Civil Code Revision – Difference between Liability for Defects and Liability for Nonconformity to Contract
The revised Civil Code came into effect on April 1, 2020. With regard to sales and contracting, the liability of the seller/contractor has changed from “liability for defects” to “liability for nonconformity to contract”. What differences have resulted from this change? This column explains the difference between “liability for defects” and “liability for nonconformance with contract.
Overall picture
With the change from “liability for defects” to “liability for nonconformity to contract,” the buyer now has more options for the right to make a claim, the scope of damages that can be claimed has been expanded, the burden of the period for exercising rights has been reduced, and so on. Therefore, this amendment is considered to be an advantage for the buyer/ordering party, but on the other hand, it is considered to be a disadvantage for the seller/contractor, since the content of the amendment has increased their liability. Below is a specific explanation of the difference between “liability for defects” and “liability for nonconformity to contract” with respect to sales and contract, respectively.
Concerning Sales and Purchases
The differences between “liability for defects” and “liability for nonconformance with contract” for sales and purchases are summarized in the table below.
| Liability for defects | Liability for breach of contract | |
|---|---|---|
| Applicable subject matter | Specified object (object designated by the parties focusing on the individuality of the object) with a “hidden” defect | As long as the object does not conform to the contents of the contract, there are no restrictions on the object to be covered |
| Buyer’s claimable rights | Cancellation of contract, claim for damages | Cancellation of contract, claim for damages Claim for completion of performance Claim for reduction of the price |
| Necessity of reasons attributable to the seller for compensation for damages | Not necessary | Necessary |
| Scope of damages | Profit from reliance (expenses spent in the belief that the contract was valid and consequently wasted (expenses to return the buyer to the state of affairs prior to the conclusion of the contract)) | the buyer would have obtained if the contract had been performed) |
| Period for exercising the right to pursue liability | The right must be exercised (manifestation of intention to pursue liability) within one year from the time when the buyer became aware of the defect | The buyer should give notice of nonconformity within one year from the time when the buyer became aware of the nonconformity |
Subject Matter
The subject matter of a sale and purchase subject to liability for defects was considered to be a specific object (an object designated by the parties focusing on the individuality of the object) with a “hidden” defect. In contrast, there is no longer such a limitation on the subject matter of a sale subject to liability for breach of contract.
Buyer’s Claimable Rights
Under liability for defects, the buyer could, in principle, only cancel the contract or claim damages against the seller. In contrast, under liability for nonconformity to contract, in addition to rescission of the contract and a claim for damages, the buyer may now demand that the subject matter be repaired, that performance be completed by delivery of a substitute or by delivery of a deficiency, or that the price be reduced. Since the options available to the buyer have been expanded, this is considered to be beneficial to the buyer in this respect.
Necessity of the Seller’s Attributable Grounds for Damages
Under the liability for defects, the seller was considered liable for damages even if he/she was not negligent. In contrast, under liability for breach of contract, the seller is liable for damages only if the seller is negligent. However, under liability for breach of contract, even if the seller is not negligent, the seller must respond to a demand for completion of performance, a demand for reduction of the price, or cancellation of the contract. Therefore, the fact that the seller is not liable for damages in the case of no-fault does not seem to be considered a disadvantage for the buyer (or an advantage for the seller).
Scope of damages
Under the liability for defects, the scope of damages was limited only to the benefit of reliance (the cost of restoring the buyer to the condition before the contract was concluded), which was spent in the belief that the contract was valid and was consequently wasted. In contrast, under liability for breach of contract, the scope of damages now includes not only reliance profits, but also performance profits (profits that the buyer would have earned if the contract had been performed (e.g., resale profits)). The change to liability for nonconformity to contract has expanded the scope of the seller’s claim for damages against the buyer, which is considered a benefit to the buyer and a disadvantage to the seller in this respect.
Period for Exercising Right to Pursue Liability
In the case of liability for defects, the claim must be exercised within one year from the time when the buyer became aware of the defect (manifestation of intention to claim for pursuit of liability). In contrast, under liability for nonconformity to contract, if the buyer notified the nonconformity within one year from the time when he/she became aware of the nonconformity, it is possible to make a specific claim for pursuit of liability afterwards (however, if the right to pursue the liability is not exercised within 5 years from the time when he/she became aware of the nonconformity or within 10 years from the time of delivery, the right to pursue the liability shall be extinguished. The change to liability for nonconformity to the contract is considered to be an advantage for the buyer and a disadvantage for the seller in this respect, since the burden for the buyer to be able to pursue liability is considered to have been reduced.
Regarding Contracts
The differences between “liability for defects” and “liability for nonconformance with contract” for contracting are summarized in the table below.
| Liability for defects | Liability for breach of contract | |
|---|---|---|
| Limitation on cancellation of contract | Yes | No |
| Right to demand reduction of the price | None | Yes |
| Period for exercising right to pursue liability | In principle, a claim for warranty must be made within one year from the time of delivery of the object of work (exception: 5 years for buildings and other structures, 10 years for structures) | It is sufficient if the Buyer gives notice to that effect within one year from the time when he/she becomes aware of nonconformity |
Limitation on Cancellation of Contract
Under the liability for defects, it was said that the contract could not be cancelled with respect to buildings and other structures on the land. In contrast, under the liability for nonconformity to contract, there is no such limitation on cancellation of the contract.
Existence or non-existence of right to claim reduction of price
Under the liability for defects, a claim for repair of defects, a claim for compensation for damages, and rescission of the contract are permitted under the regulations, but there is no provision for a claim for reduction of the price. In contrast, the liability for nonconformity to contract provides for a claim for reduction of the price in addition to a claim for completion of performance such as repair of the subject matter, a claim for compensation for damages, and rescission of the contract. This is considered to be beneficial to the buyer in this respect, since the buyer now has a wider range of options in terms of the rights available to him.
Period for Exercising Right to Pursue Liability
In the case of liability for defects, the claim must be exercised within one year from the time when the buyer receives delivery of the subject matter (manifestation of intention to pursue the liability). In contrast, in the case of liability for nonconformity to contract, if the buyer notified the nonconformity within one year from the time when he/she became aware of the nonconformity, it is possible to make a specific claim for pursuit of liability afterwards (However, if the right to pursue liability is not exercised within 5 years from the time of knowledge of the nonconformity or 10 years from the time of delivery, it is subject to the statute of limitations.) The change to liability for nonconformity to the contract is considered to be an advantage for the buyer and a disadvantage for the seller in this respect, since the burden for the buyer to be able to pursue the liability is considered to have been reduced.
Legal Provisions and Voluntarily Defined Contract Provisions
As mentioned above, the change to liability for nonconformity to contract is considered to have resulted in advantages for the buyer/ordering party and disadvantages for the seller/contractor, but this occurs when the provisions of the Civil Code are applied. If the seller/contractor is in the position of the seller/contractor, it is possible to take measures to reduce the disadvantages for the seller/contractor by separately excluding the application of the provisions of the Civil Code between the parties to the contract and stipulating provisions for rights and obligations that differ from the Civil Code.
We review and confirm various types of contracts in accordance with the revised Civil Code. Please feel free to contact us if you have any questions about whether or not it is acceptable to enter into a contract based on the content of the contract presented by your business partner, or if you have any concerns about the drafting of contracts, etc.
