6.4 ESSENTIALS OF CISG ART. 50

6.4.1 Scope of Application

6.4.1.1 General application in case of non-conformity

According to Art. 50, a reduction in price is available only when "the goods do not conform with the contract". In other words, the remedy operates only in cases of non-conformity. Generally, the question of whether the goods conform with the contract can be determined in reference to Art. 35, namely: whether the goods are of the quantity, quality and description required by the contract, and if they are contained or packaged in the manner required by the contract; and meet the four specific requirements set out in Art. 35(2)(a) to (d).  ³²⁶ 

Especially since CISG Art. 35(1) imposes an obligation on the seller to deliver "goods which are of the quantity, quality, and description required by the contract", it does not seem too far-fetched to allow a reduction of the price for a quantity deficiency. In fact, "[n]o distinction is drawn in Article 50 between different types of non-conformity. The same remedy applies regardless of the reason of non-conformity and there is no difference between the approach to defects of quantity and defects of quality."  ³²⁷  Furthermore, decisions have stated that non-conformities include both quantity and quality,  ³²⁸  although it still remains to be seen whether price reduction applies to defects that are solely quantitative. In short, on the basis of Art. 35(1) a failure of quantity constitutes a "non-conformity", and that reduction of price is therefore available when the goods are insufficient in either quality or quantity.

6.4.1.2 Ambiguity over defects in title

There is some uncertainty arising from the wording of Art. 50, as it is unclear whether it also covers other situations other than non-conformity, such as defects in title to the goods. It appears controversy whether price reduction under Art. 50 should also be applied to cases where goods are not free from rights or claims (including those based on industrial or other intellectual property rights) by third parties.

On the one hand, some suggest that price reduction should not be available in such situations. For example, Bergsten and Miller suggest that "the fact that the goods are subject to a right or claim of a third party, including a right or claim based on industrial or intellectual property, does not make them non-conforming goods as that term is used in the Draft Convention."  ³²⁹  Similarly, Piliounis submits: "While by no means clear, it appears that Article 50 does not apply to defects in title. This interpretation is supported by the wording of Article 50 itself, which refers to goods not conforming to the contract. While arguably a defect in title does not 'conform to the contract', it is more properly characterised as an obligation of the seller rather than a particular character of the goods under the contract."  ³³⁰ 

Repeatedly speaking, the drafting history of the Convention is a legitimate and valuable aid in the interpretation of the Convention's provisions. In this respect, there were proposals during negotiations to broaden the scope of Art. 50 so as to apply it as remedy for defects of title. The proposal was criticized on several grounds, including lack of a formula to reduce the price in this situation, willingness to leave the third-party rights out of the Convention, and fear that other remedies would be displaced. Finally, the Norwegian representative withdrew the proposal after discussion in favour and against, saying that the matter should be left up to the courts.  ³³¹  Thus the dogmatic gap between non-conformity of goods, and third party rights or claims was not closed completely, and the right to reduction of the price was practically restricted to non-conformity.  ³³²  Even the Secretariat Commentary believes: "Goods may conform with the contract even though they are subject to the right or claim of a third party under article 39 or 40 [draft counterpart of CISG article 41 or 42]."  ³³³ 

Although no decision was reached as to whether the price may be reduced for defects in title and there are many commentators who preclude the application of Art. 50 in such situation, there are also some commentators that consider that Art. 50 may be applicable to international sales where the goods are subject to third-party rights or claims. It would indeed be justifiable to grant a right to price reduction in the case of third party rights or claims. For example, Schlechtriem submits: "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."  ³³⁴  Particularly, it cannot be overlooked that Art. 44 expressly refers to Art. 50: "Notwithstanding the provisions of paragraph (1) of article 39 and paragraph (1) of article 43, the buyer may reduce the price in accordance with article 50 or claim damages, except for loss of profit, if he has a reasonable excuse for his failure to give the required notice." In other words, a buyer who failed to give notice of the existence of third party rights or claims, but has a reasonable excuse, may nevertheless claim a price reduction. However, some considers that it is hardly understandable that a buyer should have the right to a reduction of the price only if he fails to give notice, but not if he gives notice in time, some obviously believes that the reference made in Art. 44 to Art. 50 only relates to the case described under Art. 39(1), but not to Art. 43(1).  ³³⁵ 

Anyway, it remains ambiguous whether price reduction will be applied in case of defects in title. It bears significance to recall that "Quanti Minoris was included in the CISG besides damages because there was a cultural controversy between the world's main legal traditions about how to remedy a non-conformity; there is not such a controversy about how to remedy third-party claims that disturb possession, the remedy is a claim for damages."  ³³⁶  "The buyer's ability to claim damages for any loss suffered is by far a better remedy in such circumstances. These ambiguities in scope of Article 50 also highlight the limited application of the price reduction remedy under the CISG."  ³³⁷  Sondahl seems to bring forward some guidance in submitting that:

"It was suggested that price reduction might be useful in its application toward a partial claim against a third party in order to determine the diminished value of the goods. Seeing no reason why 'a distinction should be made between remedies for goods that were defective in the physical sense and goods that were defective in other senses', another delegate voiced his support for the applicability of price reduction to third-party claims (and the inclusion of such claims in the conception of a non-conformity). While a number of other delegates registered support for the amendment allowing for the applicability of price reduction to third-party claims, ultimately the concerns of other representatives led to the withdrawal of this amendment. The withdrawal of the amendment demonstrates the 'open' status of this debate. The absence of a clear decision in the text of the Convention demonstrates the decision to apply or not to apply price reduction rests with the courts."  ³³⁸ 

6.4.2 Exercise of the Right to Price Reduction

Art. 50 of the CISG makes it clear that the buyer "may exercise unilaterally" this right. The language of ULIS that said "the buyer may declare the price to be reduced" was changed to "the buyer may reduce the price". "During the negotiation of the Convention it was felt that the Article had to be clear on this point. A statement by the UNCITRAL Secretary-General and repeated proposals of the UK to give the buyer a 'substantive right' to reduce the price, instead of a declaration of its reduction, eventually succeeded in convincing the drafting committee to clarify the article."  ³³⁹ 

As stated above, price reduction is a self-help remedy that can be implemented by the buyer unilaterally without any requirement to have the determination upheld by a court, expert or other tribunal. Furthermore, the CISG provides no time limit for the buyer to exercise his right to reduction of the price; provided that notice under Arts. 39 and 43 is given in time this right is subject to the general limitation rules only. Also, there is no need for the seller's agreement, although it is surely always more appropriate that the parties agree on the amount of the reduction. Compared to cure and avoidance, a reduction of the price of goods is the simplest remedy where the least additional expenses occur and should, therefore, be facilitated.  ³⁴⁰ 

In a word, the price is reduced by a simple declaration of the buyer, whether or not the price has been paid. A reduction, however, is not merely a facilitated claim for damages as it may sound from some commentators. While he can unilaterally declare a reduction and, provided he has not paid yet, force the seller to file suit if he does not agree. On the other hand, the declaration by the buyer is governed by Art. 27, i.e. it is directly effective, even if it does not reach the seller; it follows that the buyer, having declared a reduction, no longer has the right to performance by the seller.  ³⁴¹ 

6.4.3 Calculation of Proportional Reduction

Under CISG Art. 50, the amount by which the buyer may reduce the price is a proportional reduction of the price of goods: 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.

6.4.3.1 Decisive point: time of delivery

As for the time as to which to establish the value of the goods, what is decisive is the time of delivery and not the time of the conclusion of the contract, as laid down in Art. 46 ULIS or in 472(1) BGB, both for the value of the non-conforming goods and for conforming ones. The Convention makes it clear: at the time of the delivery bears to the value that conforming goods would have had at that time.

The calculation of a proportional reduction of the price was an issue of a real concern during the negotiations of the CISG. The present method of computing the price reduction is a new one introduced at the Diplomatic Conference, which differs from Art. 46 of the 1978 Draft. "Mr. ROGNLIEN (Norway), introducing his proposal ... said that its main purpose was to amend the time at which the value of non-conforming goods should be assessed.... His delegation considered that the time of delivery would be preferable to that of the conclusion of the contract partly because the value at the time of the delivery would be a more adequate substitute for damages." (O.R. p. 357) However, one should note that, in calculating that proportional reduction under the present CISG Art. 50, the value of the conforming goods is not just treated as equal to the price under the contract, the latter may well be below or above the former.  ³⁴²  In general, the current value at the time of delivery is easier to establish, whereas the current value at the conclusion of the contract (except for stock market goods) always tends to be somewhat hypothetical.  ³⁴³ 

Clearly, under present CISG Art. 50: "The decisive time for the calculation of the price difference between proper goods and non-conforming ones is not, as in some national legal systems, the time of the conclusion of the contract but the time of the delivery of the goods."  ³⁴⁴  And the time of delivery will be established on the basis of the contract and Art. 31.  ³⁴⁵ 

6.4.3.2 Place for comparing

The major difficulty surrounding price reduction, presumably, involves the geographical market value that should be considered when determining the value of the goods. Although the CISG clearly specifies that the goods should be valued when they are delivered, no mention is made with respect to what country's market shall control the valuation of the goods. 

As for the place to measure the market value in calculating the reduction, the representatives of Argentina, Portugal and Spain made a joint proposal to include language determining that the prevailing value would be that of the residence of the buyer. The representative of Norway, while expressing his preference to avoid such a complicated question, suggested the place of delivery was a better reference point. Consistently with this opinion, the representative from the Netherlands pointed that a buyer not necessarily would chose its place of residence for delivery and that, also, the matter could be complicated by resale while the goods are still in transit. The joint proposal was defeated.  ³⁴⁶  Accordingly, the CISG leaves open where the value of the conforming and/or non-conforming goods will be assessed.

In this respect, Enderlein submits: "The Convention does not stipulate at which place or market the prices have to be compared; however, in view of the close relationship between date and place of delivery, this place should be decisive. It is not excluded, however, that buyers may consider the place of destination."  ³⁴⁷  In another commentary, Enderlein and Maskow review as: "According to the sense and purpose of the price-reduction provision, the decisive place must be the place where the seller has to perform; in the case of sales involving carriage, it should be the place of destination [...]. Will [...] suggests a three-step solution: the place of destination, then the place of delivery, and finally the place of business of either the buyer or the seller, depending on where a market price can best be assessed. v. Hoffmann [...] also would like to take into account the current value in the buyer's country."  ³⁴⁸ 

6.4.4 Limited by the Cure

The second sentence of Art. 50 CISG stipulates: "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."

It follows that the buyer has no right to reduction if the seller cures the defective goods. Insofar as this is done according to Art. 37,  ³⁴⁹  before the time of delivery, this should be quite natural. And if the seller remedies a defect under Art. 48 (see Chapter 5), there will be no need for a price reduction because equivalence will be re-established. What is of significance here is that the right to price reduction will be lost when the buyer refuses to have the defect cured by the seller. The reason for this rule lies, as Honnold believes, in the obligation to mitigate losses. It is of no importance here why the buyer refuses the cure, e.g. because of unreasonable inconvenience. In this case, the buyer might retain the right to claim damages taking account of the probable mitigation of losses under Art. 77.  ³⁵⁰ 

It is to be noted that the reference to Art. 37 in Art. 50 is a new one which was introduced at the Diplomatic Conference. "Mr. KLINGSPORN (Federal Republic of Germany)... said his delegation believed that the second sentence of [CISG article 50] should refer to [CISG article 37 as well as to [CISG article 48]. It seemed to him logical that a provision in regard to a buyer's declaration of reduction of price should apply not only to the case in which a seller remedied a failure to perform his obligations after the date for delivery [CISG article 48], but also that case in which such a failure was remedied before the date for delivery [CISG article 37]." (O.R. p. 360)

Thus, Art. 50 allows the seller, in the same way as in a damages situation, to cure the delivery. It seems very reasonable that the seller can opt to cure the defect rather than being obligated to receive less money. The courts have been quite clear on the seller's right to cure and the buyer's obligation to let the seller cure.  ³⁵¹