Breach of Contract

Definition and Types of Breach of Contract

Breach of contract means the failure to perform any contractual obligation. Contracts are established by the mutual and free will of the contracting parties, in their own interest. The contracting parties, therefore, are precisely aware of their contractual obligations; consequently, the law establishes strict rules regarding the liability of the party in breach, thereby protecting the other party.

Typical Cases of Breach of Contract

Defective performance
Delayed performance
Non-performance, i.e., refusal of performance
In addition to these cases, a breach of contract may also occur if someone is commissioned to achieve a specific result through an activity but fails to reach that result.

For example, if we commission a contractor to build a house, and the house—as the result—is not built, this may qualify as a breach of contract.

Relationship Between Defective Performance and Breach of Contract

Defective performance means that the quality of the item or service specified in the contract does not meet the quality requirements set forth in the contract or by law.

The most typical defect is that the item is unfit for its intended use; for example, there is no electricity in the purchased property, or the engine of the purchased vehicle does not function properly.

In the event of defective performance, the obligee (the contracting partner of the party in breach) may choose from several so-called warranty (liability) rights, depending on the nature of the defect in the item or service.

The most common warranty right is the implied warranty of quality (kellékszavatosság), under which the obligee may primarily request repair or replacement, and secondarily, in certain cases, a price reduction, repair at the expense of the party in breach, or, in justified cases, may withdraw from the contract, thereby rescinding it retroactively.

Warranty rights form a complex system and often exclude each other's enforceability, so it is definitely recommended to consult an attorney.

Enforcement of Breach of Contract Penalties

"A penalty is a common but not guaranteed consequence of a breach of contract. A penalty is a specific commitment by the party in breach, wherein they undertake in the contract to pay a specified amount in the event of a breach.

This must be specifically agreed upon in the contract; it does not automatically become part of it. The penalty serves to reinforce the contract, as the contracting partner essentially assumes a penalty or sanction for a breach, thereby increasing their partner's confidence.

A penalty is also advantageous because, with precisely drafted terms, it is difficult to dispute, and exemption from payment is only possible based on strict rules. Payment of the penalty does not necessarily mean that the party in breach is exempted from the obligation to perform the contract."

Dr. Szentkláray Bence LL.M.
Master of Tort Laws
Attorney-at-Law

Damages Resulting from Breach of Contract

One of the most frequent consequences of a breach of contract is that it causes damage to the contracting partner. The law states that the party in breach is strictly liable for the damages they cause.

The legal text distinguishes between two types of damages:

Damages to the Subject Matter

This category includes any damage occurring in the delivered item or provided service itself, as well as damages directly serving their repair.

To illustrate with an example: it qualifies as tapadókár if a technician causes damage to a coffee machine ordered for a café during installation, rendering it unusable. In such a case, the damage to the item (tapadókár) is the damage to the coffee machine itself and the cost of its repair, which can be claimed from the technician as the party in breach.

The technician has breached the contract because, under the agreement, they were commissioned to perform an installation suitable for intended use, which they failed to do.

Consequential Damages

In contrast, consequential damages include those losses that occur in other ways.

Continuing the above example: if the coffee machine in the café does not work and the café cannot serve coffee, it loses revenue, resulting in lost profit, the reimbursement of which can be claimed from the party in breach.

Legal Assistance in Breach of Contract Matters

To remedy the consequences of a breach of contract—for example, to examine the amount and circumstances of damages—it is definitely recommended to seek the help of an attorney specialized in compensation law.

A detailed examination of the breach and its consequences—including damages—requires expertise: whether we can actually speak of a breach of contract, what options the injured party has, exactly what damages were caused by the liable party, whether the party in breach can be exempted from liability, etc.

Detailed disclosure and examination are therefore necessary for the effective enforcement of compensation claims; without these, one may become involved in unnecessary—and significant—costs.

Frequently Asked Questions

We did not put the contract in writing. Can we still speak of a breach of contract?

Yes, as a general rule, it is not mandatory to put contracts in writing unless specifically required by law. A contract is formed by the mutual intent of the parties; thus, it can be concluded orally or even via email. For example, a service contract is established if you request a quote from an electrician via email to fix a defect and you accept the quote sent by the electrician. If the contract is formed in any manner, it binds the parties, and therefore a breach of contract can be established. However, a significant disadvantage of the lack of a written format is that it will be difficult to prove the existence and content of the contract.

The seller is unaware of the defect in the item (property). Can we still speak of defective performance?

Yes, as the seller is liable for warranty regarding unknown (hidden) defects even if they were unaware of them. Regardless, the buyer is also subject to a so-called duty of inspection; thus, they must ensure that there are no obvious defects in the item. What qualifies as an obvious or clear defect is always judged based on the specific case. For example, the seller does not necessarily perform defectively if they show a dilapidated house on the verge of collapse to a buyer, who must clearly know (perceive) that the building is likely unfit for its intended use.

Can we also speak of defective performance in the case of leased items?

Yes, the lessor (landlord) is also subject to a warranty to ensure that the leased item (premises) remains suitable for contractual use throughout the entire duration of the lease. It is a common occurrence that a defect arises in a leased property—for example, an issue with water or electricity, or one of the rooms becoming uninhabitable. In such cases, it is the lessor's obligation to repair the defects. In severe cases, the proportional withholding of the rent—meaning the non-payment of a proportional part of the rent—may also be considered.