10 Major Revisions to the Japanese Civil Code
Part Three – Defects in Purchased Goods

By Shinya Yoshida and Peter Cassidy

This part of our series on revisions to Japan’s Civil Code will discuss what happens when there’s a problem in goods that are delivered under a contract of sale. The revised Civil Code contains major changes to interpretations and several major revisions to the law concerning sales contracts. The main feature is that under the revised Code, if there is a problem with the type, quality or quantity of the subject matter, the buyer’s options are no longer limited to compensation for damages or cancellation of the contract. Instead, it will be also possible to make a claim for a reduction of the purchase price or “subsequent completion” (i.e. repair or delivery of a replacement), regardless of whether the subject matter is an “identified good” or “unidentified good”.

(1) Current position

Sales contracts are currently divided into contracts for “identified goods”, where the contract deals with a specific item (e.g. real estate, second hand goods), and “unidentified goods” that are generic, substitutable items. The Civil Code’s warranty against defects applies to hidden defects in identified goods, but it is only applied to unidentified goods in exceptional circumstances. Therefore, in the case of unidentified goods, the buyer’s options are generally cancellation of the contract or a claim for compensation, where the scope of compensation is limited to an amount that corresponds to a reduction of the purchase price. In regard to identified goods, a claim for delivery of a replacement item cannot be made due to the major premise that identified goods cannot be substituted, and claims for repair cannot be made either. Also, claims for a reduction of the purchase price will only be recognised when there is a shortage in the quantity.

(2) Revisions to the buyer’s options

Under the revised Civil Code, the buyer has four types of claim that will be recognised if there is a problem with the type, quality or quantity of the subject matter, regardless of whether the subject matter is an identified or unidentified good. The first type to consider is a claim for “subsequent completion” (revised Article 562), which is a claim for the repair of the subject item, delivery of a substitute item, or delivery of the deficient portion if there is a shortage in quantity. It should be noted that the seller can perform subsequent completion in a manner that is different from the buyer’s claim if it does not unreasonably burden the buyer.

The second type of claim is a reduction of the purchase price (revised Article 563). In principle, it is necessary for the buyer to submit a demand to the seller for subsequent completion to be performed with a reasonable period; if the seller does not respond to the demand then the buyer can make a claim for a reduction of the purchase price that corresponds to the level of nonconformity with the contract. As an exception, a claim for reduction of the purchase price can be made without a demand in the following circumstances:

  1. when subsequent performance is impossible
  2. when the seller has indicated their intention to refuse to perform subsequent performance
  3. when the nature of the contract requires performance to be carried out at a specific time and date or within a certain period, and that specific time or certain period lapses without the seller performing the obligation
  4. when it is clear that the buyer is unlikely to receive subsequent performance even if they make a demand

The last two claims are for cancellation of the contract and compensation for damages (revised Article 564). The scope of the right to compensation for damages has been expanded to include the benefit of performance, as is the case for general claims for compensation. Each of these types of claim require the buyer to give notice to the seller within 1 year of the buyer becoming aware of the nonconformity in the subject matter. The time limit itself has not been changed, but it has been revised so that notice to the seller is sufficient, where under the current Code the buyer must submit a claim. However, this time limit will not apply if the seller was aware of the nonconformity at the time of delivery or was unaware due to gross negligence.

(3) Relationship with the current Article 526 of the Commercial Code

It is necessary to be aware that Article 526 of the Commercial Code will apply to commercial transactions subject to the Commercial Code. In a sales transaction between merchants under the Commercial Code, the buyer must inspect the item without delay after receiving delivery of it and immediately notify the seller if they discover any defects or shortage in quantity. However, if the nature of a defect in the delivered item means it cannot be identified immediately, it is necessary to notify the seller within 6 months of receipt of the item. If this inspection and notification is not performed, the defect will not be able to give rise to a claim for cancellation of the contract, compensation for loss or a reduction of the purchase price. The applicability of this Commercial Code provision is very easy to overlook so caution is required.

(4) Transfer of risk for loss or damage of the subject matter

The transfer of risk refers to the issue of which party should be responsible for the risk of loss or damage to the subject matter that may occur through no fault of either party. Under the revised Civil Code, risk transfers to the buyer upon delivery of the subject matter. In principle, a buyer cannot make a claim (for subsequent performance, reduction of purchase price, compensation or cancellation) based on loss or damage if the loss or damage occurs after delivery of the subject matter. However, there is an exception if the loss or damage is the seller’s fault. This principle also applies if the buyer does not accept delivery of the goods provided by the seller.