Defects Discovered After Handover of Work: How to Proceed Under the Law

Material or Non-Material Defect: The First Question That Will Determine Your Rights

A manufacturing company takes delivery of a production line, packaging machine, or control system, and after a few weeks of operation, it turns out that the equipment does not achieve the agreed performance or repeatedly stops. Management wants to know whether they can demand a replacement, a discount, or withdraw from the entire delivery. Under Czech legislation, the law does not initially distinguish the type of defect, but rather how seriously the defective performance breaches the contract.

A material breach of contract is one where the supplier knew or must have known at the time the contract was concluded that the customer would not have entered into the contract had they foreseen it. This is how it is defined under Czech legislation, which adds that in other cases, a breach is presumed to be non-material (Section 2002 of the Czech Civil Code). For the customer, this results in an evidentiary burden: they must show that the supplier knew the importance of the breached parameter. Ideally, by having the contract explicitly designate it as crucial.

Contracts for work and purchase contracts converge here. The provisions on purchase contracts apply mutatis mutandis to the client's rights arising from a defective work, so a manufacturer who had a machine custom-made basically has the same range of rights as a buyer of finished equipment. The difference lies in the deadlines and the fact that a replacement work cannot be requested if its subject matter cannot be returned. Defects in construction within development projects have their own specifics, which are analyzed in the article on defects of work in development projects.

Materiality therefore arises during the drafting of the contract, not only during a dispute. If the contract specifies the line's performance, defect rate, energy consumption, or system availability as parameters that the customer insists upon, it is easier to prove that failure to meet them is material. A general clause about "defect-free performance" does not provide such support. In a dispute, the supplier will then argue that it is a minor issue that can be repaired, and the customer loses the option to withdraw.

Repair, Discount, or Withdrawal: What Each Path Means for Operations

In the event of a material breach, the customer has a choice of four rights: remedy of the defect by delivery of a new item or a missing part, remedy of the defect by repair, a reasonable discount, or withdrawal from the contract (Section 2106 of the Czech Civil Code). They must communicate the chosen right when notifying the defect, or without undue delay thereafter. If they do not make the choice in time, they only have the same rights as in the case of a non-material defect.

The choice is a business decision, not just a legal act. A repair keeps operations running but extends the period during which the line is not producing at full capacity. A discount returns part of the money, but the company keeps equipment with limited capabilities. Withdrawal refunds the entire price, but the company must return the equipment and secure a replacement, which takes months for custom technology. Without the supplier's consent, the customer cannot change their choice. There are two exceptions: the repair turns out to be impossible, or the supplier fails to remedy the defect within a reasonable period or refuses to remedy it.

In the case of a non-material defect, there is less room to maneuver. The customer has the right to have the defect remedied or to receive a reasonable discount, and the supplier can choose whether to repair the defect or deliver a new item, provided this does not cause unreasonable costs to the customer. Only if the supplier fails to remedy the defect in time or refuses to repair it can the customer demand a discount or withdraw. It is therefore important for the customer to set a specific and reasonable deadline for the repair and document that the supplier failed to meet it.

Withdrawal has one more condition that companies often forget: returning the equipment. The customer cannot withdraw or demand a new item if they cannot return the item in the condition in which they received it. Under Czech legislation, there are exceptions, such as when the item was used before the defect was discovered. For a work that by its nature cannot be returned or handed over to the contractor, the client cannot demand a replacement work (Section 2615 of the Czech Civil Code). Built-in technology therefore often leads to a discount rather than withdrawal.

Procedure from Defect Detection to Resolution

The procedure below is general; the choice of which right to exercise and how quickly to act is determined by the wording of the supply contract, the agreed warranty, and the extent to which the defect limits production. Therefore, the Czech legal team at the Prague-based ARROWS law firm always assesses technology defects in conjunction with the contract and operational data before a company sends its first notification. The following steps show the usual sequence, which varies depending on the nature of the equipment.

The first step is to mitigate the damage and secure evidence. A technician will document when and how the defect manifested, save data from the control system, take photos and videos, and preserve the defective parts. If there is a risk of damage to other equipment or products, the company should shut down or limit the operation of the equipment. Any interventions by internal staff on the equipment should be kept to a necessary minimum and recorded so that the supplier cannot claim that the customer caused the defect.

The second step is a written notification of the defect to the supplier. The notification should describe how the defect manifests, when it was detected, and what right the customer is exercising. It must go directly to the supplier, to the address or contact specified in the contract. The Czech Supreme Court did not consider a copy of an email in which the customer discussed the malfunction with another service provider to be a valid notification of a defect. If the customer does not yet know which right to choose, they should notify the defect immediately and supplement the choice without undue delay.

The third step is setting a deadline to remedy the defect and withholding part of the price. The customer sets a reasonable deadline for the repair and requests a work plan from the supplier. Until the defect is remedied, they do not have to pay the portion of the price that reasonably corresponds to their right to a discount. The withheld amount must be reasonable; anyone who withholds significantly more than what corresponds to the defect risks default on payment and interest.

The fourth step is evaluating the outcome. If the supplier remedies the defect, the customer should have the repair verified using the same tests as during acceptance and record the result. If they fail to remedy it or refuse to do so, the customer switches to a discount or withdraws in writing. At the same time, they calculate the damages, such as lost production, contractual penalties from their own customers, or the costs of an alternative solution, and claim them separately.

How a Discount Is Calculated and Why a Repair Budget Is Not Enough

A discount is the most common outcome of a technology defect dispute for manufacturing companies because the equipment remains in operation. The supplier usually offers a discount equal to the cost of replacing the defective part. The customer, on the other hand, calculates the loss of performance over the entire lifespan. Under Czech legislation, the law does not provide any formula for the calculation and only states that the discount must be reasonable.

The Czech Supreme Court emphasized in 2026 that a discount must not be based solely on repair costs. In its judgment File No. 33 Cdo 2321/2025, issued in a dispute over defects in the construction of a family house, it stated that a reasonable discount must restore the disrupted balance between the price and what the client actually received. The court therefore examines how the defect limits the use of the work, whether it reduces its lifespan, and by how much its value has decreased relative to the agreed price. The repair budget alone or a simple difference in values without other circumstances is not sufficient, which is why the court remanded the case for a new assessment.

For the customer, this yields a practical tip: the discount needs to be backed by operational data. The line's performance before and after the repair, the defect rate, the number of shutdowns, and the impact on capacity are figures that show how the defect limits use. A technical expert can then translate these data into a reduction in the equipment's value. A customer who requests a discount based solely on the invoice for a replacement part deprives themselves of this line of argument.

Withholding part of the price is a powerful tool, but only in a reasonable amount. Until the defect is remedied, the customer does not have to pay the portion of the price that reasonably corresponds to their right to a discount, even if they are requesting a repair. However, if they withhold the entire remaining price due to a defect that has little impact on operations, they risk defaulting on the difference. It is therefore advisable to prepare a sober estimate of the discount and justify it in writing immediately upon withholding.

Deadlines You Cannot Afford to Miss

The most common reason why a customer loses their rights from a defect is not the strength of the supplier's arguments, but time. In the case of a work, a court will not grant a right from defective performance if the client failed to notify the defect without undue delay after they detected it or should have detected it with due diligence, but no later than two years from delivery (Section 2618 of the Czech Civil Code). However, the supplier must raise the objection of late notification.

According to the Czech Supreme Court, "without undue delay" is a very short period, the length of which depends on the circumstances. In resolution File No. 23 Cdo 1949/2023, the case concerned the delivery of technological equipment under a purchase contract. The buyer had known about the defect since September, addressed it via email with a service company, and only copied the supplier; they formally notified the defect only at the end of November. The courts ruled the notification was late, and the Czech Supreme Court recalled that in another case, even a notification after more than a month did not stand.

Other deadlines run from acceptance. If the client accepts the work without reservations, the court will not grant them a right from an obvious defect if the contractor objects that it was not asserted in time. Under Czech legislation, anyone who fails to notify a defect in time also loses the right to withdraw from the contract. If the supplier provided a quality guarantee, the warranty period begins upon delivery of the work, and the contract may specify its own deadlines and complaint procedures. For latent defects in construction, the ultimate deadline is longer, five years from acceptance of the building (Section 2629 of the Czech Civil Code).

Under a purchase contract, the supplier cannot object to late notification if the defect arose from a circumstance that they knew or must have known at the time of delivery. This is stipulated in Section 2112(2) of the Czech Civil Code. For technology, this is relevant where the supplier knew or must have known a weakness in the design or material. The rule on notifying defects of a work does not explicitly repeat this exception. Therefore, the customer should not rely on it and should notify the defect in time.

How long you can wait to notify and what counts as detecting a defect depends on the nature of the equipment and what the company knew about the defect at that moment. The Czech legal team at the Prague-based ARROWS law firm assesses this issue based on specific correspondence and operational records. The safe approach is simple: notify the defect as soon as it manifests and supplement further information continuously.

What Technology Suppliers Commonly Propose and What to Watch Out For

Supply contracts for technology usually regulate rights from defects with their own rules. The supplier offers a warranty for a certain period and replacement of defective parts, but excludes both discounts and withdrawal, and limits total liability to a portion of the price. Such an agreement can be valid between businesses, but the customer should know what they are giving up. How to set up acceptance and performance tests for a turnkey delivery is described in the article on turnkey production lines.

A warning sign is a contract that ties all of the customer's rights solely to repair without any deadline. The supplier can then repair repeatedly and endlessly, and the customer has no path to a discount or withdrawal. A reasonable contract sets deadlines for response and repair, the number of unsuccessful attempts after which the customer can switch to a discount or withdrawal, and performance parameters against which the repair will be verified.

Another common proposal is exclusive servicing by the supplier. The customer must not tamper with the equipment or commission a third party to repair it, otherwise they lose the warranty. This is understandable for complex systems, but the contract should allow for alternative repair at the supplier's expense if the supplier fails to respond in time. Without such an agreement, the customer waits for the supplier's technician while their production line stands idle.

Limitation of liability for damages also deserves attention. Suppliers commonly exclude lost profits and consequential damages and limit liability to a portion of the price. The customer should check whether the cap covers at least the costs of an alternative solution and contractual penalties from their own customers. If not, this needs to be negotiated, or the risk covered otherwise, such as through insurance or by withholding part of the price until successful trial operation.

Mistakes That Deprive Customers of Rights from Defects

The most expensive mistake is dealing with a defect informally. The customer's technician calls the supplier's service department, both parties exchange messages in an app, and no one sends a formal defect notification. After two months, the customer finds out that the supplier objects to the delay and the court rules in their favor. Prevention lies in an internal rule that any defect lasting longer than one day must be reported in writing to the supplier with reference to the contract.

The second mistake is a hasty choice of remedy. In the first email, the customer writes that they request a repair, and after unsuccessful attempts, they want to withdraw. If the defect is non-material and the supplier fails to repair it in time, a path to withdrawal exists, but the customer must document it. In the case of a material defect, the choice can only be changed without the supplier's consent if the repair proves impossible or the supplier fails to perform it within a reasonable period. It is therefore better to notify the defect immediately and wait only days, not weeks, to make the choice after a quick consultation.

The third mistake is withdrawing without a well-thought-out settlement. The customer withdraws but has not prepared the return of the equipment, dismantling, or a replacement delivery. The dispute then shifts to what the parties must return to each other and who will pay for the dismantling. How mutual claims are settled after contract termination is analyzed in the article on how to settle contractor claims after withdrawal.

The fourth mistake is excessive withholding of the price. Due to a defect, the customer withholds the entire remaining price, and the supplier sues them for payment with late interest. The court then examines whether the withheld amount reasonably corresponded to the estimated discount. How much these mistakes cost varies according to the value of the contract, and whether a specific procedure will hold up is assessed by the Czech legal team at the Prague-based ARROWS law firm based on the contract and the development of the defect even before the customer chooses their remedy.

Risks Associated with Defects Detected After Acceptance

Summary: What Management Needs to Decide

This article has shown that the customer's rights after accepting a defective delivery are determined first by the severity of the defect and only then by its type. In the event of a material breach, the customer chooses between replacement, repair, discount, and withdrawal; for a non-material defect, they have the right to have the defect remedied or to receive a discount. What matters most is that the supplier learns of the defect in time and that the notification clearly states what kind of defect it is; the written notification then serves as evidence.

Management should decide right at the beginning whether they want to keep the equipment in operation or withdraw from the delivery. On this choice depends which right the company will exercise, how quickly they must act, and what evidence they need. Delaying costs money twice: the line is not producing at full capacity, and the deadlines are running in the meantime. Anyone who waits for internal consensus before notifying a defect risks the court not granting their right.

Therefore, it is advisable to have an internal procedure prepared for technology defects: who will document the defect, who will notify it, and who will decide on the choice of remedy. It is equally important to read supply contracts before signing, because that is where it is decided whether the customer will have a path to a discount and withdrawal.

The Czech legal team at the Prague-based ARROWS law firm prepares and reviews supply contracts for technology, drafts defect notifications, and conducts negotiations with suppliers on behalf of customers. They also represent companies in court disputes over discounts, withdrawal, and damages. Write to us at consultation@arws.cz or see how we handle commercial and court disputes.