Short answer: Yes — but only where the supplier breach reaches the threshold of “fundamental breach” (Article 312.4(b) of the 2005 Commercial Law) or “serious breach” (Article 423 of the 2015 Civil Code), i.e. depriving the buyer of what it was entitled to expect under the contract. “Repeated substandard deliveries” are not automatically a fundamental breach — each delivery and the link between deliveries must be assessed under Article 313 of the Commercial Law for installment-delivery contracts. Before cancelling the whole contract, the buyer has lighter remedies to deploy first.
1. Step 1: reject the defective goods and demand cure
Article 39 of the Commercial Law defines goods non-conforming with the contract; Article 39.2 gives the buyer the right to reject non-conforming goods. The seller is liable for defects existing before the passing of risk (even if discovered later) and defects arising afterwards if caused by the seller breach — unless the buyer knew or should have known of the defects at contracting (Article 40).
The seller may cure (deliver the missing part, replace goods, repair defects) within the remaining delivery period where the contract only sets a delivery deadline; where cure would cause unreasonable disadvantage or cost to the buyer, the buyer may demand cure (Article 41). At this step, Article 297 allows the aggrieved party to compel proper performance: require elimination of defects or delivery of substitute goods (no substitution by money or goods of a different type without the aggrieved party consent); the aggrieved party may buy substitute goods or repair defects itself, with the breaching party paying the price difference and reasonable actual costs.
2. Step 2: contractual penalty and damages
Penalty: the penalty level is agreed by the parties, capped at 8% of the value of the breached contractual obligation (Article 301). Note: it applies only where the contract contains a penalty clause — no clause, no 8%.
Damages: covering actual, direct losses and the direct profits the aggrieved party would have earned (Article 302). Combined with Article 297.3: costs of substitute purchases and self-repair count as damages.
A point to clarify — “price reduction” is not a statutory remedy: the 2005 Commercial Law provides no standalone “price reduction” sanction. In practice the buyer may negotiate a price reduction with the seller, or use compelled performance (Article 297) and claim the price difference when buying substitutes (Articles 297.3 and 302). Do not present price reduction as an automatic statutory right.
3. Step 3: cancelling the whole contract — only at the threshold
Fundamental breach (Commercial Law): Article 3.13 defines fundamental breach as a breach causing damage to the other party to the extent of depriving it of what it was entitled to expect under the contract. Article 312.4(b) allows the cancellation remedy where a party fundamentally breaches its contractual obligations (or where breach is an agreed cancellation condition).
Installment-delivery contracts (Article 313): the decisive provision for “repeated bad deliveries”: a fundamental breach in one installment → cancel that installment; grounds to conclude fundamental breach will occur in future installments → cancel the future installments (within a reasonable time); installments so closely linked that delivered goods cannot be used for their purpose → cancel both performed and future parts.
Serious breach (Civil Code): Article 423 allows a party to cancel the contract where the other party seriously breaches (failing to perform properly to the point the other party cannot achieve the contract purpose); the cancelling party must notify immediately. For sale-of-assets contracts specifically, Article 437.2(c) gives the buyer the right to cancel and claim damages where the seller delivers goods not conforming to the agreed quantity or quality.
Terminology (keep consistent): “cancellation of the contract” (Article 312 Commercial Law / Article 423 Civil Code) renders the contract ineffective from the time of conclusion, with restitution of what was received; agreements on penalty, damages and dispute resolution remain effective (Article 427). This differs from “unilateral termination of contract performance” (Article 428 Civil Code) — available on serious breach by the other party, parties agreement, or as provided by law. Do not mix the two terms.
4. Reverse-risk warning: cancelling without grounds makes the buyer the breaching party
Cancellation without grounds renders the cancelling party the breaching party (Article 427.5); unilateral termination without grounds likewise identifies the terminating party as the breaching party, liable for damages (Article 428). Before declaring the whole contract cancelled, the buyer must be sure the fundamental/serious breach threshold is met on the evidence.
5. Evidence checklist and limitation period
- Delivery and acceptance records for each installment (documenting quality defects).
- Independent quality inspection results.
- Written notices of breach and cure demands sent to the seller (proving the seller was given a cure opportunity under Article 41).
- Note the 2-year limitation period for commercial dispute lawsuits from the time the lawful rights and interests are infringed (Article 319).
Frequently asked questions
Three consecutive substandard deliveries — can the whole contract be cancelled? Not necessarily. Assess under Article 313: whether past installments were fundamental breaches, whether there are grounds to conclude future installments will also be fundamental breaches, and whether installments are so closely linked that delivered goods cannot serve their purpose. Specific advice on the evidence of each case is needed.
Can the buyer demand a price reduction? The law provides no standalone “price reduction” remedy; the buyer may negotiate a reduction with the seller, or claim the price difference when buying substitute goods (Articles 297.3, 302).
How do contract cancellation and unilateral termination of performance differ? Cancellation (Article 423 Civil Code) renders the contract ineffective from conclusion, with restitution; unilateral termination (Article 428) ends performance from the effective time of termination. They are distinct institutions and must not be confused.
In a quality dispute with a supplier or need a review of your sale contract termination clauses? Reach us via the Contact page of FLAT Law Firm.
The information in this article is for reference only and does not constitute legal advice.
The legal content of this article is reviewed by the AI Legal Council of FLAT and submitted to the owner for approval before publication; it is not an opinion of a licensed lawyer and does not replace legal advice for specific cases.