One of the effects of bilateral contracts for consideration is liability for defects in performance, which may be material or legal. When we talk about legal defects, the contracting party is liable for such defects in performance and is obliged to protect the other party from the rights and claims of third parties that would exclude or limit the buyer’s right.
This article discusses legal defects in contracts of sale, a subject governed by Articles 430 to 437 of the Obligations Act (Official Gazette Nos. 35/05, 41/08, 125/11, 78/15, 29/18, 126/21 – hereinafter: OA). This legal matter was previously regulated by Articles 508 to 515 of the former Obligations Act (Official Gazette Nos. 53/91, 73/91, 3/94, 111/93, 107/95, 7/96, 91/96, 112/99, 88/01, 35/05 – hereinafter: OA/91), whose provisions are nearly identical in content to those of the current OA, meaning that case law based on the former law may still be applied.
In a contract of sale, the seller undertakes to transfer ownership of a thing to the buyer, and the buyer undertakes to pay the price. If the object of sale is a right, the seller undertakes to transfer that right to the buyer, and, where the exercise of the right requires possession of an object, to hand over the object as well.
From the buyer’s perspective, the purpose of the contract is to acquire ownership of the thing, or to obtain the legal powers associated with ownership (possession, use, enjoyment, and disposal). If the subject of the sale is a right, the purpose is to acquire the content of that right, which depends on the specific nature of the right being transferred.
However, if a third party holds a right over the subject of the sale, this constitutes a legal defect, and the seller is obliged to protect the buyer from it, as part of their contractual obligations.
This seller’s obligation exists by operation of law, so it does not need to be explicitly stated in the contract. It stems from the principle of equivalence of performances, since the buyer does not receive full value for the price paid if the item or right is encumbered by a legal (or material) defect.
Nonetheless, even though this liability is prescribed by law, there are exceptions in which the seller is not liable for legal defects, such as:
when the contract excludes or limits liability for legal defects,
or when the preclusive time limit for the buyer to assert their rights has expired.
These points will be discussed further below.
The provisions on legal defects in contracts of sale are not limited to that contract type alone; they also apply to other contracts for consideration that do not contain specific rules on legal defects. In fact, the Obligations Act stipulates that the rules on legal defects in contracts of sale apply accordingly to other contracts for consideration, unless otherwise regulated.
A legal defect exists when a third party holds a right over the subject of performance and/or there is a public law restriction that prevents the transferee from acquiring the right (or full scope of the right) as agreed in the contract.
This definition is derived from Article 430 of the OA, which states that the seller is liable if the sold item is encumbered by a third party’s right that excludes, reduces, or limits the buyer’s right. If a right is being sold, the seller guarantees its existence and the absence of legal obstacles to its realization. Article 436 of the OA further provides that the seller is also liable when special public-law restrictions exist.
It is important to note that some legal scholars argue that if the right being sold does not exist, this does not constitute a legal defect. Instead, the legal consequences of the non-existence of a right are considered analogous to the consequences of selling a non-existent item.
For example:
If the item did not exist at the time of contract conclusion (due to destruction), the contract is void.
If the objective impossibility of performance arises after contract conclusion and is not the seller’s fault, the other party’s obligation is extinguished.
In legal literature, liability for defects is often referred to as protection from eviction. Eviction is defined as:
“Any legal act by a third party that, based on their own right, excludes or limits the transferee from exercising the right which, under the contract, should belong to them—fully or without limitation.”
Eviction may be:
Total – when the third party’s right fully excludes the buyer’s right,
Partial – when it merely limits or reduces the buyer’s right.
Thus, a legal defect exists when a third party holds a right over the object of sale and/or a public law restriction exists that prevents the buyer from fully acquiring the agreed right
Due to a legal defect, the buyer has the right to:
demand that the seller remedy the defect within a reasonable time (e.g., to free the item from third-party claims or deliver another item free from legal defects if the subject is a fungible good),
if this is not fulfilled, the buyer may choose to:
request a proportional price reduction, or
terminate the contract.
If the item is taken from the buyer due to a third party’s claim (eviction), the contract is automatically terminated by law.
In all cases, the buyer has the right to compensation for damage, unless they were aware at the time of contract of the possibility that the item might be taken or their right reduced or limited, and that possibility materialized.
