In commercial transactions, receiving goods that don't quite meet the agreed-upon standards is an unfortunate but not uncommon reality. Perhaps the quality isn't what was specified, the kind is slightly different, or the quantity is short. In such situations, outright rejection or demanding a full replacement might not always be the most practical or desired solution for the buyer. The buyer might still find the goods partially usable, or the time and effort to secure alternatives might be prohibitive. The question then arises: can the buyer keep the non-conforming goods but pay a reduced price that reflects their diminished value or utility? Under the Japanese Civil Code, as significantly amended effective April 1, 2020, the answer is generally "yes," through a remedy known as the "right to demand price reduction" or daikin gengaku seikyū-ken (代金減額請求権).

A More Accessible Remedy: Price Reduction under Amended Article 563

The right to demand a price reduction for non-conforming goods has been substantially broadened and clarified by the amended Civil Code, primarily in Article 563. Previously, under the old "defect warranty" (kashi tanpo sekinin) system, a direct right to demand price reduction was typically limited to specific scenarios, such as a shortfall in quantity in a "sale by specified quantity" or when a portion of the rights being sold actually belonged to a third party.

The amended Code, however, makes the price reduction claim a general remedy available whenever delivered goods fail to conform to the contract in terms of their kind, quality, or quantity. This expansion is a significant enhancement of buyer's rights, offering a more flexible way to address non-conformities without necessarily resorting to contract termination or complex damage calculations for the principal loss in value.

The underlying purpose of this remedy, as suggested by legal commentary, is to restore the "balance of counter-performance" (taika no baransu o toru; 対価のバランスをとる) between the buyer and seller. It allows the buyer to adjust the agreed price downwards to accurately reflect the actual value or utility of the non-conforming goods received.

A crucial feature of this right is that it does not depend on whether the seller was at fault for the non-conformity. The claim arises from the objective fact that the goods delivered do not match the contractual agreement, leading to an imbalance in the value exchanged. This distinguishes it from a claim for damages (songai baishō), which, under Article 415 (governing breach of contract), generally requires that the non-performance (including delivery of non-conforming goods) be attributable to a cause for which the seller is responsible (i.e., fault, unless the seller can prove otherwise).

Conditions for Demanding a Price Reduction

While now a general remedy, the right to demand a price reduction is subject to certain conditions and procedural steps:

1. Delivery of Non-Conforming Goods

The foundational requirement is, of course, that the seller has delivered goods that do not conform to the contract in terms of their kind (e.g., delivering Model X when Model Y was ordered), quality (e.g., the goods are defective, damaged, or lack specified features), or quantity (e.g., delivering 90 units when 100 were ordered).

2. The "Cure First" Principle (Article 563, Paragraph 1)

Generally, a buyer cannot immediately demand a price reduction upon discovering a non-conformity. The law typically requires the buyer to first give the seller an opportunity to "cure" the problem. Article 563, Paragraph 1, states that if the delivered goods are non-conforming, the buyer must:

• Demand that the seller perform cure of the non-conformity (as provided under Article 562 – which includes repair, delivery of substitute goods, or delivery of any missing quantity).
• Set a reasonable period for the seller to complete this cure.

If the seller fails to perform the cure within this reasonable period, then the buyer can demand a reduction in the purchase price.

The rationale behind this "cure first" approach is to give the seller a chance to fulfill their contractual obligations correctly and to avoid premature price adjustments if the issue can be resolved to the buyer's satisfaction.

3. Exceptions: When Demanding Cure First is Not Required (Article 563, Paragraph 2)

The requirement to demand cure first is not absolute. Article 563, Paragraph 2, lists circumstances where the buyer can proceed directly to demanding a price reduction without a prior demand for cure. These are situations where seeking cure would be futile, impractical, or would not serve the buyer's legitimate interests:

• (a) If performance of cure is impossible: For example, if the goods are unique and have been irreparably damaged, or if conforming substitute goods are simply unavailable.
• (b) If the seller has clearly and definitively indicated their refusal to perform cure: If the seller unequivocally states they will not or cannot fix the problem.
• (c) If, due to the nature of the contract or a specific declaration by the parties, performance of cure by a particular date or within a particular period was essential, and the seller has failed to perform cure by that time: This applies to time-sensitive contracts where late cure is as good as no cure.
• (d) If it is otherwise clear from the circumstances that, even if the buyer were to demand cure, there is no prospect of the seller performing it in a way that would satisfy the buyer. This is a more general catch-all for situations where demanding cure would clearly be a pointless exercise.

If any of these conditions are met, the buyer can bypass the cure demand step and move directly to claiming a price reduction.

Calculating the Price Reduction: Proportionality is Key

Article 563, Paragraph 1, specifies that the buyer can demand a reduction of the price "in proportion to the degree of the non-conformity." This means the reduction isn't an arbitrary amount but should reflect how much less the non-conforming goods are worth compared to what was contracted for.

• For Quantity Shortfalls: Calculating a proportionate reduction is usually straightforward (e.g., if 10% of the quantity is missing, the price is reduced by 10%).
• For Quality or Kind Non-Conformities: This can be more complex. Determining the "degree of non-conformity" for a qualitative defect often involves:
  • Assessing the market value of the goods as delivered versus the market value they would have had if they had conformed to the contract.
  • Considering the cost of repair, if repair is possible and that cost reasonably reflects the diminution in value.
  • Evaluating the impact of the non-conformity on the usability of the goods for the buyer's intended purpose.

Legal commentary acknowledges these practical challenges in calculation for qualitative defects. It may require negotiation between the parties, or in disputed cases, expert evidence or valuation to establish the appropriate proportionate reduction. Before the direct right to price reduction for quality defects was generalized, similar outcomes were sometimes achieved via damage claims, often by calculating what the price would have been had the defect been known at the time of contracting. The new law provides a more direct legal basis for this adjustment, though the valuation itself can still be contentious.

Limitation: Non-Conformity Due to Buyer's Fault

A crucial limitation, found in Article 563, Paragraph 3, mirrors that for the right to demand cure: the buyer cannot demand a price reduction if the non-conformity is due to a cause attributable to the buyer. If the buyer's actions or omissions caused the goods to become non-conforming, they cannot then seek a discount from the seller for that self-inflicted issue.

Relationship with Other Buyer's Remedies (Article 564)

The right to demand a price reduction does not exist in a vacuum; it interacts with other remedies available to the buyer under Article 564:

• Damages: Even if a buyer successfully obtains a price reduction, this does not prevent them from also claiming damages for any additional losses they may have suffered as a consequence of the non-conformity. For example, a price reduction might compensate for the lower intrinsic value of the defective goods, but the buyer might still have incurred extra costs (e.g., expenses in dealing with the defect, lost profits from inability to use the goods as intended for a period) that could be claimable as damages. However, unlike price reduction, a claim for damages generally requires establishing the seller's attributable fault (Article 415). The amended Code distinguishes more clearly between price reduction (rebalancing value, no fault needed) and damages (covering other losses, fault generally needed).
• Termination of Contract: The right to a price reduction also coexists with the right to terminate the contract if the conditions for termination are met (e.g., the non-conformity is fundamental, or cure has failed and the remaining defect is not trivial). A buyer might choose price reduction if they want to keep the goods despite imperfections, or termination if the goods are largely unusable for their intended purpose.
• Cure: As mentioned, demanding cure is generally a precursor to demanding a price reduction. If the seller successfully cures the non-conformity, the basis for a price reduction related to that specific (now cured) defect would typically disappear. However, the buyer might still have claims for damages related to any delay or costs incurred during the cure process.

An Illustrative Example from Real Estate (adapted from PDF):
Suppose Buyer B purchases a building from Seller A. After taking possession, B discovers a leaky roof and doors that do not function properly (qualitative non-conformities). B demands that A cure these issues. If A fails to perform the necessary repairs within a reasonable time, B can then demand a reduction in the building's purchase price. This reduction would ideally correspond to the cost of repairing the roof and doors, or the diminution in the building's value due to these defects.

A Note on Ancillary Costs (e.g., Investigation Costs)

An interesting practical question, touched upon in legal commentary, concerns costs incurred by the buyer merely to determine the extent of non-conformity or the appropriate amount of price reduction (e.g., the cost of an expert inspection or survey, such as for investigating suspected soil contamination in a land sale). Can these investigation costs be directly included in the price reduction itself, or must they be claimed separately as damages (which would then require proving the seller's fault)? The commentary suggests that under the new framework, which focuses price reduction on the diminished value of the goods themselves, such ancillary investigation costs might not be directly recoverable as part of the price reduction. Their recovery might instead depend on a successful claim for damages, necessitating proof of the seller's attributable fault for the underlying non-conformity. This could represent a subtle shift from how such costs were sometimes treated under the older, less differentiated kashi tanpo regime.

Conclusion

The expanded and clarified right to demand a price reduction under Article 563 of the amended Japanese Civil Code is a significant pro-buyer development in sales law. It provides a flexible and often more practical remedy than outright termination when goods are non-conforming but still of some use to the buyer. The fact that this right can be invoked without needing to prove the seller's fault makes it a more accessible option for rebalancing the contractual exchange when the goods delivered fall short of what was promised.

However, businesses should be mindful of the procedural steps, particularly the general requirement to demand cure from the seller first, and the exceptions to this rule. Calculating the appropriate proportionate reduction, especially for defects in quality or kind, can also present practical challenges. Nevertheless, the availability of this remedy, alongside the rights to demand cure, damages, and termination, equips buyers in Japan with a more comprehensive and modern set of tools to address situations where purchased goods do not meet contractual expectations.