Understanding Hidden Defects in Contracts and Its Impact

The vendor's warranty of hidden defects is among the most important obligations undertaken towards the purchaser, so the legislator has determined provisions to regulate that, including the definition of hidden defect and the conditions that should be fulfilled; based on which the purchaser notifies the vendor of the defect, and then the vendor becomes liable for warranty.  However, this warranty has some nullifications, in order to achieve a balance between the parties to the contract. We shall discuss below the concept of hidden defect and its conditions, the potential nullifications of the warranty, and the resulting impacts.

Definition of hidden defect

• Hidden defect: is a damage or deficiency in something purchased that was not apparent to the purchaser at the time of the contract. 

In order for a defect to be considered a hidden defect and for the purchaser to be able to claim the warranty from the vendor, certain conditions must be met, as follows:

Conditions of hidden defect

• The defect is old: 

An old defect is a defect that existed before the conclusion of the contract or occurred while in the vendor's possession before delivery to the purchaser. Therefore, the defect must exist before the purchaser receives it. The purchaser is responsible for proving the existence of the defect by acceptable means of evidence; however the vendor may evade liability if it is proven that the defect was caused by the purchaser's negligence in maintaining the product or using it incorrectly. A hidden defect has to be present at the time of delivery or before delivery and its effects become apparent afterwards. For example, if the grain or wood is infected with decay before delivery to the purchaser, and then the decay appears and spreads after delivery, this is considered an old defect for which the vendor is responsible.

• The defect is latent: 

It is not enough for the defect to be old. The defect must either be apparent or hidden. A hidden defect is one that the purchaser could not have discovered at the time of the sale. However, the vendor does not guarantee the defects that the purchaser knew about at the time of the sale, or that he/she could have discovered himself/herself had he/she examined the sold item with the care of an ordinary person, unless the purchaser proves that the vendor assured him/her that the sold item was free of this defect unless he/she proves that the vendor deliberately concealed the defect fraudulently, then the vendor is responsible for the defect. This is the standard adopted by the legislator in Article (447/2) of the Civil Code. Accordingly, we are here faced with two hypotheses:

The first assumption:

The vendor’s confirmation to the purchaser that the sale is free of a specific defect that was later found in the sale. It is not sufficient for the vendor to confirm to the purchaser that there are no defects in the sale in general, but rather he confirms that the sale is free of a specific defect(s) in particular, and this is considered an implicit agreement between the vendor and the purchaser that if a defect appears in the sale, the purchaser has the right to claim the warranty.

The second assumption: 

The vendor deliberately deceived in concealing the defect. Here the vendor’s mistake has absorbed the purchaser’s mistake, so in this assumption the vendor is liable for the defect even if the purchaser could have discovered it by the usual examination, because in this case the defect is considered hidden. In all assumptions the vendor is considered liable for the hidden defect whether he knew of its existence or not. Still, if the purchaser knew of the existence of the defect and accepted it, this is considered evidence that he took this defect into account when determining the price or considered it not to affect the value of the sale, and did not object, therefore forfeiting his right to warranty.

• The defect makes the product unfit for use or reduce its value

The influential defect that requires a warranty is the defect that occurs in the thing sold itself. The standard here is a purely objective standard.

• Article (447/1) of the Civil Code stipulates that:

1. if the sold item has a defect that reduces its value or benefit according to the intended purpose as inferred from what is stated in the contract or what is apparent from the nature of the item, 

2. The previous article explains that there is a difference between a decrease in value and a decrease in benefit. A defect may decrease the value of something without decreasing its benefit. An example of this is:

• If the sale is a car and it has a hidden defect in the seats or any part of it that does not affect its suitability for driving, then this defect is considered influential and results in a reduction in the actual value of the car because if the purchaser knew about this defect, he would not have purchased it. In this case, the purchaser has the right to claim the warranty.

3. A defect may reduce the benefit of the thing without reducing its value. An example of this is:

• If the item sold is a machine that has a hidden defect that makes it unfit for some uses, and despite that, it still retains its material value. If the purchaser had known about it, he would not have purchased it. Accordingly, the purchaser has the right to claim the warranty.

4. If the vendor and purchaser do not mention anything about the benefit expected from the sale, we refer to the nature of the sold item; i.e. if we assume that the sale is a horse prepared for racing and it was purchased for that, if it turns out that it is not suitable, this is considered a hidden defect. If the sale is agricultural land allocated for growing fruit, then this purpose has to be taken into account. Therefore, the nature of the sale and the purpose for which this item is sold are what dictate the intended benefits from it.

• Article (448) of the Civil Code stipulates that:

The vendor is not liable for a defect that is customarily tolerated. 

For example, if a common amount of dust is with the wheat grains, this is considered a minor defect that is customarily tolerated. However, if the defect is so serious that it reduces the benefit and value, this is considered one of the defects subject to warranty, and the assessment of seriousness is up to the judge to decide. If the purchaser claims that the item sold has a significant defect, he shall sustain the burden of proof.

The defect must be unknown to the purchaser or was not known to him at the time of purchase: 

The purchaser must examine the sold item to ensure that it is fit for the purpose for which it is purchased. If the purchaser is unaware of the defect and it is not known to him after careful examination by an ordinary person or by experts, the vendor is bound by the warranty. As for apparent defects that the purchaser is aware of, the vendor shall not be liable. The defect may exist when the contract is concluded but the purchaser is not aware of it; however if he is aware of it upon delivery and does not object, in which case he has no right to claim the warranty. In order for the vendor to evade liability, he must prove that the purchaser was aware of the defect. Otherwise, it is assumed that the purchaser is not aware of the defect and the vendor is liable.

The reasons for the latent defect warranty to be waived

The latent defect warranty may be waived either by law or by the will of the contracting parties, as discussed below:

• Failure to notify the vendor of the defect: 

The purchaser is obligated to examine the sold item, if a defect is discovered he must notify the vendor. If the purchaser neglects to notify and does not examine it carefully enough, or notify the vendor immediately upon discovering the defect, his right to the warranty is forfeited, unless the vendor has dishonestly concealed the defect or assured that the sold item is free of defect, in which case the vendor is bound by the warranty.

• The purchaser disposes of the sold item after discovering the defect:

In the event that the purchaser disposes of the sold item after discovering the defect, whether the disposal is by sale, lease or mortgage, he forfeits his right to recourse to the vendor for warranty, because his knowledge of the defect indicates his approval of the sold item despite the presence of the defect.

• Purchaser waives his right to warranty: 

The purchaser may waive his right to warranty against hidden defects, as the law permits so. If the purchaser buys an item and acknowledges the defect in it, he cannot claim the warranty from the vendor. However, he has the right to claim the warranty if another defect appears.

• Free-from-Defect Condition:

• Article (453) of the Civil Code stipulates that:

The contracting parties may agree to increase, decrease, or waive the warranty, provided that any condition that waives or decreases the warranty shall be void if the vendor has intentionally concealed the defect in the item sold fraudulently.

• Accordingly, it is clear that the contracting parties may increase or decrease the warranty or agree to waive it, provided that the vendor does not commit fraud. In that case, the agreement is void and the condition is considered as if it did not exist, because contracts take into account the principle of good faith. The agreement to waive warranty may be either explicit or implicit.

Expiry of the period: 

• The legislator intended to specify a period, during which the lawsuit must be filed, and upon the expiry of the period, the right to the warranty is forfeited; otherwise transactions shall be instable.

Article (452/1) of the Civil Code stipulates that:

The warranty claim shall be extinct by prescription if one year has passed from the time of delivery of the sold item, even if the purchaser did not discover the defect until after that, unless the vendor agrees to be bound by the warranty for a longer period.

While Article (452/2) stipulates that: 

The vendor may not claim the extinctive prescription if it is proven that he/she intentionally concealed the defect fraudulently.

• It means that the legislator has set a specific period of one year from the time the purchaser receives the sold item to file a warranty claim, but that right is forfeited if the vendor conceals it through fraud. In this case, the claim is not forfeited except after fifteen years from the time of the sale, as long as the purchaser has proven that the vendor concealed the defect through fraud. “This is settled in the rulings of the Court of Cassation.”

Perished Purchase  

Article (437) of the Civil Code stipulates that: 

If the thing sold perishes before delivery as a result of a cause beyond the control of the vendor, the sale shall be dissolved and the price refunded to the purchaser, unless he was summoned to take delivery before the loss.

The legislator has linked the consequences of perishing and delivery. If the sold item perishes before the purchaser receives it, the responsibility for perishing falls on the vendor, and the purchaser may cancel the contract and recover the price. However, if the purchaser was summoned to take delivery of the sold item before the loss, the responsibility falls on him. 

It is clear that the perishing is transferred by the transfer of possession, not by the transfer of ownership. If we assume that the sold item is a real estate and its possession is transferred to the purchaser without registering the contract, then the responsibility for the perishing falls on the purchaser and not the vendor, even though the vendor still owns the property because the contract has not yet been registered. Accordingly, the purchaser bears the responsibility for perishing because the sold property is in his possession.

Article (451) of the Civil Code stipulates that: 

The warranty claim remains even if the sold item is destroyed for any reason.

This Article did not specify whether the loss was due to force majeure or due to the purchaser, so we will differentiate between two cases:

1. If the defective item sold perishes after delivery, but before the defect is proven and the lawsuit is filed, the warranty for the loss is forfeited due to the lack of the subject of warranty.

2. If the sold item perishes after delivery, while the defect is proven and the lawsuit is filed, then in this case the contract is annulled because it is impossible to return the sold item, and the purchaser is compensated. Also, in order for the purchaser to claim the warranty, it is required that he notify vendor of the existence of the defect at timely manner before the sold item is destroyed and not after.

Consequences of the warranty of hidden defects: 

In conclusion, if the defect fulfills its conditions and the purchaser notifies the vendor of the defect in a timely manner, he is entitled to claim the warranty. The purchaser may return the sold item to the vendor and recover the paid price; i.e. canceling the contract. Or the purchaser keeps the sold item if the defect is not significant, and therefore he has no choice but to claim compensation for the damage suffered as explained below:

• Termination of the contract: 

When a hidden defect appears in the sold item and is significant and serious, the purchaser may return the sold item to the vendor and recover the price. If the vendor agrees to the return of the sold item, in this case the price is repaid and the contract is terminated. 

However, if the vendor refuses, the purchaser may resort to the judiciary. The court has the discretionary power to accept or reject the purchaser’s request. If the purchaser finds the defect and the court concurs, it shall order the return of the sold item and the purchaser to recover the price. This is stated in “Article 144/1 of the Civil Code.”

• Reduction of the Price 

Article (434) of the Civil Code stipulates that: 

In a case of deficiency or excess in the thing sold, the right of the purchaser to apply for a reduction of the price or for cancellation of the contract, and the right of the vendor to claim that the price be made up, are both prescribed within one year from the date of the actual delivery of the thing sold.

Therefore, 

• If the sale includes the estimated thing sold, neither more nor less, then the contract is valid and no one has the right to recourse. However, if there is a deficiency in the thing sold and there is an agreement between the parties on that, then the agreement is valid; otherwise, the common custom applies.

• The deficiency may be customary acceptable, therefore the purchaser does not demand anything from the vendor. However, if the deficiency is unacceptable, the purchaser may request compensation represented in reducing the price by the amount of the deficiency in the quantity of the sold item. The deficiency in the sold item may be significant that if the purchaser had known about it, he would not have concluded the contract, in which case the purchaser may request the cancellation of the contract.

In conclusion We believe that hidden defects warranty is an essential tool that enhances trust between individuals and contributes to the stability of transactions by avoiding disputes that may arise between parties. Therefore, adherence to these principles when carrying out sale procedures is beneficial.

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