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Commentary on the manner in which the Principles of European Contract
Law may be used to interpret or supplement Article 50 of the CISG

Jarno Vanto [*]
September 2003

a. Article 50 of the Convention is a part of the remedial scheme of the CISG. This provision is reflective of the general CISG approach of trying to balance the rights of the buyer and the seller, in the sense that it gives the buyer the right to reduce the price, but the seller may remedy the non-conformity and subsequently obtain the original price agreed on in the contract. PECL article 9:401 gives the buyer the same right of reducing the price, even though the Principles do not apply the term "buyer" but instead a "party who accepts the tender of performance". It must be noted that the Principles apply not only to contracts for the sale of goods but also to other types of contracts.[1] In the CISG's realm, the buyer has at his disposal,[2] in addition to price reduction, the remedies of specific performance (CISG art. 46), request for remedying of the non-conforming performance (CISG art. 48), avoidance of the contract in cases of fundamental breach of contract (CISG art. 49(1)) and damages (CISG arts. 45(1), 74-77).

b. The objective of CISG art. 50 is to give the buyer an opportunity to keep the received goods which, even though not entirely conforming to what had been agreed on in the contract, he may still make use of but may take the non-conformity into account when paying the purchase price. This means that price reduction is a remedy that is available to the buyer only if the goods are not in conformity with what the parties had agreed on in the contract and not, for example, in cases where the price of the contracted goods has gone down in the world market after the conclusion of the contract and the buyer feels trapped in a bad contract. This is the case also with PECL article 9:401.

c. Both CISG article 50 and PECL article 9:401 set as a prerequisite for their application that the goods do not conform with the contract.[3] Article 35(1) of the Convention states that the goods conform with the contract if they are of the quantity, quality and description required by the contract. The goods also need to be contained or packaged in the manner required by the contract. Additionally, CISG article 35(2) states that the goods do not conform with the contract unless they: a) are fit for the purposes for which goods of the same description would ordinarily be used; b) are fit for any particular purpose expressly or impliedly made known to the seller at the time of the conclusion of the contract, except where the circumstances show that the buyer did not rely, or that it was unreasonable for him to rely, on the seller's skill and judgment; c) possess the qualities of goods which the seller has held out to the buyer as a sample or model; d) are contained or packaged in the manner usual for such goods or, where there is no such manner, in a manner adequate to preserve and protect the goods.

d. The Official Comment [4] on PECL article 9:401 brings forth that the remedy of price reduction is available to the aggrieved party where the other party's performance is incomplete or otherwise fails to conform to the contract and whether the non-conformity relates to quantity, quality, time of delivery or otherwise. In connection with this, CISG articles 41 and 42 state that the seller has an obligation to deliver the goods free from any third party right or claim or a third party right or claim based on industrial property or other intellectual property. Opinions have been raised that price reduction could be used as a remedy also in relation to third party claims. Unless the third party claim would amount to a fundamental breach of contract, e.g. the consignment is owned entirely by a third party, this would seem plausible in the light of the comment to PECL article 9:401.[5]

e. The buyer bears the burden of proof with regard to the nature and extent of the non-conformity of the goods.[6]

f. In addition to the non-conformity of the goods, a pre-requisite for the buyer's right to reduce the price is that the buyer give notice to the seller and specify the nature of the lack of non-conformity within a reasonable time after he has discovered it or ought to have discovered it, as defined in CISG article 39, unless the seller knew or could not have been unaware of the lack of conformity (CISG art. 40).[7]

g. PECL article 9:401(3) states that "a party who reduces the price cannot also recover damages for reduction in the value of the performance but remains entitled to damages for any further loss it has suffered so far as these are recoverable under Section 5 of this Chapter."

On the other hand, CISG article 50 does not explicitly state that when the buyer reduces the price he may not recover damages for reduction in the value of the performance. However, it is stated in CISG article 45(2) that the buyer is not deprived of any right he may have to claim damages by exercising his right to other remedies. It is reasonable to presume that the reduction in value may not be claimed both as price reduction and as damages and that in this sense the effect of CISG article 50 and PECL article 9:401 is similar, even though both PECL and the CISG give the buyer the right to claim any further losses as damages.[8] [9] [10]

The comment on PECL article 9:401 states that the two remedies are incompatible, so there is no right to cumulate them. As is clear, the two remedies are incompatible only to the extent that they overlap.[11] Furthermore, both CISG article 50 and PECL article 9:401 give the buyer an opportunity to demand price reduction even if damages are not or cannot be claimed, for instance, when CISG article 79 is applicable.[12]

h. Price-reduction as a remedy for contractual breach can in many cases be regarded as a pre-procedural remedy in the sense that buyer presumably often demands a reduction in price from the seller in case retaining the goods delivered serves his interests, even though they do not conform entirely with what the parties had agreed on in the contract. If the requested price reduction is not met with acceptance on the seller's side, the dispute in all likelihood will be dealt with in court. It has been argued that when price-reduction is claimed in court it often assumes the nature of a defense rather than a claim. This is so when the seller claims the purchase price for delivered goods and the buyer brings forth a claim for price reduction on the basis of non-conforming goods.[13] Even though in practice price-reduction has assumed a character of a defense rather than a claim, it must be emphasized that it is still a unilateral right of the buyer.

i. Both PECL article 9:401 and CISG article 50 apply the same manner in which the reduction in price is calculated. The price reduction is proportionate to the reduction in value due to the non-conforming performance.[14] In this relation the contract price is the value without defect and the reduced price is the value with the defect. The defining moment for determining the price is the time of delivery of the goods.[15] [16] This means that if the price of the goods has fallen when the buyer demands price reduction he may still calculate the price reduction based on the original, higher, price which results in price reduction being beneficial to him. Then again, if the price of the goods has risen after the non-conforming goods were delivered, the buyer may only demand the price to be reduced in proportion to the contracted lower price. In these situations it may be more beneficial for the buyer to claim damages as an alternative to price reduction.

j. It has been acknowledged that the remedy of price reduction is traditionally a civil law remedy which has its origins in the Roman law remedy of actio quanti minoris.[17] [18] Actio quanti minoris has been brought forward in the comment on PECL article 9:401.[19] The original meaning of the actio was that the buyer could bring an action against the seller to reduce the price when there was a hidden or latent defect in the goods.[20] Both CISG article 50 and PECL article 9:401, sharing similar rationale and modus operandi, are somewhat qualified expressions of actio quanti minoris. [21]

k. The terminology employed by both CISG article 50 and PECL article 9:401 appears similar and would presumably produce largely similar results in resolving a contractual dispute. PECL art. 9:401 lays out many of the criteria for the application of the remedy of price reduction that in the CISG have to be drawn from many intertwined articles of the Convention. The utility of the PECL to interpret CISG article 50 is more extensive in civil law jurisdictions where the concept underlying PECL article 9:401, i.e., actio quanti minoris, as a conceptual tool for understanding price reduction has more weight. Common law systems do recognize the remedy of price reduction but it assumes a narrower scope than it does in civil law systems. PECL article 9:401, however, is of use even for a common lawyer wanting to understand the remedy of price reduction in a CISG-related dispute.


FOOTNOTES

* Jarno J. Vanto holds a Bachelor of Laws-degree and a Master of Laws-degree from the University of Turku and an LL.M. degree from the New York University School of Law. He is a member of the New York Bar. Mr. Vanto has authored a number of articles on data protection law and on international commercial agreements. He is the Editor-in-Chief and co-author of the International Privacy Guide and Co-Editor and co-author of the International Contract Manual, both published by West, a Thomson-Reuters Business.

1. Wilhelmsson, Thomas, Ole Landon kyydissä kohti Eurooppalaista Sopimusoikeutta, available online at <http://www.cbs.dk/departments/law/staff/ol/commission_on_ecl/literature/wilhelmsson/ole-landon-kyydissa-korjattu.rtf>.

2. Handelsgericht des Kantons Aargau, 5 November 2002, available online at <http://www.cisg-online.ch/cisg/urteile/715.htm>.

3. Germany 12 October 2000, District Court Stendal, available online at <http://cisgw3.law.pace.edu/cases/001012g1.html>.

4. Like the commentary to the UNIDROIT Principles and the U.S. Restatements, the comments to the PECL help explain the text. The PECL notes identify civil law and common law antecedents and related domestic provisions. With the permission of the Commission on European Contract Law, the comments and notes to PECL Article 9:401 are available online at <http://cisgw3.law.pace.edu/cisg/text/comparison50.html>. The source of that material is Ole Lando & Hugh Beale eds., Principles of European Contract Law: Parts I and II, Kluwer Law International (2000) 430-433.

5. Third party claims are problematic in the sense of price reduction since it is with difficulty that one is able to calculate the price reduction in these instances. See e.g., Schlechtriem P. Uniform Law -- The UN Convention on Contracts for the International Sale of Goods d) Reduction of the Price (Article 50): "The general similarity of the prejudice caused by these defects with that caused by other defects justifies the availability of price reduction in these cases as well. But the formula for calculating the decrease in value due to such defects surely would have required thorough deliberations for which no time remained at the Conference", available at <http://www.cisg.law.pace.edu/cisg/biblio/schlechtriem-50.html>.

However, the structure of Section II, namely the "Conformity of the goods AND third party claims" points to another direction. The Section title presents these as separate items of the section. Article 50 talks about the conformity of the goods. If one were to adhere to the structuring of Section II in the way that its wording seems to hint, one would possibly not apply price reduction to third party claims. However, article 44 specifically states that price reduction is applicable to third party claims and gives leverage to the argument that third party claims are subject to price reduction despite the difficulties in calculation.

6. See the relevant case law:

-   Switzerland 9 September 1993 Commercial Court Zürich, available online at
<http://cisgw3.law.pace.edu/cases/930909s1.html>;
- Netherlands 15 October 2002 Netherlands Arbitration Institute, Case No. 2319, available at
<http://cisgw3.law.pace.edu/cases/021015n1.html>;
- Switzerland 30 November 1998 Commercial Court Zürich, available at
<http://cisgw3.law.pace.edu/cases/981130s1.html>;
- Italy 12 July 2000 District Court Vigevano (Rheinland Versicherungen v. Atlarex), available at
<http://cisgw3.law.pace.edu/cases/000712i3.html>;
- ICC Arbitration Case No. 6653 of 1993, available at
<http://cisgw3.law.pace.edu/cases/936653i1.html>.

See also, Ferrari F., in Review of the Convention on Contracts for the International Sale of Goods, 2000-2001, Kluwer Law International, at p. 6: "... the following three general principles (1) any party which wants to derive beneficial legal consequences from a legal provision has to prove the existence of the factual prerequisites of that provision (2) any party claiming an exception has to prove the existence of the factual prerequisites of that exception; and (3) those facts are exclusively in a party's sphere of responsibility and which therefore are, at least theoretically, better known to that party have to be proven by that party, since it is that party who exercises the control over that sphere."

7. Netherlands 19 December 1991, District Court, Roermond, Fallini Stefano v. Foodik, case presentation available online at <http://cisgw3.law.pace.edu/cases/911219n1.html>, where it was held that, in order for the seller not to be able to rely on CISG articles 38 and 39, the buyer had to prove its allegation that the seller knew or could not have been unaware of the lack of conformity of the goods. The court observed that, if the buyer were able to meet that burden of proof, it would be entitled to a reduction of the purchase price pursuant to article 50 CISG.

8. Kritzer, A.H. in International Contract Manual, Guide to Practical Applications of the United Nations Convention on contracts for the International Sale of Goods, Kluwer Law 1994, p. 441: "Article 45 (2) makes it clear that the buyer can claim damages in addition to declaring the reduction of the price in those cases where reducing the price does not give as much monetary relief as would an action for damages. A buyer might wish to combine the two remedies in a case if there was some possibility that damages could not be recovered, either because there was a question as to whether the seller was exempted from damages (but not from a reduction of price under Article 79) or because there was a question as to whether the damages had been foreseeable under article 74. A declaration of reduction of the price would give the buyer some immediate relief while the rest of the claim for damages was subject to negotiation or litigation OFFICIAL RECORDS: p. 43, para. 13".

9. See UNCITRAL YEARBOOK VIII A/CN. (/SER.S/1977, p.42, para. 231). See also Honnold J., Documentary History of the UN CISG, p.355: "Even in cases where the buyer had declared the price reduced, he might have suffered additional damages, for instance because of delay. It was considered that the remedy scheme of the Convention should not preclude the buyer from obtaining such damages from the seller".

10. Will, Michael R. In Bianca/Bonell Commentary, at p.373: ""It is up to the buyer to decide which is more advantageous for him: price reduction, or damages or price reduction and damages".

11. "Der Schadensersatzanspruch konkurriert mit anderen Rechtsbehelfen, insbesondere auch der Minderung des Kaufpreises. Der Gläubiger kann allerdings keinen Schadensersatz verlangen, so weit er einen anderen Rechtsbehelf erfolgreich ausgeübt und dadurch erreicht hat, dass der Schaden ganz oder teilweise beseitigt wird (von Caemmerer/Schlechtriem, Kommentar zum einheitlichen UN-Kaufrecht, 2. Aufl., Rn. 5 zu Art. 74" (Damages claim exists in concurrence with other remedies including price reduction. The claimant may not claim damages if he has pursued another remedy which already covers the extent of the loss suffered...) in Oberlandsgericht Schleswig 8 August 2002 11 U 40/01, available online at <http://cisgw3.law.pace.edu/cases/020822g2.html>.

12. On differences between price reduction and damages, see Eric E. Bergsten & Anthony J. Miller, The Remedy of Reduction of Price, 27 American Journal of Comparative Law (1979) 255-277, also available online at <http://www.cisg.law.pace.edu/cisg/biblio/bergsten.html>.

13. Sondahl E., Understanding the Remedy of Price Reduction - A Means to Fostering a more Uniform Application of the United Nations Convention on Contracts for the International Sale of Goods, available online at <http://www.cisg.law.pace.edu/cisg/biblio/sondahl.html>.

14. Lookofsky, J, Understanding the CISG in Europe, 2nd ed., Kluwer Law International, p.135.

15. Landgericht Aachen, 3 April 1990, 41 0 198/89, available online at <http://cisg-online.ch/cisg/urteile/12.htm>.

16. Switzerland 27 April 1992 District Court Locarno Campagna, available online at <http://cisgw3.law.pace.edu/cases/920427s1.html>. In that case, an Italian seller of furniture claimed the purchase price which the Swiss buyer refused to pay alleging lack of conformity of the goods. It was held that as the buyer had resold some of the defective furniture without notifying the seller in time about the resale, the buyer had lost its right to rely on non-conformity of the goods. With regard to other goods, the buyer was granted a reduction of price, since he had promptly notified the seller about the defects and the seller had refused to remedy the defects. The court rejected an offer made by the seller during the proceedings to pay the repair cost, holding that article 50 CISG was not intended to provide for restitution of the repair cost but a reduction of the purchase price in the same proportion as the value that the goods actually delivered had at the time of delivery bore to the value that conforming goods would have had at that time.

17. Piliounis, Peter A., The Remedies of Specific Performance, Price Reduction and Additional Time (Nachfrist) under the CISG: Are these worthwhile changes or additions to English Sales Law, Pace International Law Review (Spring 2000) 1-46, also available online at <http://cisgw3.law.pace.edu/cisg/biblio/piliounis.html>; Zimmerman, R., The Law of Obligations: Roman Foundations of the Civilian Tradition, Oxford, Clarendon Press, 1996, p.318.

18. Ole Lando & Hugh Beale eds., Principles of European Contract Law: Parts I and II, Kluwer Law International (2000) 430-433.

19. The Official Comments and Notes on PECL article 9:401, are available online at <http://cisgw3.law.pace.edu/cisg/text/comparison50.html>.

20. See Lando & Beale, op. cit.

21. On actio quanti minoris in civil law systems and on common law understanding of price reduction, see the Official Comment on PECL Article 9:410 containing notes on the match-up between Continental and Common Law rules, available online at <http://cisgw3.law.pace.edu/cisg/text/comparison50.html>.


Pace Law School Institute of International Commercial Law - Last updated May 26, 2009
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