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Cite as Will, in Bianca-Bonell Commentary on the International Sales Law, Giuffrè: Milan (1987) 368-376. Reproduced with permission of Dott. A Giuffrè Editore, S.p.A.

Article 50

Michael Will

1. History of the provision
2. Meaning and purpose of the provision
3. Problems concerning the provision

ARTICLE 50

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 the 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.

1. History of the provision

     1.1. - Article 50 contains the remedy of price reduction but limits it if the seller has a right to cure.

     1.2. - Price reduction as a remedy in international sales law meets with the greatest difficulties.

Unknown in common law jurisdictions, it has always been fiercely defended by civil law countries. Initially a Roman law tradition (actio quanti minoris), price reduction entered into most codifications, including those of socialist and third world nations, as a supplement to the remedy of damages, a remedy which these legal systems limit to cases where there is fault. Where the buyer accepts that goods do not conform with the contract, and the seller is not at fault, price reduction provides a further remedy of pecuniary compensation; it is a popular and important remedy in daily national and international practice.

The compromise reached by ULIS as well as by the present Convention is the simultaneous availability of damages without fault and of the price reduction remedy. This hybrid solution adds to the confusion already existing.

The confusion dates back to the preparatory work for ULlS. Common law lawyers experienced great difficulty, in [page 368] understanding the nature of the remedy of price reduction and tended to confuse it with the remedy of damages. The conceptual difficulties led to dubious translations which, in turn, aggravated the misunderstanding. Even though in the end the authors of ULIS somehow managed to produce an English version in harmony with the French text, the conceptual difficulties reappeared during the drafting of the Convention.

     1.3. The drafters of the Convention have made great efforts to overcome these difficulties by changing the wording. and substance of the provision.

          1.3.1. - Two modifications, unknown in ULIS, were introduced into the UNCITRAL Draft Convention to clarify the remedy's scope of application.

First, it is made expressly clear that the buyer can reduce the price even after he has paid (see Yearbook, VII (1976), 92). In such a case he will have to obtain a refund from the seller.

Second, it is made expressly clear that the right to cure (Article 48) prevails over the right to reduce the price, just as it prevails over all other remedies. Under ULIS some commentators had doubts in this respect. The reference to Article 37 was added at the Vienna Conference (see Official Records, II, 360).

          1.3.2. - The substance of the UNCITRAL Draft Convention has been materially changed at the Vienna Conference as to the moment for calculating values. Instead of the time of conclusion of the contract, as in Article 46 of ULIS, now the time of delivery is relevant (see Official Records, II, 358). This change was based mainly upon two reasons. On the one hand, it was argued that at the moment of concluding the contract the goods might not yet exist and hence neither the value of conforming goods nor that of non-conforming ones could be ascertainable. On the other hand, the buyer can now calculate more easily which of the two remedies -- damages or price reduction -- would be more advantageous to him. The calculations for both remedies are now based on the same figures -- those valid at the moment of delivery. This simplification convinced the representatives of the common law countries, since for them the right of price reductiod still appeared «as roughly analogous to [page 369] the right of set off» (see ZIONITZ, A new uniform law, 171).

This definite simplification for all practical purposes may turn out to have added to the theoretical confusion.

2. Meaning and purpose of the provision

     2.1. - Reduction of price presupposes that the seller delivers (Article 31 et seq.) non-conforming goods (Article 35 et seq.), and that the buyer decides to accept them nevertheless.

All the difficulties lie in calculating the amount of the reduction. What is the method to be employed? How is that method to be applied in practice?

          2.1.1. - Rather than adopting the absolute method of deducting from the stipulated purchase price the objective value of the goods received, the Convention and Article 46 of ULIS, following the civil law, use a relative approach. This allows for the parties to keep in line with their good or bad bargain. The proportion between the purchase price and the objective value of the goods is maintained.

New and contrary to ULIS is the time chosen for calculating values: the time of delivery. Compared with the time of conclusion of the contract it produces different results only where the relevant market prices change disproportionately, but those results appear to be wholly justified. This can be shown by developing the basic example in the Secretariat's Commentary (see Official Records, I, 42): Seller contracted to deliver No. 1 corn but delivered No. 3 corn; the market price for these different corns at the time of conclusion were 200 and 150 respectively. Regardless of whether both market prices (a) remain the same at the time of delivery, or (b) rise by 20%; or (c) fall by 60% -- each time the reduction will be 50. The situation is different, however, where the market price of No. 1 corn rises (or goes down) by 20%, and of No. 3 corn by 60%: while the reduction under ULIS and the UNCITRAL Draft Convention -- taking the time of conclusion as a basis -- would again be 50 each time, it is 0 (or 125) under the Convention.

The divergence is obvious. The results under the Convention are preferable because the time for assessing values is more [page 370] realistic (see Official Records, II, 358). At the time of conclusion the buyer contemplates receiving nothing but No. 1 corn. At that time the value of No. 3 corn is totally irrelevant. It is only at the moment of delivery, when the buyer discovers the lack of conformity, that the value of No. 3 corn begins to become relevant. Only at this moment can the buyer decide which remedies to choose. The choice largely depends on the marketability and actual -- not historical -- value of the non-conforming goods as compared to the value of the goods contracted.

Chances and risks are distributed fairly.

In the first alternative, where the market price of non-conforming goods rises disproportionately, the buyer holds, at the time of delivery, goods of inferior quality but equal market-value. It is only fair that after having chosen to accept those goods and to profit from their higher value, he should be held to a comparatively lesser reduction or even to nothing (as in the present example). There is no divergence of values to be evened out.

In the second alternative, where the market price of non-conforming goods falls disproportionately, the buyer holds, at the time of delivery, goods not only of inferior quality but of even more inferior market-value. It is only fair that the seller should bear the risk of a declining market-price. The risk would have been the seller's anyway, if the buyer had chosen not to accept. There is no good reason why acceptance would lead to a change in risk distribution.

As the foregoing examples show, the remedy of price reduction strikes a balance between the stipulated price and the value received. It is not its function to compensate for any other losses sustained by the buyer.

          2.1.2. - Mathematically speaking, the relation of the stipulated to the reduced prices equals the relation of the market-values of conforming to non-conforming goods: [page 371]

     stipulated price     
reduced price
  =  
                   value of conforming goods                   
   value of non-conforming goods   

and consequently:
      reduced price     

 
  =  
 value of non-conforming goods x stipulated price  
value of conforming goods

          2.1.3. - The remedy of price reduction differs from all other remedies provided in the Convention with regard to its effects and to the time-limits.

As to the effects it differs from many models offered by national laws in that it gives the buyer a stronger position. If the buyer wants the non-conforming goods he can unilaterally adapt the contract to the new circumstances. He need not look to a judge, nor need he depend in any way on the seller. His unilateral declaration suffices. Such declaration travels at the risk of the seller (see Article 27). It takes effect upon dispatch and immediately -- even if it never reaches the seller -- transforms the contract. As a further consequence, the buyer immediately loses any right to choose another remedy.

As to the time-limits, unlike Articles 46 and 49, Article 50 does not contain the element «within a reasonable time». This means that provided the buyer respects the condition of Article 39 (notice of lack of conformity within no more than two years), the Convention imposes no period of time for his reducing the price. As a result, he may reduce the price even after the abovementioned remedies are no longer available. Therefore, the domestic laws on limitation periods determine if the seller is left in uncertainty for an excessive period of time.

     2.2. - Article 50 may have originated as a concession by common law lawyers to civil law lawyers, but represents more than a mere vestige: it will no doubt be of current utility. The utility of the remedy in question, a pecuniary remedy, can best be measured by comparing it with the only other pecuniary one: damages.

Both remedies can be exercised separately or cumulatively. However, their function is totally distinct. Damages are to compensate the buyer's losses, while reduction of the price tends to prevent the seller from getting a windfall. The seller should receive proportionately less than the price he would have received for conforming goods. The buyer, having chosen so, should have to pay proportionately less for keeping the goods delivered. [page 372]

It is up to the buyer to decide which is more advantageous for him: price reduction, or damages, or price reduction and damages. Damages in this context are not additional losses of the buyer, but the difference of value at the delivery date, between the goods contracted for and those delivered. Price reduction may turn out to be useless, helpful or indispensable.

Where the buyer has already paid the stipulated price and the amount of the reduction is inferior or equal to that of damages, reduction does not seem to bring any advantage over a claim for damages. However if the amount of reduction is superior, the buyer will obviously be well-advised to reduce.

Where the buyer has not yet paid, the remedy of price reduction is his best weapon.

If the amount of the reduction is inferior to that of damages the buyer has an interest in first deducting that amount from the price and then suing for the remaining damages. If the amount of reduction is equal or superior to that of damages the buyer is well-advised to reduce the price immediately and not to choose a claim for damages.

Price reduction is indispensable in such cases where the seller according to Article 79 is relieved of liability. In such cases the remedy of price reduction is the only one giving the buyer monetary relief.

As can be seen from the foregoing examples, price reduction is more than a «venerable legal tool» (HONNOLD, Uniform Law, 326) of civil law tradition. It also has a useful function beyond the situation where the circumstances relieve the seller from liability for damages. A declaration of price reduction always gives the buyer some immediate relief, while a claim for damages remains subject to negotiation or litigation (see Secretariat's Commentary, Official Records, I, 43).

     2.3. - The buyer's right to declare a reduction of the price is expressly subject to the seller's right to remedy any failure to perform his obligations pursuant to Articles 37 and 48 (see Secretariat's Commentary, Official Records, I, 43).

3. Problems concerning the provision

     3.1. - A first problem concerns the situation of a buyer who has promised a purchase price consisting of a sum of money plus certain goods or services. What then precisely is the original amount to be [page 373] reduced? The money value of the goods and services should be determined as of the time of conclusion of the contract, because it is at that time that the parties had calculated the value of their respective obligations. The basis for the reduction is then the sum total of money and money value.

The question then arises as to whether the reduction operated only on that part of the price fixed in terms of money and if so, whether for a reduction exceeding that sum, the difference has to be borne by the seller. A better solution seems to be to give the buyer willing to accept non-conforming goods a choice between reducing the sum of money and claiming the difference from the seller, or reducing the amount of goods or services promised, be they fungible or not.

     3.2. - A second problem concerns the situation of a contract concluded between several buyers and/or sellers.

Where the buyer has concluded a single contract with several sellers and declares the reduction of the price to any one of them, the declaration is effective as to each seller, as it changes the substance of the contract immediately.

Where the seller has concluded a single contract with several buyers who seek diverging remedies, it is not the reduction of the price but the remedy first declared that prevails. Where several buyers have concluded a single contract with several sellers, the remedy first declared by one of the buyers prevails and is effective as against each seller.

Where several buyers declare the reduction of the price, but use diverging proportions of reduction, the first declaration of reduction prevails. Discrepancies among the buyers are to be resolved among themselves. They should not become a problem for the seller. Otherwise the execution of international transactions would suffer uncertainty and delay.

     3.3. - A problem first raised but not decided at the Vienna Conference (see Official Records, II, 358-359) was left to the risk of the buyers who wish to reduce the price. The problem lies in determining from where to take the figures for comparing the value of the goods contracted and of those delivered. There is no question that the value of both is to be assessed with reference to the same time, the moment of delivery, and [page 374] also to the same place; otherwise the comparison would make no sense; But which place?

The most practical answer which best protects the buyer would seem to be a three-step solution. In the first instance it should be the place of the first destination of the goods as contracted which is relevant for the evaluation. If this solution fails for want of such a place of first destination or of a market-price at that place, it should be the place of delivery of the non-conforming goods. Where this solution fails for want of a market-price at that place, the catchall, at the buyer's choice, should be either the place of business of the buyer or of the seller.

The place of the first destination of the goods contracted, serving as the main reference, has the advantage of being closely related to the interests of the buyer at the moment of choosing his remedy. The price level in this place will usually determine his considerations as to resale or repair of the defective goods. This reference covers both fungible and non-fungible goods, and deliveries to the buyer's place of business or habitual residence as well as deliveries elsewhere. The latter case is sometimes overlooked. To rely on the value «at the buyer's place of business or habitual residence», as did a joint proposal by the delegations of Argentina, Spain, and Portugal (see A/Conf.97/C.1/L.168) is somewhat arbitrary if the goods had never been intended to be shipped to that destination; probably in such a case the buyer's interest lies elsewhere.

     3.4. - Another problem concerns the question of whether Article 50 extends to cases where the buyer discovers that the value of the goods is diminished because they are subject to a right or claim by third parties as described in Article 41. The Norwegian delegation introduced an amendment expressly providing such extension. The problem was discussed but not decided by the Vienna Conference (see Official Records, II, 360). Lack of time led to the decision not to amend the text but to leave the solution for the courts.

The courts will hardly fail to look at Article 44, which contains a reference to Article 50 with regard not only to non-conformity but also to third party claims. This seems to indicate that the article presupposes the possibility of price reduction in such cases. What sense would it make to allow that remedy only under [page 375] the exceptional situation where the buyer failed to give notice within reasonable time but presented a reasonable excuse? Why deny that remedy where the buyer gives the required notice in time?

This line of reasoning, however, is not in complete harmony with the above-mentioned discussion which expressly left open whether third party claims may lead to price reduction. Further doubts originate in the history of the Vienna Conference. It was the same First Commitee which amply discussed and voted to accept first Article 44 (see Official Records, II, 350) and, on the very next day, Article 50. Can they possibly have overlooked the contradiction and the need to delete any reference to paragraph (1) of Article 44?

The courts and arbitral tribunals will have to choose one of two interpretations. They may interpret Article 44 so restrictively as to practically delete the reference to third party claims. One might point to the fact that the provision, introduced late in the debates, was always considered in the context of non-conformity, not of third party claims. However the argument lacks strength because in the end the provision was precisely taken out of that context, put at the end of the section and elevated to the level of a separate article. The other way would be to interpret Article 50 so extensively as to make the remedy of price reduction available beyond the narrow scope of Article 44. Whether the latter solution is the better solution, as one might be inclined to think, will need further exploration. [page 376]


Pace Law School Institute of International Commercial Law - Last updated February 1, 2005
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