One of the most common problems encountered in purchase agreements is the determination of parties' rights and obligations due to defects that are identified in goods. Even though the Turkish Code of Obligations ("TCO") numbered 6098 introduced amendments on this particular subject, unlike the repealed previous Code of Obligations numbered 818, these innovations are not revolutionary. Many European States, such as Germany and the Netherlands and, particularly, the Scandinavian countries, amended their local legislation by way of making serious reforms in parallel with the provisions of the United Nations Convention on Contracts for the International Sale of Goods ("CISG"). In this respect, they took significant steps in order to resolve all kinds of disputes arising from such purchase agreements under a common structural adjustment and, perhaps, to avoid potential problems.
This article addresses the determination of parties' rights and obligations due to defects that occur in purchase agreements, pursuant to the provisions of TCO and Turkish Commercial Code ("TCC") numbered 6102.
The Definition of Defect and its Legal Nature
Firstly, the seller's liability due to defects is regulated between Articles 219 and 231 of the TCO. The TCO states that the defect can be defined as any deficiency on a sold thing that does not have the agreed quality, or is not suitable for customary use, and the quality is usual in things of the same kind, and the buyer may expect this quality in view of the type of the thing, upon the passing of the risk.
Pursuant to Article 35/2/a of the CISG, it is required that the goods that are sold and delivered to the buyer be fit for the purposes for which goods of the same description would ordinarily be used. Furthermore, pursuant to Article 35/2/b of the CISG, it states that the goods that are sold and delivered to the buyer are required to be fit for any particular purpose, expressly or implied, as made known to the seller at the time of the conclusion of the contract.
According to the majority opinion of the doctrine, the liability of the seller for the defects in the sold thing is of a complementary nature, whereas the primary obligation of the seller is the transfer of ownership. Moreover, as the provisions regarding the liability of the seller due to defects under the TCO, except for the cases where the seller is grossly negligent, are not mandatory, an agreement may be concluded within the scope of the freedom of contract, in order to exclude or limit this liability. However, it is noteworthy that any vague non-liability provision should be interpreted narrowly, and in favor of the buyer.
The Conditions for the Seller's Liability due to Defects
In order to hold the seller liable for the defects on the sold things, certain conditions must be met. These conditions are listed as following:
The Existence of the Defect When the Benefit and Risk are Passed to the Buyer
Pursuant to Article 219 of the TCO, "The seller is liable for the defects of any sold things that do not have the quality agreed to with the buyer, as well as of any things sold that have material, legal or economic defects, which remove or reduce the benefits expected and value of intended use, and that it is contrary to its quality or quantity that affects its quality." According to this Article, the defects may be in the quality of the thing, and as well, may be material or legal. The thing is free of material defects if it is suitable for the use intended under the purchase agreement, and if it is suitable for customary use, and its quality is usual in things of the same kind, and the buyer may expect this quality in view of the type of the thing, and the thing is free of legal defects if third parties, in relation to the thing, can assert either no rights, or only the rights taken over in the purchase agreement against the buyer1.
Another matter of note is the legal nature of the deficiency in quantity. In principle, any deficiency in quantity as to the sold thing is not considered to be a defect. However, such deficiency nonetheless gives rise to the obligation of the seller due to its improper performance. Nevertheless, it should be noted that the deficiency in quantity may be considered as a defect in exceptional cases where the quantity affects the quality. The width of a house, the caliber of a device, or a missing pattern on a fabric can be evaluated as exceptional examples in this regard2.
Knowledge of the Buyer Regarding Defects and the Significance of Defects
Pursuant to Article 222 of the TCO, "The rights of the buyer due to a defect are excluded if he has knowledge of the defect at the time the contract is entered into. The seller can be held liable for defects that can be discovered by the buyer's due inspection on the sold thing in the event that the seller assures the buyer that the goods are free of defects."
According to this Article, and in parallel with Article 35/3 of the CISG, the seller cannot be held liable for any lack of conformity of the goods if, at the time of the conclusion of the purchase agreement, the buyer knew or could not have been unaware of such lack of conformity. In order to deem that the condition regarding the existence of a significant defect is met, the value or the availability of the thing that is subject to the purchase agreement must be remarkably reduced, or completely removed, as a result of the defect in the sold thing.
The fact that the liability for defects is not excluded by an agreement
According to Article 221 of the TCO, any agreement that excludes or limits the liability of the seller is null and void if the seller is grossly negligent in the transfer of the sold thing together with defects. As mentioned above, considering the fact that these provisions are not mandatory, it is possible to conclude an agreement that limits or excludes the liability of the seller for defects. However, as it can also be understood from the above-mentioned Article that such non-liability clause shall be null and void in the event that the seller is grossly negligent or at fault in the transfer of the defected thing, or if the seller fraudulently conceals the defect in the sold thing.
The fact that the buyer has fulfilled its obligations that are imposed by law and that the buyer refused to accept the defects
Pursuant to Article 223 of the TCO, "The buyer must inspect the purchased thing without undue delay in the normal course of business, and if he discovers any defects of which the seller is liable, he must notify the seller within a reasonable period of time. In the event that the buyer omits to inspect and fails to notify the seller in this respect, it is deemed that the buyer accepted the defected goods. However, if the sold thing has defects that would not be discovered by an ordinary inspection, this clause will not apply. If such defects are discovered at a later stage, the seller must be notified immediately; otherwise, the sold thing is deemed to be accepted together with its defects."
The obligations that are imposed on the buyer are (i) to inspect the sold thing and (ii) to notify the seller regarding the alleged defects. The buyer must inspect the purchased thing and, in the event of any defects, it is obliged to inform the seller in this regard. However, according to a recent opinion in the doctrine, as these aforementioned obligations might be considered placing undue responsibilities on buyers that are not merchants, in any event, such consumers should have the opportunity to claim damages and make other requests through the general provisions pursuant to Article 112 of the TCO.
Another provision in relation to the subject is stipulated in Article 23 of the TCC. According to this provision, "if it is expressly clear that the good at issue is defective on delivery, the buyer must notify the seller within two (2) days. If it is not expressly clear, the buyer is obliged to investigate or have it investigated, and notify the defect to the seller in order to protect its rights within eight (8) days upon delivery of the goods. In other cases, the second paragraph of Article 223 of the Turkish Code of Obligations shall be applied." Accordingly, the notification periods are stipulated in parallel with the nature of the defects in cases where the commodity in commercial sales is defective. Nonetheless, the intended meaning of the expression "reasonable time" under Article 223/1 of the TCO is to notify the seller of the situation without losing any time, following the determination of the defect, with normal promptness that is required by the nature of content of the work, and the circumstances.
If the obligation of inspection and notification are not fulfilled by the buyer in due time, the buyer shall be deemed to have accepted the defective goods. However, it should be noted that in cases where the seller is grossly at fault, the seller shall not exclude its liability by way of alleging that the buyer made a belated a notification.
The buyer's obligation of inspection is regulated under Article 38 of the CISG. Pursuant to this provision, "The buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances." Furthermore, according to the second paragraph of the same Article, "In case the contract involves carriage of the goods, examination may be deferred until after the goods have arrived at their destination."
The buyer's obligation of notification is set out under Article 39 of the CISG. According to this Article, "The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it. In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof, at the latest, within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time limit is inconsistent with the contractual period of guarantee."
The Optional Rights of the Buyer deriving from the Liability of the Seller due to Defects
The TCO entitles the buyer to certain optional rights if the seller delivers defective things. These rights are enumerated in Article 227 of the TCO. Accordingly, "When the seller is liable for the defects of the delivered things, the buyer may exercise one of the following optional rights:
- Revocation of the contract by notifying that he is ready to return the sold thing.
- Detaining the sold thing and requesting reduction in the purchase price in the proportion of the defects.
- Unless its reparation is too expensive, requesting free reparation of the sold thing at the seller's cost and expense.
- If possible, asking for the replacement of the sold thing with those that are free of defect.
The buyer's right to claim compensation for damages according to the general terms is reserved.
The seller may prevent the buyer from exercising his optional rights by immediately delivering the same sold thing free of defect, and by compensating all damages of the buyer.
In the event that the buyer exercises his right to revoke the contract, and if such revocation is unjustified, then the judge may request that the seller repairs the thing or make a reduction in the purchase price.
If the loss of the sold thing is very close to the purchase price, then the buyer may only use its right to revoke the contract or ask for the replacement of the thing with a new one free of defects."
There are various opinions in the doctrine regarding the legal nature of the optional rights that are vested to the buyer by law. The issue that causes divergence in the doctrine is whether the buyer's optional right, particularly its right to revoke the agreement, is a formative right, or a claim that occurs with the parties' consensus. Although the majority view in this specific subject is that the optional rights are formative rights, thus it can be used by way of unilateral declaration of intention to the seller, there are also other opinions in the doctrine arguing that it is required to have parties' consensus on the optional right that the buyer will exercise. Whereas those optional rights were only exercisable through the courts under the previous Turkish Code of Obligations numbered 818, the TCO precluded this problem and paved the way for taking action in a quicker way.
Limitation on the Exercise of Optional Rights
As emphasized, above, considering the fact that the provisions in the TCO regarding the liability for defects are complementary rules, the parties may stipulate various limitations on the optional rights and their applicability, by an agreement. For instance, they may limit the exercise of these optional rights through the courts. In addition, under the circumstances that the loss of the sold thing's value is very close to the purchase price, the buyer may only exercise its right to revoke the agreement or request the replacement of the sold things with similar ones. Another limitation is, as also emphasized above, with regard to the lapse of time. It is obvious that the buyer cannot exercise his optional rights in the event of that the lapse of the time periods regulated under the TCO and TCC are time barred. Furthermore, as it is indicated in Article 227 of the TCO, the seller may prevent the buyer from exercising his optional rights by immediately giving the same sold thing, free of defect, and by compensating for all damages that the buyer was exposed to.
The consequences of the revocation are clarified in Article 229 of the TCO. Pursuant to this Article, "In the event of revocation of the agreement by the buyer, the buyer is obliged to return the sold thing to the seller together with any benefits derived from it. In return, the buyer may request the following from the seller:
- Return of the purchase price together with interest.
- In accordance with the provisions governing the possession of the thing, compensation for litigation costs, and expenses that are incurred by the buyer.
- Payment of the direct damages derived from the defected sold thing.
The seller is obliged to compensate the buyer for any further loss or damage unless he can prove that no fault is attributable to him."
Due to the above-mentioned controversies of the opinions in the doctrine, the purchase agreement retrospectively is revoked, sometimes by way of a unilateral declaration of intent of the buyer and sometimes by way of the mutual consent of the parties or, in some cases, through the revocation decision given by the judge. Therefore, the return of the executed fulfillments is required upon revocation of the agreement.
The return of the obtained benefits and the interest of the paid amount are stipulated, as the purpose of the exercise of this right of revocation of the agreement which is to reach the point before the conclusion of the agreement. That being said, the compensation of the seller, for the damages that the buyer is exposed to, is also stipulated in this regard.
Reduction of Price
As is noted, above, Article 227 of the TCO entitles the buyer to detain the sold thing, and to file a claim to request reduction of price in proportion of the deficiencies in the defected thing. Contrary to the option of right to revoke the agreement, in the exercise of this optional right, the agreement, except for the provisions regarding the price, maintains its existence, and the validity and the accessory rights that belong to the reciprocal receivables remain the same. The unilateral declaration of intention is not sufficient for the exercise of this right. In this regard, the consent of the seller as to the reduction of price is required, as well. Another method in this respect is to apply to the courts.
Replacement of the Defective Goods
The right of replacement of the defective goods, which is another optional right that is vested to the buyer under Article 227 of the TCO, is only exercisable for generic obligations. Considering the obligations involving a unique item, the exercise of this right can only be practiced in case the parties agree upon this issue. Whereas article 227 of the TCO entitles the buyer to this right, it also entitles the seller the right to prevent the buyer from exercising his optional rights by immediately replacing the same sold thing free of defect, and by compensating the buyer for all of the damages it incurred.
Right to Claim Compensation for Damages according to the General Provisions
One of the most vital introductions that the TCO brought to the Code of Obligations numbered 818 is the right to claim compensation according to the general provisions for the damages that the buyer exposed due to the delivery of the defected goods, pursuant to Article 227 of the TCO. Such innovation in the TCO brings controversies together with its introduction. It is arguable whether the buyer is required to fulfill its obligation to inspect and notify in order to claim compensation for damages with its optional rights or independently from its optional rights. Another controversy is as to whether the statute of limitations of two (2) years will be applied to these kinds of claims pursuant to Article 231 of the TCO, or whether the statute of limitations will be ten (10) years according to Article 146 of the TCO.
It is worthy of note that this issue is clarified in the preamble Article 227/2 of the TCO:
"... it is stated that as acknowledged in the doctrine and practice, regardless of whether the buyer exercised its optional right, the buyer's right to claim compensation for damages that it suffered due to the delivery of the defective goods, according to the general provisions is reserved. However, given the consequences of the exercise of the right to revoke the agreement by the buyer due to the fact that the sold thing is defective, are stipulated in Article 229; there is no hesitation on the possibility for the buyer to claim compensation for the damages according to the general provisions in addition to its optional rights except the right to revoke the agreement."
The most common criticism regarding this newsletter topic is the emergence of unsatisfactory, unfair consequences due to the substantial controversies between the cases of contractual breaches and the legal consequences. The problem is mostly revoked by way of adopting these general principles. It is also noteworthy that entitling the buyer with the right to claim damages based on the general provisions, in addition to its optional rights, is considered to be the most important introduction of the TCO.
1 Cevdet Yavuz, Türk Borçlar Hukuku: Özel Hükümler, 2014 İstanbul.
2 Cevdet Yavuz, Türk Borçlar Hukuku: Özel Hükümler, 2014 İstanbul.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.