falls. As has been noted, in cases like Example 50C the buyer would seldom accept the goods and hence could not use the price-reduction formula of Article 50. However, if he should accept the goods, price-reduction under Article 50, in some situations, would provide more compensation for the non-conformity than would damages under Article 74. As we have seen, in Example 50C the buyer could reduce the price from $100,000 to $20,000, a reduction of $80,000. Under Article 74, the difference between the value of conforming goods at the low price-level ($50,000) and the value of the goods received ($10,000) would give buyer a damage claim of $40,000, which is less favorable than the price-reduction of $80,000 allowed by Article 50. However, if the buyer has also suffered "consequential" loss (such as a plant shutdown), he may find it more advantageous after all to claim damages under Article 74. (As we have seen, there is no provision for "damages" in the price-reduction approach of Article 50.)
Difficult problems can arise in integrating price-reduction under Article 50 with the general rule on damage-measurement in Article 74, §§403–408, infra. Suppose that a buyer notifies the seller of price-reduction under Article 50 and later seeks to prove a more generous measure of the loss available under Article 74. (See Example 50B and the favorable protection under Article 74 for the buyer’s "expectation interest" when the market price rises between the making of the contract and delivery of the goods). The Convention does not seem to deal with this question of election of remedies. Article 45(a) and (b) does indicate that "rights provided in articles 46 to 52" (note the inclusion of article 50) do not bar damages under Article 74. On this basis the buyer could claim [page 338] both price reduction and consequential losses—e.g. delays in production because of defects in the goods. See Nicholas, 105 L.Q.R. 201, 226 (1989). In any event, Article 45 should not be construed to permit double recovery based on the reduced value of the goods. Perhaps the buyer should be held to have elected the price-reduction formula of Article 50 only if this had been part of an agreement to settle damages or if the seller had changed its position relying on the seller’s notification.
§313 B. Genesis and Evolution of "Price-Reduction"
One can only appreciate Article 50 when it is seen in historical perspective—as a vestige of an important tool designed to cope with a traditional civil law doctrine (eroded but not abandoned) that a seller is liable for "damages" caused by defective goods only when he is guilty of fault or fraud. However, at an early stage in the development of the civil law it was decided that even though the seller was not liable for the buyer’s damages it would be unjust for the seller to receive the full price for defective goods; such is said to be the basis in Roman law for the buyer’s right to reduce the price to the degree of the deficiency—the actio quanti minoris.
The traditional role of this special price-reduction mechanism was removed by the Convention’s adoption of a unitary contractual approach. Under Article 45(1), supra, "If the seller fails to perform any of his obligations under the contract or this Convention, the buyer may...(b) claim damages as provided in Articles 74 to 77." Common law observers saw little reason to retain this venerable legal tool. The lack of such a provision in their statutes had not led to difficulties; in rare cases like Example 50A, where force majeure relieves the seller from damages for the delivery of defective goods, the question of how much the buyer should pay if it retains the defective goods could be handled under domestic rules providing for restitution to avoid unjust enrichment (cf. Art. 81(2), infra at §439). Ernst Rabel, writing in 1952, doubted the current utility of the actio quanti minoris, but in the Hague and UNCITRAL proceedings most representatives from civil law systems insisted on retaining this feature [page 339] of their legal heritage. And a common lawyer must concede that Article 50, by providing a solution for cases like the above examples, will avoid the uncertainty and disunity of recourse to domestic rules on restitution.
In the 1978 Draft, as in ULIS 46, the formula for price-reduction was based on the ratio between the value of non-conforming and of conforming goods "at the time of the conclusion of the contract. " At the Diplomatic Conference the reference-point was changed to the time for delivery. This change avoided constructing a theoretical value for defective goods that might not exist at the time of the contract.
The work in UNCITRAL on "price-reduction" was complicated by a failure to appreciate the traditional role of this legal tool. Until 1976 the draft lacked the phrase "whether or not the price has already been paid"; until this lack was corrected in 1976, the provision that "the buyer may reduce the price" was understood by some to be addressed to the amount that the buyer should remit to the seller as a result of set-off.
The final sentence of Article 50, in denying price-reduction to a buyer who refuses to allow the seller to exercise his right to cure, underscores the pervasive significance of the duty to mitigate damages. (See the discussion of "general principles" under Art. 7, supra at §101 and Art. 77, infra at §418.) See also Schlechtriem, 1986 Commentary 79.
Decisions: Examples of Price-Reduction. (1) HUNG. ARB. C of Com., VB/94131, 5 December 1995. S contracted to produce and deliver waste-containers to B. Two of the containers were not water-tight. S offered to repair the containers on B’s payment of the price. S insisted that the price must be paid first; B then obtained repairs from another firm. Held: B’s refusal [page 340] to accept repair on S’s terms did not bar reduction of the price, which was granted in proportion to B’s expenses for repair. UNILEX D. 1995-29. (2) SWITZ. Pr. de Locarno, 6252, 27 April 1992. B received furniture from S that needed, and received, repair. Under Art. 50 the price was reduced in proportion to the cost of repair. UNILEX D. 1992-10. (3) GER. OLG München, 7 U 4419, 2 March 1994. S delivered coal to a third party (T) designated by B. T’s complaints of poor quality were promptly relayed by B to S. S sued for the price; B requested price reduction under Art. 50. This request was denied: B had not made a "declaration" on price reduction. [Note, at §313.2, deletion from Article 50 of language requiring a declaration.] UNILEX D. 1994-7. See: Schlechtriem, Com. (1998) 439–444.
§ 313.1 C. Field of Application
Article 50 states that price-reduction is available when the "goods do not conform with the contract"—an area which the Convention distinguishes from other types of breach such as the place and time for delivery of goods and documents (Arts. 31–34), existence of third-party claims (Art. 41, 42) and other obligations imposed by contract (Art. 30). Nevertheless, questions have been raised as to whether price-reduction under Article 50 (as contrasted with the rules governing "damages" in Article 74, §§403–408, infra ) applies to other types of non-performance such as delay, delivery at the wrong place, defects in documents and the like. At the Diplomatic Conference Norway proposed an amendment that the right of price-reduction should apply when the goods are subject to third-party rights or claims. The proposal attracted conflicting views; Norway withdrew the proposal. On the other hand, Article 44, a compromise developed late in the Diplomatic Conference to meet objections to the notice requirements of Article 39(1) (conformity of goods), includes references to the notice requirements of Article 43(1), and adds that these requirements do not prejudice the buyer’s rights to various remedies, including [page 341] Article 50. However, nothing in the legislative history indicated that Article 44 was understood to amend Article 50. Indeed, the debate that led to the failure of the Norwegian proposal (note 8 supra ) recognized the difficulty of applying the price-reduction formula of Article 50 outside of its stated sphere—claims of non-conformity. Nor is there need to stretch Article 50 beyond its stated scope. As we shall see, Article 74’s general provisions on the measurement of damages provide a flexible measure of the buyer’s loss in diverse circumstances (§§404-408, infra) and in most situations are more appropriate than the formula stated in Article 50. (Recourse to Article 50 is, of course, optional.)
Language in earlier versions of Article 50 ("the buyer may declare the price to be reduced") might have been construed to give special weight to the buyer’s declaration. (Contrast the Nachfrist notice under Article 47, §289 supra.) To prevent this interpretation the Diplomatic Conference deleted the above language.
May a buyer who receives non-conforming goods reduce payment of the price only by virtue of Article 50? Does the buyer have a similar right under Articles 45(1)(b) and 74? The answer depends on rules such as set-off and counterclaim. Under procedural systems with which this writer is familiar a buyer with a damage claim based on non-conformity of the goods will have an opportunity to establish that claim as a set-off or counterclaim to an action for the price; payment and settlement practices reflect this legal right.[page 342]
FOOTNOTES: Chapter on Article 50
1. Art. 50 resulted from the redrafting, at the Diplomatic Conference, of Art. 46 of the 1978 Draft. Cf. ULIS 46. For action in UNCITRAL see III YB 89, IV YB 56–57; 60, VI YB 71, 77 VIII YB 46; Docy. Hist. 106, 133–134, 137, 149, 155, 339. For action at the Diplomatic Conference see O.R. 42–43, 357–361; Docy. Hist. 432–438, 578–582. See generally Will, B-B Commentary 368–376; Schlechtriem, Com.(1998) 437–448 (Huber).
2. Treitel, Remedies (Int. Enc.) §67; Treitel, Remedies (1988) 107–109; Honoré, The History of the Aedilitian Actions From Roman to Roman-Dutch Law in Daube, Studies in the Roman Law of Sale, 132 (1959); German (F.R.G.) Civil Code 462, 472 (reduction "in the proportion which at the time of the sale, the value of the thing in a condition free from defect would have borne to the actual value"); Swedish Sales Act 42, 43 (buyer may claim "such reduction in the price as is proportionate to the defect").
3. Rabel, A Specimen of Comparative Law: The Main Remedies for the Seller’s Breach of Warranty, 22 Revista Jur. Univ. P.R. 167, 191 (1953). The proposed revision of the Quebec Civil Code omits a special "price-reduction" formula. Quebec Civ. Code Rev’n., Sales 62–63: Proposed Article 37: "Damages for non-fulfilment may be claimed by way of reduction of price, or otherwise." The Comment explains: "Under this article, an action quanti minoris does not differ from an action for damages."
4. Com. 1 Art. 46, SR. 23 paras. 23–41, O.R. 357–358, Docy. Hist. 578–579.
5. Delay by some (including the present writer) in grasping the special role of the civil law doctrine of "price-reduction" contributed to difficulty in preparing ULIS and in the UNCITRAL proceedings. An interesting account of this background is given by Bergsten & Miller, The Remedy of Reduction of Price, AJCL UNCITRAL Symposium 255. The structure of the Convention helps to clarify the role of Art. 50. Art. 45(1), in introducing the system of remedies, distinguishes between the buyer’s privilege to "(a) exercise the rights provided in Articles 46–52" (requiring performance, avoidance, price reduction) and the buyer’s privilege to "(b) claim damages as provided in Articles 74–77."
6. See Bergsten & Miller, supra note 5, at §255.
7. The heading approved by the Diplomatic Conference for Section II (Articles 35–44) is "Conformity of the Goods and Third Party Claims". Different notice requirements are established for claims of "lack of conformity of the goods" (Arts. 39, 40) and claims that the goods are subject to a "right or claim of a third party" (Arts. 41, 42).
8. The provision on price reduction was then draft Article 46. The proposal: O.R. 118, Docy. Hist. 690; the discussion: O.R. 360–361, Docy. Hist.. 581–582. The Norwegian sponsor said he withdrew the proposal "on the understanding that it would be up to the courts to decide whether and to what extent" the price reduction provision would apply to third-party claims. No weight should be given to such a statement by an individual delegate in the absence of evidence that the Conference agreed to such an "understanding". See Lord Diplock’s properly skeptical response to such an "understanding" at §91 supra. For helpful discussion see Will in B-B Commentary 375–376; Schlechtriem, 1986 Commentary 79.
9. The significance of this provision was noted by Will, B-B Commentary, 375–376.
10. The text of the U.K. proposal: O.R. 118, Docy. Hist. 690; the deliberations: O.R. 359–360, Docy. Hist. 580–581. See para. 61—the buyer’s action was "subject to the jurisdiction of courts".
11. The U.N. Convention on the Limitation Period in the International Sale of Goods (1974: A/CONF. 63/14) Art. 25(2) gives protection to the right of set-off "(a) if both claims relate to the same contract or to several contracts concluded in the course of the same transaction". See (U.S.A.) Federal Rules of Civil Procedure, Rules 12 and 13; (U.S.A.) UCC 2–717; "The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any party of the price still due under the contract".