Abstract:Chinese law has simple stipulations about price reduction rule. There is misunderstanding about the meaning of that rule i. e. treating the value difference between nonconforming performance the obligor provided and conforming performance as the amount that should be reduced from the price. Substance of this kind of price reduction is damages for loss in value as one form of damages for breach of contract. On the other hand price reduction as independent liability form for breach of contract means that reduced price equals contract price multiplies value ratio of nonconforming and conforming performance. The justification of price reduction rule is in case that the obligor's performance is nonconforming based on consideration of fairness principle and synallagma between performance and reciprocal performance the obligee need not provide his reciprocal performance as promised but rather can diminish his performance. While reducing price value ratio of nonconforming and conforming performance should be taken into account and original contract exchange relationship should be maintained. Situations in which price reduction rule applies mainly are liability of price reduction exists while liability of damages for breach of contract does not exist both these liability forms exist but the amount of price reduction is higher than the amount of damages. The premises for application of price reduction rule are the object is nonconforming (e. g., the object provided by the obligor has defect of thing or defect of right the obligor does not deliver accessory thing or fruits), the obligee's reciprocal performance is divisible, and the obligee has informed the obligor of defect. It should be emphasized that , for the sake of protecting the obligor's interest in the counter-party's performance sufficiently and maintaining the transaction, price reduction rule should be put in an intermediate position in the remedies system. In terms of application, it is inferior to supplementary performance, but superior to termination, and the obligee can choose between price reduction and damages. Calculation of price reduction in fact is ascertaining reduced price according to three factors , among which contract price is usually definite. If there is relative market, it is also easy to ascertain the value of non-defective and defective objects. In the opposite situation, the value of non-defective and defective objects can only be ascertained by evaluation. Relevant time of market price should be the time of contracting and the main reason is whether the contract is worthwhile can only be decided by comparing contract price and the object value at the time of contracting. Relevant place for market price should make sense for determining whether the transaction is worthwhile for the obligee thus it should be the place of contracting in general. If that place is pointless for determining whether the transaction is worthwhile, another appropriate place should prevail. Concerning the value of non-defective object and the value difference between defective and non- defective objects, some scholars advocate two presumptions, i. e., the value of non-defective object equals purchasing price, value difference between defective and non-defective object equals expenditures that a buyer may pay for repairing defective object. The former presumption is sound , while the second is flawed because it may confound price reduction and damages for breach of contract and help the obligee evade limits of damages. For convenience of cleaning up debts right of price reduction should be identified as formulation right. In this way, the obligee is benefited in various ways: the legal proceedings of exercising rights is simple , price reduction occurs earlier, the obligor who does not give back extra money should pay interest for delayed performance. The obligee?s declaration of price reduction should convey intention of price reduction definitely, and signify calculation basis.