by Peter Huber
1. Concept and purpose of price reduction
a) Conceptual outline
Price reduction refers to an abatement of the contract price to remedy a performance by one party that does not conform to the contract. The aggrieved party retains the defective performance offered by the party in breach, while the latter receives only a reduced payment to account for the defect in its performance. In cases where the injured party has paid the full price to the party in breach before delivery, it can recoup what it has paid over and above the reduced price. In contrast to termination of a contract, price reduction does not result in restitution of the delivered goods. Instead, it most often (but not always) leads to results identical to those achieved by way of damages. It should be noted, however, that price reduction does not preclude aggrieved parties from claiming incidental and consequential damages in addition to the damages caused by a non-conforming performance.
b) Function of price reduction
The purpose of price reduction is financially to offset the defective performance of the party in breach without having to terminate the contract. Although such a compensation could be obtained through a right to damages, price reduction usually offers the same result under less stringent requirements. Thus, price reduction generally remains available even though the performance of the party in breach has been excused (eg on account of force majeure), even though the damages to the aggrieved party were unforeseeable, and even if the party in breach is not legally responsible for the breach. Furthermore, price reduction maintains—as long as it is calculated proportionally and not absolutely (see 3. c) below)—the ratio of values the parties agreed to exchange under the contract.
c) Historical background of price reduction
Price reduction is a standard legal remedy in civilian legal systems. Its origins lie in the Roman law of the classical period, where it was made available under the aedilitian edict as the actio quanti minoris, and as an alternative to the actio redhibitoria (termination and restitution). It was a sort of implied warranty action to remedy latent defects in goods—available, originally, only to buyers of slaves and beasts of burden. These buyers could claim the difference between the value of the defective ‘chattel’ and the value it would have had had it conformed to the contract.
Over time, the remedies developed in the jurisprudence of the aediles curules (ie the Roman market police) were integrated into the Roman ius civile and thereby made available for other types of purchases. Among these remedies was the actio quanti minoris. Many continental European legal systems then modelled their civil codes on Roman law (see Art 3(2) Consumer Sales Directive (Dir 1999/44); § 932(1) Austrian Allgemeines Bürgerliches Gesetzbuch (ABGB); § 441 German Bürgerliches Gesetzbuch (BGB); Art 1644 French Code civil). In some systems, the remedy of price reduction has been expanded to other transactions. For example, German law allows price reduction to remedy non-performance in barter agreements, lease, contracts for work, and travel agreements. Under Dutch law, price reduction is available—in the form of a partial termination—as a general remedy for any breach.
Price reduction remains foreign to common law systems. However, the common law achieves the results of price reduction in its own way. Commercial codes often provide buyers with a damages action without regard to fault for the underlying non-performance, against which they may then set off the purchase price they pay to the seller (see § 2-717 Uniform Commercial Code (US); s 53(29), (3) Sale of Goods Act (UK)). The results of such provisions are very similar to those achieved by buyers in civilian systems.
2. Modern developments
Even though price reduction remains primarily a continental European remedy unknown to common law systems, it has been included in almost all uniform and model rules on the sale of goods (with the exception of the UNIDROIT PICC). Its inclusion is part of an international tendency not to favour remedies terminating the contract and to refer buyers instead to remedies maintaining the contractual relations, such as a right to claim supplementary performance, damages or price reduction (for this tendency, see termination of a contract). Accordingly, the requirements for claiming price reduction are usually less strict than those for terminating (avoiding) a contract—eg a breach need not be fundamental before a buyer is entitled to a price reduction. Still, a seller’s right to cure sometimes takes priority over a buyer’s right to price reduction (see, eg, the Consumer Sales Directive, the BGB or the Convention on the International Sale of Goods (CISG)). This again arises from an international tendency to give sellers a second chance to earn the full purchase price they bargained for (see supplementary performance).
3. Price reduction in uniform sales rules
Any legal norm that allows for price reduction must answer four questions. (a) What requirements must be satisfied for an injured party to be granted the right to price reduction? (b) How may an injured party claim price reduction? (c) By what method will the reduction in price be calculated? (d) What is the relationship between price reduction, damages and termination of the contract?
a) Requirements for price reduction
Price reduction requires, in principle, that the party in breach has made a performance which is not in conformity with the contractual (or legal) requirements and which has been accepted by the other party (see Art 9:401(1) PECL, Art III.-3:601(1) DCFR, Art 50(1) CISG). Its sphere of application therefore lies within the law concerning defective performance.
Consistent with the tendency to favour remedies that do not result in termination of the contract, price reduction is not normally subject to the stringent requirements of termination (such as the requirement that a breach be fundamental).
However, regulations differ with regard to the relationship of the aggrieved party’s right to price reduction vis-à-vis a non-performing party’s right to cure. Some legal systems grant the non-performing party (often the seller) a period within which it may cure the defective performance before the aggrieved party may claim a price reduction. Under Art 3(5) of the Consumer Sales Directive, the buyer may only claim price reduction when the seller has failed to remedy its performance within a reasonable period. In contrast, Art 8:104 PECL appears to allow a non-performing party to cure the defective performance only when the aggrieved party has refused to accept it. If the buyer instead accepts the goods, it would seem that Art 9:401 PECL permits it to reduce the price without providing the non-performing party with an opportunity to cure. The DCFR takes a middle position between the EU and PECL priority schemes. Article III.-3:202 provides the debtor with a right to cure but normally requires that, promptly after being notified of the lack of conformity, the debtor offers to cure the non-performance within a reasonable time and at the debtor’s own expense. During the period allowed for cure, the creditor may (withhold its own performance but) not resort to any other remedy, including price reduction (Art III.-3:204(1)). Article 50 CISG explicitly states that a buyer loses its right to price reduction if the seller remedies any defects in performance. However, the CISG leaves unclear whether a buyer must wait a reasonable period to claim a price reduction, or whether price reduction is only excluded when the seller offers to cure without unreasonable delay.
b) Procedure for claiming price reduction
In most national legal systems, price reduction was originally available to the aggrieved party in the form of a claim against the non-performing party. The aggrieved party could demand that the non-performing party consent to a reduction in price, but the price reduction became effective only upon the consent of, or a judgment against, the non-performing party. Such a structuring of price reduction still exists in many legal systems, especially those with a close resemblance to Roman law such as French law. In contrast, most uniform law instruments have granted buyers a unilateral right to reduce the price, which the non-performing party may then contest (see Art 51 CISG; Art III.-3:601 DCFR; Art 9:401 PECL; and also the new § 441 BGB after the reform of 2002).
c) Calculating the amount by which the price will be reduced
Most national and uniform price reduction rules employ a proportional method for calculating the amount by which the price should be reduced. The contract price is reduced by the ratio of the value of the defective performance to the value of a performance that would have conformed to the contract. As a result, the reduction in price does not correspond in a linear fashion to the reduced value of the seller’s performance, but instead maintains the ratio of values between the parties’ performances to which they had originally agreed.
Uniform contract rules set the appropriate time for determining a price reduction at the time of delivery (Art 50 CISG; Art 9:401 PECL; Art III-3:601 DCFR). German law, in contrast, determines the price reduction with reference to the time of contract formation (§ 441 BGB).
d) Relationship between price reduction, damages and termination
Insofar as price reduction makes up for the loss of value the aggrieved party has suffered due to the other party’s defective performance, there will obviously be no additional claim for damages. However, a claim for damages may remain available to the aggrieved party in order to remedy loss other than the difference in value provided, of course, that the requirements for such a damages claim are met. Some uniform regulations expressly provide for such a ‘supplementary’ damages claim (Art 9:401(3) PECL; Art III.-3:601(1) DCFR), while others (such as the CISG) would reach similar results under general principles of the law of damages.
As a rule, once a price reduction has become effective, the aggrieved party may no longer terminate the contract because a choice in favour of price reduction expresses the intention of the buyer to retain the seller’s defective performance.
Ernst Rabel, Das Recht des Warenkaufs, vol 2 (1958) 232 ff; Guenter H Treitel, Remedies for Breach of Contract (1988) 318 ff; Reinhard Zimmermann, The Law of Obligations (1996) 800 ff; Andreas Schwartze, Europäische Sachmängelgewährleistung beim Warenkauf (2000) 220 ff; Christian von Bar and Reinhard Zimmermann (eds), Grundregeln des Europäischen Vertragsrechts (2002) 439 ff, 450 ff, 495 ff; Andrea Sandrock, Vertragswidrigkeit der Sachleistung (2003) 209 ff; Reinhard Zimmermann, The New German Law of Obligations (2005) 66 ff, 107 ff; Peter Huber, ‘Comparative Sales Law’ in Mathias Reimann and Reinhard Zimmermann (eds), The Oxford Handbook of Comparative Law (2006) 937; Peter Huber and Alastair Mullis, The CISG (2007) 209 ff.