Defective performance is a form of breach of contract, and is subject to the rules given in chapter XXV of the Hungarian Civil Code.
The legal consequences defective performance may be enforced for any type of contract, but since 1 July 2003, the law has set stricter conditions on consumer contracts than other contracts.
The Consumer, and Consumer Contracts
A consumer is a person who makes a contract for a purpose other than commercial or professional activity. A consumer contract is a contract made between a consumer and a person or entity who or which makes the contract as part of business or professional activity and the subject of the contract comprises goods.
Under a contract involving a valuable consideration, i.e. in which the parties are due mutual services, the performance of the obligor is defective if at the time of performance the goods provided does not comply with the attributes stipulated by law or in the contract.
Improper assembly of the goods provided also quali-fies as defective performance if the assembly is a con-tractual obligation and was carried out by the obligor or his agent. The obligor is also liable for a fault in assembly if the assembly is carried out by the obligee and the improper assembly may be attributed to a fault in the instructions.
A stipulation in a consumer contract departing from the above provision to the detriment of the consumer is void.
In the case of a consumer contract, a presumption is made that a fault detected within six months following performance existed at the time of performance. Naturally, if this presumption is incompatible with the nature of the product or the fault or the obligor proves the contrary, the obligor is exempt of liability. Any agreement between the parties departing from this is void.
The obligor bears liability for defective performance. This means that the obligee may exercise against the obligor the warranty rights defined by law.
The obligee may choose from among four kinds of warranty rights. These are: repair, replacement, price reduction and cancellation.
The obligee may decide which warranty right he wishes to exercise, but he must observe the sequence defined by law.
In the first stage, the repair or replacement of the de-fective goods may be requested.
As already mentioned, the obligee decides whether the goods should be repaired or replaced. However, if it is impossible to fulfil the chosen warranty claim, i.e. repair or replacement, or if fulfilment of the chosen warranty claim would incur disproportionately large additional costs for the obligor relative to the other warranty claim, then it may not be chosen, and the other warranty right applies.
The obligor must endeavour to carry out the repair or replacement within a reasonable time and without causing the obligee significant inconvenience. The costs of the repair are naturally borne by the obligor.
The obligee also has the option to retain a propor-tionate part of the purchase price until the obligor satisfies his obligation to repair or replace the goods.
If the obligor does not undertake or carry out the repair within a satisfactory time, the obligee may at the obligor’s expense repair the defect himself or have it repaired by another party.
In the second stage, the obligee may choose between price reduction or cancellation, but only if there is no possibility of repair or replacement. For example, in the case that the obligor did not undertake repair or did not carry it out in satisfactory time, or there is no possible means of repair or replacement. An insignifi-cant defect does not constitute grounds for cancella-tion.
Cancellation means that the contract is extinguished retrospectively from the date it was concluded and services already performed are returnable. In case of cancellation, the defective goods must therefore be returned and the valuable consideration repaid.
In case of a reduction in price (purchase price, contract fee, etc.) the valuable consideration must be reduced to a level where it corresponds to the value of the defective goods.
The obligee may change over from one warranty right to another. However, he must reimburse the obligee for the costs caused by changeover unless the conduct of obligor provided grounds for changeover or there were other substantial grounds for changeover.
A stipulation in a consumer contract departing to the detriment of the consumer from the sequence of war-ranty rights defined by law is void.
Time Limit for Exercise of Warranty Rights
The obligee may exercise its warranty rights during the six month limitation period from the day of per-formance (delivery of goods, transfer of possession of real estate etc.).
If the minimum period for which the goods should be usable is defined by official regulation or compulsory technical regulation (mandatory period of fitness) and is shorter than six months, this period is applicable to exercising a claim. However, the obligor may only make reference to a limitation period of less than six months for exercising a warranty right if he informed the consumer of the mandatory period of fitness satisfactorily when the contract was concluded (by marking the product, by quality certificate, by entry on payments list, etc.).
If the contract concerns sale of an animal, the warranty right expires after sixty days following performance.
The part of the repair time during which the obligee is unable to use the goods for their proper use does not count in the limitation period.
In the case of replacement or repair of the goods or a substantial part thereof, the limitation period for ex-ercising warranty rights starts anew in respect of the replaced or repaired goods (part of goods) and in re-spect of a fault occurring in consequence of the repair.
The limitation period for a consumer to exercise his warranty rights under a consumer contract is two years starting on the day of performance. A stipulation setting a shorter limitation period is void.
If the subject of the consumer contract is second-hand goods, the parties may agree on a shorter limitation period, but not less than one year.
If the obligee cannot exercise his warranty claim for an excusable reason, particularly if the defect could not be detected within the limitation period owing to the nature of the fault or the goods, the time limit for exercising the warranty rights is one year from the day of performance or three years in the case of durable goods.
If the mandatory period of fitness is longer than three years, then this period shall apply for exercising a claim. On expiry of these time limits, the rights are forfeited.
In a consumer contract, a term stipulating a time limit less than the foregoing three year time limit is void..
Exercise of Consumer Contract Warranty Rights
The procedure to be followed in case of defective performance of a consumer contract is defined in Ministerial Decree 49/2003. (VII. 30.) GKM on Set-tlement of Warranty and Guarantee Claims under Consumer Contracts.
The consumer must possess and produce the certificate proving payment of the valuable consideration (invoice, receipt, etc.) to exercise his claim.
The obligor is obliged to make a written record of the consumer’s complaint. The record must contain the consumer’s name and address, the consumer article, its purchase price, the date of purchase, the date of reporting the fault, the description of the fault, the claim the consumer wishes to exercise and the means by which he wishes the complaint to be settled. A copy of the record must be provided to the consumer.
If the obligor cannot make an immediate statement on whether the claim may be fulfilled, he must inform the consumer of his position on the third working day thereafter at the latest.
The obligor must endeavour to carry out the repair or replacement within 15 days.
A receipt must be given for the goods handed over for repair, showing the consumer’s name and address, the data required to identify the product, the date of receipt of the goods and the date when the consumer may take receipt of the repaired goods.
Mandatory Exemption from Warranty Liability
The obligor is exempted from liability if the obligee knew or should have known of the fault at the time when the contract was concluded.
It is also exempted from liability if the fault may be attributed to material provided by the obligee, provid-ing that the obligee was warned of the unfitness of the material.
In addition to exercising his warranty rights, the obli-gee is entitled to claim reimbursement of his losses arising from defective performance, under the rules of compensation. Compensation may be claimed under a general five year limitation period.
Warranty under contracts other than those for goods
The legal consequences of defective performance are applicable if the obligation was not for the provision of goods; in such cases “replacement” is understood as re-performance of the service.
June 2007 Dr Gyula Horváth
This Newsletter gives only summary information. It is not comprehensive and does not qualify as advice