Legal News [March 2023]: The Supreme Court dealt with the issue of the contractual penalty adequacy

The recent decision of the Grand Chamber of the Supreme Court brings a change in the approach to the moderation of contractual penalties. The judgment, which departs from existing case law, describes the conditions for assessing the adequacy of a claim for a contractual penalty. You can read more details and other news from Czech decision-making practice in our selection.

The question of whether the court, when examining the adequacy of a contractual penalty, or its moderation pursuant to Section 2051 of the Civil Code, should also take into account the circumstances that occurred after it was agreed upon, was dealt with by the Grand Chamber of the Civil and Commercial Division of the Supreme Court in its recent judgment, Case No. 31 Cdo 2273/2022. First of all, the Grand Chamber does not share the opinion that, in view of the practically literal wording of the provisions on the moderation of contractual penalties under the Commercial Code and the new Civil Code, the application of the earlier case law is reasonable and possible. In interpreting Section 2051 of the Civil Code, it is also necessary to consider the reasons for the adoption of the new Civil Code, including the sources of inspiration, and the principles on which it is based (e.g. the emphasis on the autonomy of the will). The Chamber concluded that the moderation of the contractual penalty cannot (contrary to the concept adopted in the interpretation of Section 301 of the Commercial Code) be perceived as an instrument of substantive control of the arrangement adequacy. On the contrary, such control is based on an examination of the adequacy of a specific claim for contractual penalty and it aims to ensure that the creditor is not paid an inadequate contractual penalty in view of the specific interests of the parties. The court’s moderation process can be divided into the following stages. In the first step, the court determines what function the contractual penalty was intended to perform. Then it examines the specific circumstances, taking into account the function of the contractual penalty. On the basis of those circumstances, the court answers the question of whether the amount of the contractual penalty is reasonable in relation to the creditor’s interests which have been impaired by the breach of the contractual obligation and should have been protected by the contractual penalty. In a third step, the court reduces the contractual penalty to a reasonable amount, taking into account the functions it is intended to fulfil, and the value and importance of the obligation secured.

Labour Law

The interpretation of the trade unions position on the employers request for prior consent to termination of employment was dealt with by the Supreme Court in its judgment in Case No. 21 Cdo 2100/2022. The Supreme Court confirmed that although the decision of the trade union on the employer’s request for prior consent to termination of employment is not a legal act but (only) a factual act that is a substantive prerequisite for a legal act (termination of employment) and is not in itself capable of producing consequences in the legal relations of the parties to the employment (and given that it is also an expression of will), the clarification of the content thereof shall be subject to (in line with) the rules governing the interpretation of legal acts, which are included in the Civil Code (Sections 555 et seq.).

In its judgment in Case No. 21 Cdo 2369/2022, the Supreme Court addressed a partial issue concerning the working time account, namely whether an employee who is subject to this working time allocation is obliged to reimburse the employer for the difference in wages paid if the sum of their fixed wages for the compensation period exceeds the resulting amount of wages earned. The Supreme Court confirmed that in such a case, the Labour Code does not oblige the employee to reimburse the employer for the difference in wages paid and the employer is not entitled to demand payment of such a difference from the employee and, therefore, to make a deduction from wages in respect of that amount.

Other selected case law

  • Reasonable consideration as defined in Section 241(5)(a) of the Insolvency Act was dealt with by the Supreme Court in its judgment in Case No. 29 ICdo 22/2021 regarding consideration of a property nature provided to the debtor. The Supreme Court stated that such (reasonable) consideration cannot be considered to be the “prolongation” of the repayments of the claim (secured by the legal action disputed), the “non-use” of the penalties associated with the debtor’s breach of their obligation to pay the claim, or the “non-enforcement” of the security promissory note; the same applies to the “enabling” of the continued operation of the company (the debtor). The Court referred to its recent resolution of Chamber Case No. 29 ICdo 50/2019, published under No. 9/2022 of the Collection of Judicial Decisions and Opinions.
  • We also bring a summary of an earlier Supreme Court judgment, Case No. 20 Cdo 2644/2022, addressing the legal question of whether a guarantee may arise retrospectively if a monetary debt is already due and the debtor has already been requested to pay. According to the current provisions of the Civil Code, a guarantee presupposes a valid debt of the debtor and may be granted for future or contingent debts, as well as for a set of debts of a certain kind arising to the debtor at a certain time or a set of different debts having the same legal reason. From this provision, the Supreme Court concluded a contrario that a debt which is already due and the debtor has already been requested to pay may also be secured by a guarantee. This is because it is a ‘valid’ debt as defined in Section 2019(1) of the Civil Code, which has not yet expired so it can still be secured by a guarantee. At the same time, it cannot be ruled out that the debtor will continue to perform the debt after the guarantee has been established, even if they are in default, and in such circumstances, the security of the debt by way of guarantee will cease to exist. From the provision of Section 2026(1) of the Civil Code, according to which a guarantee ceases to exist upon the extinction of the debt, the Supreme Court concludes that the guarantee performs its function until the extinction of the debt secured thereby, so it may also arise until the extinction of the debt.
  • In its judgment in Case No. 27 Cdo 408/2022, the Supreme Court addresses the consequences of the fact that a receivable has not been assigned. It states that the consequence of the debtor learning that the receivable has not in fact been assigned is only that from that moment on, the (alleged) assignee no longer has any substantive rights with respect to the debtor relating to the receivable. From that point on, the (alleged) assignee could no longer make the receivable due, nor would the debtor have redeemed their debt by paying the alleged assignee. However, the effects of the legal actions taken in respect of the debtor by the (alleged) assignee up to the moment when the debtor became aware that the assignment of the receivable had not taken place remain unchanged.
  • From previous case law, we summarise the judgment in Case No. 21 Cdo 1755/2022, which deals with acting on behalf of a legal entity in civil court proceedings in a situation where the statutory body of a legal entity consists of several persons (i.e. it is a collective body, such as the board of directors of a joint stock company). In such a case, the chairman of the statutory body, or a member of the statutory body who has been authorised to do so, shall act on behalf of the legal entity. Thus, while the chairman of the statutory body acts for the legal entity without further authorisation, a member of that body may act for the legal entity only if they have been authorised to do so (either ad hoc, or in all or only in certain matters). It follows from the nature of the issue that the authorisation to a member other than the chairman of the statutory body is granted by the collective statutory body. Membership of the collective statutory body of a legal entity does constitute authority to act on behalf of that person in court.
Legal News dReport newsletter

Upcoming events

Seminars, webcasts, business breakfasts and other events organized by Deloitte.

    Show morearrow-right