- Czech law (in particular the Civil Code) distinguishes between:
- Category 1 – liability for defects (which may exist at the time of transfer of risk and are based on criteria such as quality, amount and manner of performance as agreed between the parties or as it is appropriate or as it is customary); and
- Category 2 – liability for quality (i.e. absence of defects and/or presence of certain features) guaranteed for a certain period of time after the delivery – the warranty.
- It is important to distinguish between the above two categories since in B2B contracts the purchaser has right to claim defects existing at the moment of transfer of risk whereas a warranty is only optional and exists only if the seller provides it (as a unilateral declaration or mutual agreement between the parties regarding quality existing for a certain period of time).
- The leading principle (especially in B2B contracts) is the autonomy of will. Parties to a contract can autonomously adjust the liability for defects, warranty or damage. However, even in B2B relationships, such an arrangement could be invalid if such limitation or exclusion contravenes with the general principles of the Civil Code such as the principle of good morals, equivalence or laesio enormis. This leading principle, however, does not apply fully in B2C in contrast to the statutory protection of the consumer against the limitation or extinction of rights from liability for defects.
- As mentioned in the general remarks above, a defect is an imperfection in the physical substance of the sold goods. This defect may be characterised as a departure from particular standards regarding the characteristics, quality, quantity and the manner of production that are crucial for achieving the purpose the goods are to be used for.
- A defect is material (in Czech: podstatné porušení smlouvy) if it is a breach of a contract to the extent the breaching party upon conclusion of the contract knew or should have known that the other party would not have concluded the contract had it foreseen such a breach; in other cases, a breach is presumed not to be of a material/fundamental nature.
- The parties are free to expressly determine in a contract what they consider as a material breach in order to avoid any misunderstandings or future disputes.
A legal defect (právní vada) is a breach of a contract by the seller where the delivered goods are limited by the rights of third parties (i.e. not free of encumbrances etc.).
Rights and Remedies of Purchaser
The rights to remedy a defect vary depending on whether the breach is material or not.
If defective performance constitutes a material breach of the contract, the purchaser is entitled to choose one of the following:
- Removal of the defect by having new defect-free goods or the missing goods supplied,
- Removal of the defect by having the goods repaired,
- A reasonable reduction of the purchase price, or
- Withdrawal from the contract.
If a defective performance constitutes a breach of contract which is not material the purchaser has the right to
- have the defects removed, or
- a reasonable reduction of the purchase price.
These rights apply to the same extent for defects existing at the transfer of risk as well as for defects which occur later and which are covered by a warranty.
Subsequent performance is the removal of defects (repair, provision of missing goods and provision of new goods). These claims are not cumulative (i.e. one option excludes the other).
Right to Choose Subsequent Performance
The purchaser informs the seller of its choice of subsequent performance when notifying the seller of the defect or without undue delay after notification. The purchaser may not change its choice without the consent of the seller; this does not apply if the purchaser requested the repair of a defect which proves to be irreparable. Limitation of the right to choose only certain type of subsequent performance is generally deemed permissible in individual contracts or GTCs. The options are usually specified in a claims handling procedure of the seller.
Costs of Subsequent Performance
- The purchaser is entitled to reimbursement of expenses incurred. However, parties to a B2B supply contract are free to agree otherwise.
- In contracts vis-à-vis consumers and as a rule in GTCs, any restrictions or limitations are generally invalid.
Conditions for Claims for Damages
- Claims for damages are subject to the provision of the Civil Code regulating breach of contractual duties. Such liability for damage is objective, i.e. irrespective of the culpability.
- However, the seller may waive the requirement for compensation if it proves that an unpredictable and insurmountable obstacle which occurred independent of its will has prevented it from fulfilling the original contractual obligation.
Extent of Claims for Damages/Limitation of Liability
- The statutory reimbursement of expenses incurred while exercising this right may consist of costs of inspection and verification of defects, costs of transportation of goods, obtaining an expert opinion, etc.
- Claims normally include indirect damage, if such is not expressly excluded. If a breach of the contract is caused by circumstances which are extraordinary, insuperable and independent of the breaching party’s will, such party would not be liable (if it proves such circumstances).
- Limitation and exclusion of warranty rights and claims for damages is possible within the following restrictions:
- It is possible to limit liability for damage in a contract or GTCs concluded between companies. However, even in B2B relations it is not possible to limit liability for damage caused intentionally or by gross negligence.
- Any restriction or exclusion of consumer rights to remedy or compensation agreed prior to the occurrence of a defect (either based on a unilateral statement by the seller or a mutual agreement between the seller and the consumer or purchaser) is not allowed and such stipulation in a contract is deemed ineffective.
Withdrawal from Sales Contract
- Right to withdraw depends on whether or not a defect constitutes a material breach of a contract (please see the respective section above).
- If the purchaser chooses to withdraw from the contract, obligations of the sales agreement are terminated whereas the rights to claim damages are not affected.
- If the seller fails to remedy a defect in time or refuses to remedy the defect, the purchaser may request a reduction of the purchase price or withdraw from the contract. The purchaser may not change its choice without the consent of the seller.
- As a rule, the withdrawal right may not be restricted in contracts vis-à-vis consumers. etc.).
Limitation Period for Claims for Defects
- The basic requirement is that a defect must be notified to the seller.
- There are different periods for claiming defects existing at the moment of transfer of risk (delivery) and claiming defects from the warranty (please see the General Remarks above). Furthermore, business customers are required to be more diligent when inspecting the goods.
- Category 1 – defects which existed at the time of transfer of risk/delivery:
- The Civil Code generally requires that defects are notified “without undue delay” after they have been discovered. This period depends on the actual performance in question and is assessed on case by case basis.
- In case of a latent/hidden defect, the same applies if the defect was not notified without undue delay after the purchaser could have discovered it by exercising due care, but no later than two years after the delivery of the goods.
- Business partners are free to stipulate procedures for inspecting delivered goods or notification of defects as well as various exclusions.
- Category 2 – defects which occur during the warranty period
- In B2B contracts, the parties are free to stipulate terms of warranty.
Purchaser’s Obligation to Inspect Goods and Report Defects in B2B Contracts
- Inspection of goods by the purchaser is not a legal obligation, but a possibility. Failure to inspect goods does not lead to a loss of rights based on defects, but it is usually the only opportunity to check the state of goods and their compliance or non-compliance with the contract.
- It is therefore in the purchaser’s interest to inspect goods. Otherwise the purchaser carries the risk of preclusion (expiration) of the right.
- Inspection also includes checking the documentation and packaging.
The purchaser is entitled to inspect goods in person or may entitle the third person with expert knowledge to inspect it.