6.3 IN CONTRAST WITH DAMAGES

6.3.1 Introduction

As stated above, some seeming advantages of the right to reduce price become apparent when contrasted with the right to damages. However, at several stages of the drafting history of the provision, Common law participants saw the provision as a type of set-off whereby the buyer was authorized to deduct damages from the price. It became clear in the discussions that many representatives believed that price reduction constitutes a kind of damages. As stated above, Art. 50 represents one of several CISG provisions with a civil law background. Whereas the civil codes of, for example, France and Germany contain codified versions of the actio quanti minoris of Roman law, the right to reduce the price of defective goods is unknown in common law countries. As a result, during the deliberations of the Draft Convention some common law participants appear to have confused this remedy with the right to deduct damages from the price under, for example, section 2-717 UCC.  ³⁰⁶ 

Practically speaking, it is easy to confuse the remedies of reduction of price and of damages because they overlap to a great extent. On the one hand, the remedy of reduction of price is similar to the remedy of damages in that both grant relief to the buyer measured in money. On the other hand, they overlap to a greater extent under the Convention than they do in the Civil law because the Convention accepts the Common law rule that damages are available for any defective performance even if the non-performing party was not at fault. Nevertheless, reduction of the price is a remedy separate from that of damages and should not be confused with the right to set-off. For example, not only does set-off differ from a price reduction with respect to its capability of being asserted unilaterally, but a set-off also requires the parties to have reciprocal debts. This difference will be clarified in more details below.

6.3.2 Distinctions from Damages under the CISG

6.3.2.1 Diverse ratio legis

Generally, the ratio legis of damages is to place the injured party in the same economic position he would have been in if the other party had fulfilled his obligations. "Instead, Article 50 of the CISG has the same ratio legis as the provisions of [...] paragraphs 462 and 472 of the Bürgerliches Gesetzbuch(BGB). The buyer is given the opportunity to retain non-conforming goods and bring the contract in line with the changed circumstances through proportionate reduction of the purchase price."  ³⁰⁷ 

Assuming that the contract price is equal to the value of the goods at the time of conclusion of the contract and there is no price change between that time and the time of delivery, there would be no difference in the amount of monetary relief to the buyer whether he reduced the price or claimed damages. However, if there has been a change in the price of the goods, the amount of monetary relief would be different. As stated by Sondahl: "Article 50 is especially unique since it is not designed to protect a buyer's expectation, reliance, or restitution interests, and it may at times violate expectation principles. While Article 74 damages put the buyer in the position she would have been in had the seller properly performed the contract, Article 50 departs from the expectation damage calculation method. The amount of the price reduction under Article 50 is based on a principle unknown to the common law. Unlike expectation damages, which are designed to preserve the benefit of the bargain for the aggrieved party, price reduction attempts to preserve the proportion of the bargain. Assuming that the buyer would have made the same relative bargain, Article 50 treats the buyer as though she has purchased the non-conforming goods that were actually delivered. Price reduction is not as concerned with the actual economic efficiency of the promise as the damages remedy."  ³⁰⁸ 

Alternatively one could view the Art. 50 remedy as a modification of the sales contract. From this perspective a seller could be seen as offering such a modification by shipping non-conforming goods. The buyer accepts the offer by keeping the goods at an implied price proportional to the original contract price.  ³⁰⁹  In other words, the principle underlying price reduction is that the buyer may keep non-conforming goods delivered by the seller in which case the contract is adjusted to the new situation. Price reduction should therefore be regarded as an adaptation of the contract not as an award of damages.

6.3.2.2 Different manner in calculation

The aforementioned diverse ratio legis indicates that, unlike damages-based remedies, the principle of the price reduction remedy is not dependent on actual loss being suffered by the buyer, but is solely dependent on the abstract relationship between the actual value of the goods delivered and the hypothetical value of conforming goods.  ³¹⁰  To phrase the matter in a fashion that echoes the traditional description of common law remedy principles, one could say that Art. 50 puts an aggrieved buyer in the position she would have been in had she purchased the goods actually delivered rather than the ones promised -- assuming she would have made the same relative bargain for the delivered goods.  ³¹¹ 

It follows that the two remedies differ in that the right for a buyer to reduce the price payable is generally not calculated in the same manner as contractual damages and is different from a right to set-off which is also tied into damages. Arguably, this point is the most important distinction between the two remedies. In other words, the decisive point in distinguishing the two remedies is that the date at which the buyer's monetary relief is calculated and the means by which it is calculated are different. In comparing this point, we are referring only to the direct damages which the buyer could recover for delivery of non-conforming goods. In this context, the differences in calculating the monetary compensation under the two remedies can be summarized as follows: damages are measured as of the time of delivery; reduction of price is measured as of the time of conclusion of the contract. Damages are calculated as the absolute sum of money necessary to reimburse the loss suffered by the buyer; reduction of price is calculated in terms of an amount proportional to the difference in value of the goods as contracted and the goods delivered.  ³¹² 

6.3.2.3 Other differences

Although the most obvious difference between damages and reduction of price is that the amount of them is measured in a different manner, there are a number of other differences between the two remedies.

For instance, as shown above, one difference (more formalistic than substantive) is that, under the Convention, the remedy of price reduction is effectuated by the unilateral declaration of the buyer. No further action by the seller, such as acquiescing to the reduction of price, or by a tribunal in confirming the reduction, is necessary. This can be compared with the remedy of damages in which the buyer may "claim" the damages from the seller but his claim is not liquidated until the seller or a tribunal has agreed to it. Another difference is that even if the seller is excused from paying damages for his failure to perform the contract by virtue of Art. 79, the buyer may still reduce the price if the goods do not conform with the contract. Third, the right to reduce the price is not affected by the limitation to which a claim for damages is subjected under Art. 74, i.e. that the amount of damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contracts a possible consequence of the breach of the contract.

Finally, in illustrating the differences between damages and reduction of price it is helpful to compare reduction of the price with the effect of a partial or complete avoidance of the contract. Art. 51 CISG provides that if the seller delivers only part of the goods or if only part of the goods is in conformity with the contract, all of the remedies of the buyer, including the right to declare the contract avoided, apply to the part which is missing or which does not conform.  ³¹³  As a result, in case of partial non-delivery of the goods, reduction of price under Art. 46 and partial avoidance of contract under Art. 47 would lead to the same measure of monetary relief for the buyer. This is confirmed by the Secretariat Commentary on Art. 46 of the 1978 Draft [draft counterpart of CISG article 50]:  ³¹⁴  "The remedy of reduction of the price also leads to results which are similar to those which would result from a partial avoidance of the contract under article 47 [draft counterpart of CISG article 51]."  ³¹⁵  The most important difference between Arts. 50 and 51 in this regard is that if the contract has been partially avoided under Art. 51, the seller loses his right to remedy the non-conformity whereas reduction of price under Art. 50 does not terminate the seller's right to remedy the non-conformity.

6.3.2.4 A summary

In sum, reduction of the price is a remedy separate from that of damages and in fact has becomes an alternative to damages for the buyer. The Secretariat Commentary makes it clear: "The remedy of reduction of the price is a remedy which is not known in some legal systems. In those legal systems it would be natural to see this remedy as a form of damages for non-performance of the contract. However, although the two remedies lead to the same result in some situations, they are two distinct remedies to be used at the buyer's choice."  ³¹⁶ 

Nonetheless, it is also important to realize that assertion of a price reduction will not bar a buyer from also seeking damages, if the seller is liable for his fault. Under Art. 45(2) CISG, exercise of the right to reduce the price does not preclude the buyer from claiming any further damages he has suffered which would not be compensated by a reduction of price, such as extra expenses in preparing for the goods or losses caused by spoilage of other goods caused by delivery of the non-conforming goods. Thus, the buyer "may seek to combine a reduction in price under Article 50 with an action for damages."  ³¹⁷  In most circumstances before a court, seeking damages alone would give the buyer the largest recovery, since damages are calculated on the basis of the loss suffered by the buyer. Price reduction alone is calculated without reference to the loss suffered by the buyer, and so therefore would not include common costs incurred by the buyer, such as costs of mitigation, lost profit and so on. On the other hand, a claim in damages would typically include the loss in value suffered by the buyer in receiving non-conforming goods. A buyer would therefore be well advised to either seek damages alone or damages in conjunction with price reduction to maximise its remedy.  ³¹⁸ 

6.3.3 An Alternative to Damages

6.3.3.1 Introduction

As stated above, the importance of the price-reduction remedy in international sales law is somewhat limited because, by virtue of CISG Art. 45, damages are, in principle, readily available for the buyers in every breach of contract on a no-fault basis. On top of that, under the CISG the remedy of damages often serves the buyer better since the amount recoverable under Arts. 45 and 74 is usually higher than the sum by which the price can be reduced according to Art. 50. Clearly, in the majority of situations it will still be more beneficial to rely on a claim for damages.

Nonetheless, from this it cannot be inferred that, concerning contracts which are governed by the Convention, the price-reduction remedy is superfluous because under certain circumstances it is advantageous or even necessary to rely on this right instead of damages. In certain circumstances, Art. 50 confers on the buyer a right to reduce the price of non-conforming goods in lieu of claiming damages (assuming there is a right to damages).  ³¹⁹  In fact, The remedy of price reduction is an alternative remedy to the claim for damages, especially in the following circumstances.

6.3.3.2 In conjunction with force majeure

First, the main application of Art. 50 in lieu of damages is in conjunction with Art. 79, which sets forth various measures whereby a party (in this case, the seller) is not liable for a failure to perform if that party can show that the failure was due to an impediment beyond its control (force majeure). In other words, Art. 50 has its principal significance when the buyer accepts defective goods under circumstances provided by Art. 79(1) of the CISG in which the seller is not liable for damages according to Art. 79(5).

Art. 79(5) makes it clear that this exemption only applies to claims for damages and that it does not prevent either party from exercising any other remedy under the Convention. Since the force majeure exemption does not affect the buyer's rights other than damages, he may reject the goods and declare the contract avoided if the seller's failure amounts to a fundamental breach in terms of Art. 25 of the CISG. However, in case he has a particular interest in the goods and thus decides to accept them, the buyer cannot claim damages under Art. 45(1)(b) because, according to Art. 79 of the CISG, the seller is free from that liability. Under these circumstances, the buyer can resort to the remedy of price reduction under Art. 50, because Art. 50 is separate from any claim for damages, the buyer can still claim a price reduction for defects under those circumstances.

6.3.3.3 In case of falling market

Secondly, perhaps the more frequently occurring situation is where the market price of the (conforming) goods has changed substantially between the time of contracting and the time of delivery. More directly, in the case of a falling market, where the market price of conforming goods has substantially decreased between the time of contracting and delivery, the buyer is well advised to opt for the reduction of the purchase price instead of damages. This results from the different methods, as shown above of calculating the price reduction and damages respectively. It may be inferred from a hypothetical illustration that whenever the market falls the price-reduction remedy represents an economically sensible alternative to damages.  ³²⁰ 

Of course, if there were a reduction in market price from the time of contracting, the buyer would most likely reject the goods, since it could obtain conforming replacement goods on the open market at less than the contract price. The application of Art. 50 appears to give the buyer the upper hand, since it can elect to pursue the remedy that offers it the highest return. One must note that Art. 50 is expressly made subject to the seller's right to cure any defect under Art. 48. This does serve to balance the position between buyer and seller so that the seller does have an opportunity to have some input into the resulting remedy pursued by the buyer. The combination of these two remedies can be viewed in light of the CISG's purpose to preserve the parties' bargain wherever possible.  ³²¹ 

6.3.3.4 Upon difficulty in proving damages

Thirdly, price reduction is most advantageous to the buyer when establishing the liability of the seller is difficult. "In some circumstances, the buyer would prefer to rely on the price reduction remedy instead of damages. The most straightforward situation is where the buyer has difficulty in proving its loss, such as where it has purchased the goods for altruistic/non-commercial purposes. If, for example, the buyer has purchased foodstuffs to donate to charity, it has not necessarily suffered any loss from the diminution in value of the non-conforming goods. Without any loss or necessarily the ability to prove any damage, the buyer's preferred remedy would be a reduction in the price to be paid to the seller."  ³²² 

Interestingly, an examination of German case law on Art. 50 CISG reveals that, so far, neither Art. 79(1) nor falling markets seem to have induced buyers to resort to this remedy. According to the facts of most cases, the buyers in question decided to reduce the price under circumstances where, theoretically speaking, claiming damages could have brought in greater monetary relief. From this it can be inferred that the price-reduction remedy does not only serve a useful purpose in the above mentioned situations. Instead, it may be presumed that merchants prefer to make use of this self-help remedy because it enables them to immediately restore the parity of performances without having to resort to a court.  ³²³ 

6.3.3.5 A summary

In sum, the main situation where price reduction remains a suitable alternative is in the situation where the seller can claim exemption from liability under Art. 79, where the buyer no longer has the right to claim damages nevertheless his other remedies, including the right to reduce price under CISG Art. 50, are not affected. The second situation where price reduction may benefit the buyer is where the price of the goods has fallen between the conclusion of the contract and delivery. In this case, the sum calculated under Art. 50 will be higher than the difference in value between the conforming and non-conforming goods at the time of delivery. Finally, where the buyer could have difficulty in calculating his damages, he may find price reduction a more practical and speedy option.

These situations show that Art. 50 is of narrow applicability. In most cases, as mentioned above, damages would be the preferred remedy. The narrow application of Art. 50 does throw some doubt on the necessity for such a provision. Despite these concerns, the worth of a provision should not be determined on the basis of its frequency of use. Apart from its use as a familiar tool to those comfortable with civil law systems, it does protect the buyer from certain inequitable situations that would otherwise not be properly remedied by damages alone.  ³²⁴  Indeed, it appears sensible to assume that this advantage is also the reason why many international contracts for the sale of generic goods provide for price-reduction in cases of non-conforming goods. With regard to this particular problem, one can therefore draw the conclusion that, Art. 50 of the CISG reflects commercial practice which indicates that it provides for an economically sensible solution.  ³²⁵  Accordingly, a price-reduction remedy, which was obviously modelled upon Art 50 of the CISG, has also been included in Art. 9:401 PECL (infra. 6.5.2).