1. Introduction – Civil Code and Commercial Code in relation to warranty clause for products –

If you, companies outside of Japan, transact business with Japanese companies, you might need to refer to Japanese law, especially when the contract is governed in Japanese law.

Today, I am focusing on a warranty clause in Sale and Purchase Agreement which is governed by Japanese law (Civil Code and Commercial Code).

Here below is Civil Code and Commercial Code related to a warranty for seller’s products.

(1)【Abstract of Civil Code】

<Buyer’s Right to Demand Cure>

Article 562　(1)　If the subject matter delivered to the buyer does not conform to the terms of the contract with respect to the kind, quality or quantity, the buyer may demand that the seller cure the non-conformity of performance by repairing the subject matter, delivering the substitute or delivering the replenishment; provided, however, that the seller may cure the non-conformity of performance by a method that is different from the method demanded by the buyer if it does not impose any undue burden on the buyer.

(2)　If the non-conformity referred to in the preceding paragraph is due to grounds attributable to the buyer, the buyer may not demand that the seller cure the non-conformity of performance under the provisions of that paragraph.

<Buyer’s Right to Demand Reduction of Price>

Article 563　(1)　In the case prescribed in the main clause of paragraph (1) of the preceding Article, if the buyer demands that the seller cure the non-conformity of performance by specifying a reasonable period of time but the non-conformity of performance is not cured within that period, the buyer may request a reduction of the price in proportion to the degree of non-conformity.

(2)　Notwithstanding the provisions of the preceding paragraph, in the following cases, a buyer in good faith may request a reduction of the price immediately without making demand referred to in that paragraph:

(i)　if it is impossible to cure the non-conformity of performance;

(ii)　if the seller unequivocally manifests the intention to refuse to cure the non-conformity of performance;

(iii)　if, due to the nature of the contract or a manifestation of intention by the parties, the purpose of the contract is unable to be achieved unless the performance is carried out at a specific time on a specific date or within a certain period of time, and the seller fails to cure the non-conformity of the performance at the time or before the period expires; or

(iv)　beyond the cases set forth in the preceding items, it is obvious that the seller is unlikely to cure the non-conformity of the performance even if the buyer makes the demand referred to in the preceding paragraph.

(3)　If the non-conformity referred to in paragraph (1) is due to grounds attributable to the buyer, the buyer may not request a reduction of the price under the provisions of the preceding two paragraphs.

<Claim for Compensation for Loss or Damage and Exercise of Right to Cancel by Buyer>

Article 564　The provisions of the preceding two Articles do not preclude the buyer from claiming compensation for loss or damage pursuant to the provisions of Article 415 or exercising the right to cancel pursuant to the provisions of Articles 541 and 542.

<Limitation on Period of Warranty with Respect to Kind or Quality of Subject Matter>

Article 566　If the subject matter delivered by the seller to the buyer does not conform to the terms of the contract with respect to the kind or quality, and the buyer fails to notify the seller of the non-conformity within one year from the time when the buyer becomes aware of it, the buyer may not demand cure of the non-conformity of performance, demand a reduction of the price, claim compensation for loss or damage, or cancel the contract, on the grounds of the non-conformity; provided, however, that this does not apply if the seller knew or did not know due to gross negligence the non-conformity at the time of the delivery.

(2)【Abstract of Commercial Code】

<Inspection of Property by Buyer; Notice of Non-conformity>

Article 526　(1)　In a sales transaction between Merchants, upon receiving the object of the sales transaction the buyer must inspect it without delay.

(2)　In a case prescribed in the preceding paragraph, if the buyer, as a result of the inspection under the provisions of that paragraph, discovers non-conformity with the terms of the contract with respect to the kind, quality or quantity of the object of the sales transaction, it may not cure the non-conformity of performance, demand reduction of price, cancel the contract nor claim for compensation on the grounds of the non-conformity unless it immediately issues notice of the non-conformity to the seller. The same applies if the object of a sales transaction has non-conformity with the terms of the contract with respect to the kind or quality that is not immediately obvious which the buyer discovers within six months.

(3)　The provisions of the preceding paragraph do not apply if the seller had knowledge of the non-conformity.

■NOTE: If you are a company or any other commercial organizations, or a independent contractor, and enter into an agreement with Japanese company, you need to follow Commercial Code as well as Civil Code if the contract is governed by Japanese law.

2. Tips for drafting or reviewing warranty clause.

When you draft or review a commercial contract including warranty clause for products, you need to see the relating Civil Code and Commercial Code as we described above 1 firstly.

Secondly, because the articles in contracts related to such laws can be altered by agreement between parties, you should consider describing clauses which revise the contents of the articles of the laws if necessary.

■ For example (1)

According to Commercial Code Article 526 (1) and (2), a buyer should inspect a product delivered by a seller without delay and notify a seller of non-conformity with the terms of the contract if any.

However, the “without delay” set forth in the Article might be too abstract to clarify until when a buyer should finish inspection and notification, so it might lead to dispute whether a buyer do that with delay.

With considering such risk, we tend to describe particular days, like “within five business days” in contracts.

■ For example (2)

According to Civil Code Article 563 (1), a buyer can only demand reduction of prices after a buyer demands that a seller cures the non-conformity of performance by specifying a reasonable period of time, but the non-conformity of performance is not cured within that period by a seller.

In view of a buyer, it would be reasonable to be able to demand reduction of prices without such prior notification. In other word, it would be better for a buyer to choose, at its sole discretion, to demand such reduction or demand to cure non-conformity.

A buyer, therefore, tends to revise the Article 563(1) in a contract in order to create such buyer’s choices.

■ For example (3)

It would be beneficial for a buyer to demand, at buyer’s sole discretion, how to cure non-conformity from a seller.

But according to the proviso of Civil Code Article 562(1), a seller may cure the non-conformity of performance by a method that is different from the method demanded by a buyer if it does not impose any undue burden on a buyer.

A buyer, therefore, sometime negotiate with a seller on inserting a clause which is that “The proviso of Civil Code Article 562(1) does not apply to the agreement” in a contract.

There are a lot of other important points regarding sale and purchase agreement including warranty clause for products, so I will introduce them in this column.

Lawyer Ken Takahashi

Email: k-takahashi@kensei-law.jp

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