Goods Delivered by My Japanese Supplier Don't Meet Specs: What Are My Rights?
In commercial transactions, receiving goods or completed work that fails to meet the agreed-upon specifications is a common and often frustrating problem. Whether it's a discrepancy in type, quality, or quantity, such non-conformity can disrupt business operations, lead to financial losses, and strain supplier relationships. Japanese law provides a framework for addressing these situations, primarily through the concept of "liability for non-conformity" (契約不適合責任 - keiyaku futekigō sekinin). This framework, significantly reformed by the 2020 amendments to the Japanese Civil Code, outlines the rights and remedies available to a buyer or an entity that has ordered work when the delivered product or service does not align with the contract.
This article explores the key remedies available under Japanese law when goods or services from a Japanese supplier fail to meet contractual specifications, including the right to demand cure, price reduction, damages, and contract termination, as well as the important duty of the recipient to notify the supplier of any non-conformity.
1. Understanding "Liability for Non-Conformity" (Keiyaku Futekigō Sekinin)
The concept of keiyaku futekigō sekinin replaced the older, more fragmented doctrine of "defect liability" (瑕疵担保責任 - kashi tanpo sekinin) in the 2020 Civil Code revisions. The new framework aims to provide a more unified and comprehensive approach, treating non-conformity largely as a form of general contract non-performance (債務不履行 - saimu furikō).
"Non-conformity" under this regime means that the delivered goods (in a sales contract) or the completed work (in a contract for work) do not conform to the terms of the contract with respect to their type, quality, or quantity (Civil Code, Article 562 for sales; Article 559 applies these sales provisions mutatis mutandis to contracts for work, unless the nature of the contract for work does not permit such application).
Determining "conformity to the contract" involves looking at:
- Explicit terms and specifications in the agreement.
- Implied terms based on the nature of the transaction or customary practices.
- The intended purpose of the goods or work, especially if known to the supplier.
If non-conformity is established, the buyer (or the party who ordered the work, hereafter "orderer") has several potential remedies.
2. Buyer's/Orderer's Primary Remedy: Demand for Cure (Tsuikan Seikyū - 追完請求)
The first line of remedy provided under Article 562 of the Civil Code is the right to demand that the seller or contractor "cure" the non-conformity. This is known as tsuikan seikyū. The buyer/orderer generally has the right to choose the method of cure from the following options, as applicable:
- Repair of the Goods/Work (目的物の修補 - mokutekibutsu no shūho): Demanding that the supplier fix the defective items. For example, if laptops delivered have faulty displays, the buyer can demand their repair.
- Delivery of Substitute Conforming Goods/Materials (代替物の引渡し - daitaibutsu no hikiwatashi): Demanding that the supplier replace the non-conforming items with conforming ones. If, for instance, an older model of a machine was delivered instead of the agreed new model, the buyer can demand the delivery of the correct new model.
- Delivery of Any Shortfall in Quantity (不足分の引渡し - fusokubun no hikiwatashi): If fewer items were delivered than contracted for (e.g., 8 units instead of 10), the buyer can demand delivery of the missing quantity.
While the buyer/orderer chooses the method of cure, Article 562, paragraph 1, proviso, allows the seller/contractor to perform the cure by a different method than the one chosen by the buyer/orderer if the buyer's/orderer's chosen method would impose an unreasonably burdensome cost on the seller/contractor, and the alternative method does not cause unreasonable inconvenience to the buyer/orderer.
However, the right to demand cure is not absolute. It cannot be demanded if the cure is physically impossible or if it would involve disproportionate expense for the seller/contractor when compared to the significance of the non-conformity and the value of conforming performance.
3. Right to Demand Price Reduction (Daikingengaku Seikyū - 代金減額請求)
If the seller/contractor fails to perform the cure within a reasonable period after being requested to do so, or if cure is impossible from the outset, or if the seller/contractor unequivocally refuses to perform the cure, the buyer/orderer can then demand a reduction in the purchase price or contract fee (Civil Code, Article 563).
Key aspects of this remedy:
- Procedural Step: Generally, a demand for cure must be made first (Article 563, paragraph 1). However, if cure is impossible, or the seller/contractor clearly refuses to cure, or if cure by a certain deadline was essential and that deadline has passed, the buyer/orderer can demand a price reduction without first demanding cure (Article 563, paragraph 2).
- Proportional Reduction: The price reduction should be proportionate to the degree of non-conformity. It aims to adjust the price to reflect the diminished value of the non-conforming goods or work.
- No Fault Required: This right to demand a price reduction does not depend on proving that the non-conformity was due to the seller's/contractor's fault. It is available as long as the non-conformity exists and the conditions for demanding cure (or bypassing it) are met. It can be seen as a form of partial termination of the contract corresponding to the non-conforming part.
4. Right to Claim Damages (Songai Baishō Seikyū - 損害賠償請求)
The delivery of non-conforming goods or work is a form of non-performance of contractual obligations. Therefore, the buyer/orderer can also claim damages under the general rules for contract default (Civil Code, Article 564, which makes Article 415 applicable).
- Fault Requirement: Unlike price reduction, a claim for damages generally requires that the non-conformity be attributable to the seller/contractor (i.e., due to their fault, which can include negligence). The seller/contractor can avoid liability if they can prove that the non-conformity was not due to a cause attributable to them.
- Types of Damages: Damages can cover various losses, such as:
- The cost of having the non-conformity cured by a third party if the original supplier fails to do so.
- Loss of profit resulting from the inability to use or resell the non-conforming goods.
- Consequential damages caused by the non-conforming goods to other property or interests of the buyer/orderer (subject to rules on the scope of foreseeable damages under Article 416).
- Relationship with Cure: Damages can be claimed in addition to, or instead of, demanding cure, depending on the nature of the loss. If cure is not performed or is inadequate, the buyer/orderer may claim damages representing the cost of cure or the diminution in value. Damages in lieu of cure (填補賠償 - tenpo baishō) are also possible under Article 415, paragraph 2, under certain conditions (e.g., if cure is impossible or refused).
Under the pre-2020 law, case law (such as Supreme Court, March 20, 1984, Hanrei Jihō No. 927, p. 184, for contracts for work) allowed an orderer to claim damages in lieu of repair without first demanding repair. The interplay between the right to demand cure and the right to claim damages (especially damages that substitute for cure) is an area where the application of general default principles (like Article 415, paragraph 2, which might imply a preference for allowing the debtor to cure first) to non-conformity cases continues to be refined under the new framework.
5. Right to Terminate the Contract (Keiyaku no Kaijo - 契約の解除)
If the non-conformity is sufficiently serious, the buyer/orderer may have the right to terminate the entire contract (Civil Code, Article 564, making Articles 541 and 542 applicable).
- Termination with Prior Demand (Article 541): If the non-conformity is curable, the buyer/orderer must generally first set a reasonable period and demand cure from the seller/contractor. If the cure is not performed within that period, the buyer/orderer can then terminate the contract. However, termination is not permitted if the non-conformity is "minor" (see Section 2A above).
- Termination without Prior Demand (Article 542): Termination without prior demand is possible in more severe situations, such as:
- If cure of the non-conformity is impossible.
- If the seller/contractor unequivocally refuses to perform the cure.
- If the non-conformity is so fundamental that the purpose of the contract cannot be achieved even if the remaining parts were performed or if cure was attempted.
The consequences of termination include the duty of both parties to restore each other to their pre-contractual positions (原状回復義務 - genjō kaifuku gimu) and the possibility of claiming damages.
6. Buyer's/Orderer's Duty to Notify of Non-Conformity (Kensa Tsūchi Gimu - 検査通知義務)
An important aspect that can affect the buyer's/orderer's ability to exercise these remedies is the duty to inspect the goods/work and notify the supplier of any non-conformity. The rules differ significantly between commercial sales and general civil sales:
- Commercial Sales (governed by the Commercial Code - 商法, Shōhō):
Article 526 of the Commercial Code imposes strict duties on a buyer in a sale between merchants (or where one party is a merchant acting in that capacity).- The buyer must inspect the received goods without delay.
- If any non-conformity is discoverable through this immediate inspection, the buyer must immediately notify the seller. Failure to do so results in the buyer losing their rights to demand cure, reduce the price, claim damages, or terminate the contract based on that non-conformity.
- For "hidden" non-conformities (those not discoverable by an immediate, ordinary inspection), if discovered later, notification must still be made immediately upon discovery, and in any event, all rights are lost if not discovered and notified within six months of delivery.
This is a very strict forfeiture rule designed to promote swift resolution of issues in commercial dealings.
- General Civil Code Sales (and Contracts for Work by analogy):
For sales not subject to the Commercial Code (e.g., B2C, C2C, or if specific exclusion applies), or for contracts for work, the primary notification rule is found in Article 566 of the Civil Code.- If the non-conformity relates to the quality or type of the goods/work and it was something that could not have been discovered by an ordinary inspection at the time of delivery, the buyer/orderer must notify the seller/contractor of the non-conformity within one year from the time they became aware of it.
- This one-year notification period under Article 566 is a statute of limitations for exercising the rights related to that specific non-conformity; it is not a strict forfeiture rule triggered by lack of immediate notice like in the Commercial Code.
- Importantly, this one-year notification rule in Article 566 does not apply to non-conformity in quantity or if the goods delivered are entirely different from what was ordered. In such cases, the general prescription periods for claims (typically 5 years from awareness of the right to claim, or 10 years from the act of non-performance, under Article 166) will apply to the buyer's/orderer's remedies.
Finally, if the non-conformity in a contract for work is due to the nature of materials supplied by the orderer or due to instructions given by the orderer, the contractor is generally not liable, unless the contractor knew of the unsuitability of the materials or instructions and failed to notify the orderer (Civil Code, Article 636).
Conclusion: A More Unified Framework for Non-Conformity
The 2020 reforms to the Japanese Civil Code have significantly reshaped the legal landscape for dealing with non-conforming goods and services, moving towards a more unified framework that aligns closely with general principles of contract non-performance. Buyers and orderers in Japan now have a clearer hierarchy of remedies, starting with the right to demand cure, followed by options for price reduction, damages, and contract termination under specified conditions. However, it is equally crucial for businesses to be acutely aware of their own obligations, particularly the duty to inspect and provide timely notification of non-conformities, especially in the stringent context of commercial sales under the Commercial Code. Navigating these provisions effectively requires careful attention to contract terms and prompt action when issues arise.