Keeping Defective Goods from a Chinese Supplier: How to Calculate a Price Reduction
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A foreign buyer may be able to keep nonconforming goods from a Chinese supplier and reduce the price, but a repair quote or an arbitrary percentage is not automatically the correct reduction. Identify the applicable sales rules, preserve the defect notice and valuation evidence, and distinguish the reduced price from additional damages.
This guide concerns business-to-business goods purchases from mainland Chinese suppliers. It does not address consumer returns, product safety permissions or a right to sell unsafe goods. Legal sources checked on 14 October 2026.
1. Decide whether the claim keeps the sale in place
Price reduction adjusts what is payable for the goods retained. It differs from ending the contract and exchanging the goods for repayment, and from setting off a separate damages debt against an invoice. See the related guide to quality deductions and set-off. Keeping or using goods does not by itself establish an agreed discount; a signed settlement or acceptance document may also affect the remaining claims.
First assess whether the United Nations Convention on Contracts for the International Sale of Goods (CISG) applies. Check the parties’ places of business, the transaction, contractual exclusions or variations and relevant State declarations. China has been a party since 1 January 1988; the mainland declaration concerning Article 1(1)(b) requires attention. A choice of Chinese law does not by itself necessarily exclude the CISG. Questions governed by domestic law require separate analysis.
2. Under CISG Article 50, compare values at delivery
Article 50 allows a price reduction for nonconforming goods whether or not the price has already been paid. Unlike avoidance, this remedy does not require proof of a fundamental breach. Subject to its conditions and any relevant contractual variation, the calculation is proportional:
Reduced price = contract price × value of the goods actually delivered ÷ value of conforming goods, with both values assessed at the time of delivery. The reduction is the contract price minus that reduced price. Use comparable valuation assumptions; later market changes and a buyer’s desired resale margin do not automatically measure the contractual shortfall.
Illustration only, not a reported case: assume the affected goods have a contract price of USD 100,000. At delivery, conforming goods would be worth USD 120,000 and the delivered defective goods USD 90,000. The reduced price is USD 75,000 and the reduction USD 25,000. It is not automatically the USD 30,000 difference between the two market values. These values must be proved in a real claim.
On those simplified assumptions, if USD 40,000 has been paid, the balance at the reduced price would be USD 35,000. If the original USD 100,000 has been paid, the claimed repayment would be USD 25,000. This illustration excludes other credits, interest and damages and assumes the reduction is legally established. A disputed calculation does not make every withheld amount justified.
3. Preserve notice rights and address a proper cure
Price reduction does not bypass inspection and defect-notice rules. CISG Articles 38 and 39 require examination and a notice specifying the nonconformity within the applicable periods. Article 40 concerns undisclosed facts the seller knew or could not have been unaware of. Article 44 can preserve price reduction where there is a reasonable excuse for missing Article 39(1)’s notice requirement; it does not override Article 39(2)’s outer limit. Do not assume that a general complaint or ongoing negotiations preserve every defect claim. See the inspection and notice guide.
Article 50 also excludes price reduction where the seller cures in accordance with Article 37 or 48, or the buyer refuses performance offered in accordance with those provisions. An indefinite repair promise is not the same as a compliant cure. Review the proposal’s timing, practicality, inconvenience and cost arrangements, and respond with reasons. The repair-offer guide addresses that assessment. Do not combine a full successful cure with a reduction calculated as though the original defect remained.
4. Where PRC domestic sales law governs, justify the remedy and amount
Article 617 of the PRC Civil Code refers nonconforming quality to Articles 582–584. Article 582 first looks to the parties’ agreed liability arrangement. If the remedy is absent or unclear and cannot be determined under Article 510, the injured party may reasonably choose a remedy, including price reduction, considering the goods and the loss. Article 582 does not itself prescribe the CISG Article 50 formula.
Present the contractual quality standard, the established defect, its effect on the goods’ value or use, and a supported calculation. A percentage suggested in negotiations is not automatically a statutory entitlement. Inspection, notice and guarantee arrangements under Articles 620–623 must also be examined. Article 583 allows compensation for remaining losses after performance or remedial measures; recoverability and amount still require analysis, including Article 584 and mitigation under Article 591.
5. Build a valuation file and prevent overlapping recovery
| Evidence | What it should establish |
|---|---|
| Contract and affected goods | Agreed specifications, price allocation, shipment and batch identities, and the supported scope of the defect. |
| Condition at delivery | Inspection records, retained samples and logistics or storage records distinguishing an original defect from later damage. |
| Comparable values | Contemporaneous quotes, market transactions or a reasoned valuation using consistent dates, goods, quantities, currency and commercial terms. |
| Payments and other claims | Money paid, credits, repair proposals and costs, and separately itemised losses with any overlap identified. |
A defect rate in a sample is not automatically the same percentage loss in the value of the entire shipment. Explain sampling, affected quantities and price allocation. A later distressed resale price or repair estimate may be relevant evidence, but does not automatically establish both delivery-date values. Explain adjustments and preserve the underlying records; an expert’s conclusion also needs a defensible method.
Under CISG Articles 74 and 77, additional damages depend on causation, foreseeability and mitigation. Price reduction may coexist with a supported claim for a different loss, but do not count the same diminished value again as repair costs or damages. Separate each item and explain what remains uncompensated. Product safety and resale obligations continue to require their own assessment.
6. Make a precise demand and define any settlement
Identify the seller, order, affected goods, legal basis, valuation date, calculation, previous payments and amount now sought. Attach the available evidence and explain any uncertainty rather than presenting an unverified figure as final. A negotiated credit should specify the invoices, whether it reduces an unpaid balance or requires repayment, the currency and deadline, and the scope and conditions of any release. A credit note alone does not prove that a promised repayment arrived.
For an initial discussion, provide the parties’ legal names, contract price and currency, amount paid, delivery and notice dates, goods’ location, defect evidence, proposed cure and the desired outcome. The contract, notices and calculation can then be reviewed to discuss negotiation, arbitration or litigation as appropriate. Service scope and fees are confirmed before engagement; sending documents does not itself create a retainer or guarantee recovery.
See cross-border business legal services and contact Lawyer Pan, or email panjianxing46@gmail.com.
Official sources: CISG text, Articles 1, 6, 38–40, 44, 50, 74 and 77; UN depositary status and declarations; PRC Civil Code, Articles 582–584, 591, 617 and 620–623 (effective 1 January 2021).
General legal information, not advice on an individual transaction. The cover is an AI-generated conceptual illustration, not a photograph of an actual client, case or shipment.
Jianxing Pan, Lawyer and Partner, Beijing Chang’an Law Firm · Beijing / Shenzhen.
