Liability for legal defects in contracts
In addition to material defects under a contract of sale, the seller is also liable for legal defects. Legal defects are governed by Article 430 of the Civil Obligations Act and arise when a third party holds a right over the subject of the contract that excludes, reduces, or limits the buyer’s right—provided that the buyer was not informed of this right and did not agree to accept the item encumbered by it.
The seller guarantees that the right being transferred exists and that there are no legal obstacles to its fulfillment.
1) The transaction is made for consideration;
2) The defect existed at the time of contract conclusion;
3) The buyer was not aware of the defect and could not reasonably have been expected to know about it.
Buyer’s rights
If it becomes evident that a third party claims a right over the subject of the contract, the buyer is obligated to notify the seller and invite them to resolve the issue within a reasonable time. An exception to this duty exists if the seller already knew about the third party’s claim.
If the seller fails to act and the item is taken from the buyer, the contract is automatically terminated by law. If the buyer’s right is only partially reduced or limited, the buyer may either terminate the contract or request a proportionate price reduction.
If the seller does not remedy the defect within a reasonable timeframe, and the purpose of the contract cannot be achieved as a result, the buyer is entitled to terminate the agreement.
In all such cases, the buyer is entitled to compensation for damages, based on general rules of liability. However, there is an exception: if the buyer knew at the time of contracting that there was a risk of losing the item or of having their rights limited, and that risk materializes, they are not entitled to damages—only to a refund or price reduction.
If the buyer, without informing the seller, enters into a legal dispute with a third party who claims a right and loses the case, the buyer may lose their right to claim legal defects—if the seller can prove they had the means to defeat the third party’s claim.
Limiting or excluding the seller’s liability
The Civil Obligations Act allows for the contractual limitation or exclusion of the seller’s liability for legal defects. However, such a clause is null and void if the seller knew or could not have been unaware of the defect at the time of the contract’s conclusion.
Restrictions of public law nature
Seller’s liability also applies in cases of public law restrictions (e.g. an administrative order requiring removal of a structure or limitation of use) that were unknown to the buyer, if the seller knew of them or knew they were likely and failed to disclose them.
Limitation period for legal defect claims
Claims based on legal defects are subject to a preclusive time limit. This means that the buyer’s right expires one year from the date they became aware of the third party’s right.
If the third party initiates legal proceedings within that period, and the buyer has duly notified the seller and invited them to participate, the buyer retains their right for six months after the final court decision.
