Legal News [December 2023]: The Supreme Court reassessed the disproportionality of contractual penalty

Last month, the Supreme Court passed an important judgement in the field of labour law concerning the employer's offer obligation. The Supreme Court ruled that the employer is obliged to offer a job even outside the organisational unit where the employee has worked so far, which in this case included other regions. The Supreme Court also confirmed previous case law on the issue of the proportionality of the contractual penalty; it also dealt with the so-called (non-)merger of the building with the land. The last topic of the current Legal News is the relation between the damage caused to the company and the breach of duty by the defendants as members of the board of directors.

  • The Supreme Court maintains its previous conclusions in the matter of the assessment of the disproportionality of the contractual penalty. The Court confirmed this in its judgment in Case No. 25 Cdo 2100/2023. It stated that for the assessment of the disproportionality of the contractual penalty, the circumstances that were present at the time of the contractual penalty agreement were decisive and circumstances that occurred afterwards could not be considered. Thus, where a contractual penalty was agreed for breach of the obligation to complete and deliver the entire work within the agreed deadline, with a single completion date, it cannot be concluded that the contractual penalty was disproportionately high if it was agreed at a proportionate percentage of the total price of the work (or, as in this case, at a proportionate specific amount) for each day of delay.
  • The issue of whether the employer’s (in this case, the Czech Labour Office) offer obligation applies only to jobs within the regional branch of the Czech Labour Office where the employee performed work prior to resigning from the managerial position was addressed by the Supreme Court in its judgement No. 21 Cdo 2532/2022. The Supreme Court concluded that the mere fact that the Labour Office of the Czech Republic is divided into other organisational units (regional branches) does not imply that the employer’s fulfilment of the so-called offer obligation is limited only to the organisational unit (in this case the regional branch) where the employee had previously performed their work. On the contrary, the offer obligation, i.e. the employer’s obligation to offer the employee, after their removal or resignation from office, another job which the employee is able to perform considering their state of health and qualifications, applies to the employer as a whole, irrespective of the territory and place of work.
  • The Supreme Court addressed the issue of the existence of a causal relation between the breach of duties by the defendants as members of the board of directors and the damage to the company (debtor in bankruptcy proceedings) in its judgement No. 27 Cdo 446/2023. Considering the previous case law, the Supreme Court concluded that if the company claims that the actions of the members of the board of directors in violation of due diligence constitute the cause of the damage consisting in the uncollectibility of the receivable due to its statute of limitations, it must prove that without such actions, no such damage would have occurred. In the present case, the company succeeded in this respect, since it was proved that, if the defendants had not held the position of members of the board of directors only formally, and if they had regularly and properly monitored the performance of the activities delegated by them to the agent, they would have been aware of the provision of funds to a company with personal connections on the basis of an entirely invalid contract and, as diligent managers, would have sought to recover the funds or otherwise resolve the situation before the statute of limitations expired. At the same time, the defendant board members should have informed the liquidator of the company of the existence of the receivable for the recovery of the funds provided, so that the liquidator could make a timely and qualified decision on the further procedure.
  • The Supreme Court has addressed the (non-)merger of a building with the land on which it is located in a situation where both the land and the building are pledged in its judgement No. 29I Cdo 153/2022. According to the Supreme Court, no merger of the building with the land occurs if the pledges securing different claims of different pledgees encumber the land and the building to an unequal extent. This is prevented by the regulation contained in Section 3060 of the Civil Code. Specifically, in the present case, prior to 1 January 2014, a pledge in rem was created to secure the pledgee’s claim as a first ranking pledge over a plot of land owned exclusively by the debtor and a building on that plot of land owned equally by the debtor and his spouse. Furthermore, prior to 1 January 2014, another pledge was created to secure another claim of another pledgee, which was (only) on that plot of land and on the pledgee’s share of the building, but not on the share of the other co-owner of the building (the debtor’s spouse). The Supreme Court concluded that the nature of the pledge precluded the building from becoming part of the land in a situation in which the debtor also became the sole owner of the building as of 1 January 2014.
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