Legal News [November 2022]: The Supreme Court dealt with a conflict of interest between the executive director and the company

In a breakthrough judgment of the Grand Chamber, the Supreme Court construes a conflict of interest between the executive director and the company in connection with the arbitration agreement. Judgement ref. no. 31 Cdo 1640/2022 affects not only the practice of corporate law, but its impact will very likely be reflected in legal acts in general. In our article, you can find details of this judgment, as well as other news from current case law.

A conflict of interest between the executive director and the company in connection with the arbitration agreement was resolved by the Grand Chamber of the Civil and Commercial Division of the Supreme Court in its most recent judgment ref. no. 31 Cdo 1640/2022. The Grand Chamber commented particularly on the application of the Business Corporations Act’s provisions regarding a conflict of interest to arbitration agreements and on the consequences of breaching the conflict of interest rules. With regard to the first issue, it concluded that Section 55 of the Czech Business Corporation Act, i.e. the obligation of the executive director to inform (in this case) the General Meeting, applies to all agreements concluded between a member of an elected body of a business corporation and this business corporation. The arbitration agreement is no exception. The Grand Chamber infers this rule not only from a linguistic interpretation, but also from the fact that the arbitration agreement clearly affects the interests of the corporation by depriving it of its right to judicial protection in the matter. Thus, if the (former) executive director did not notify the General Meeting that they intended to conclude an arbitration agreement with the company, they were not entitled to represent the company in concluding the agreement. The consequences of their conduct which is in conflict of interest must be assessed in accordance with the general regulation of Agency in Section 437 of the Civil Code.

In that regard, the Grand Chamber found that, as a result of the agent’s conduct in an (unlawful) conflict of interest, the principal was not bound by the agent’s conduct (in the event of a third party’s lack of good faith in the agent’s authority to represent). This is one of the situations of exceeding the authority to represent. The Grand Chamber found no reason to consider it differently from other cases of exceeding the authority to represent, i.e. acting without this authority, and to find, for example, the relative or absolute invalidity of the agreements thus concluded, as the lower courts did. For the sake of completeness, it added that if the agent whose interests are in conflict with the interests of the principal performs actions, the principal is always bound by this conduct if the third party (with whom the agent negotiated) was in good faith that the agent had the authority to represent (i.e. that there was no conflict between the interests of the agent and the interests of the principal, or that the existing conflict did not limit the agent’s authority to represent).

Real estate law

In its judgment ref. no. 25 Cdo 1080/2022, the Supreme Court dealt with the facts of compensation for damage caused by an item, namely a building collapsing or part of it becoming separated pursuant to Section 2938 of the Civil Code. The harmful event in this case consisted of the collapse of the staircase, which occurred as a result of degradation of the material due to moisture, which was caused by an inappropriate structural arrangement that contributed to the wood rotting. The Supreme Court deduced that these facts correspond to the above-mentioned facts in a situation where a defect in the building or its insufficient maintenance were the cause of the damage. It held that the owner of the building was obliged to supervise the building and to maintain it adequately. The fulfilment of these obligations is enforced by the threat of objective liability without the possibility of liberation. The responsibility of the owner of the building for its collapse is based on the constitutional principle that ownership is binding and the owner is obliged to take care of the state of affairs in their property. The owner is thus responsible for ensuring that the maintenance of their building is carried out properly so as to avoid damage to third parties as a result of the collapse of the building and also for improper or inappropriate activity of third parties authorised by the owner to maintain the building, even if the third parties followed instructions of experts or were experts.

It is also worth mentioning judgement ref. no. 22 Cdo 3650/2021 concerning the dissolution and settlement of co-ownership of immovable property. The Supreme Court confirmed its hitherto established decision-making practice that if an objection is raised in the relevant proceedings that one of the parties to the proceedings is not the owner of a co-ownership share in immovable property and the state of entries in the land register is not in line with the actual situation, in such a case the court is obliged to provisionally resolve the issue of which persons are co-owners of the settled property.

Insolvency law

In the area of insolvency law, we would like to draw your attention to the judgement of the Supreme Court ref. no. 29 ICdo 57/2021, in which the Supreme Court dealt with the validity of a contract concluded between a limited liability company on the one part and its sole owner and executive director on the other part in the event of failure to comply with the prescribed form [notarial deed or (as is the case under the current Business Corporations Act) written form with officially verified signatures]. It concluded that the obligation to comply with the legally required form of that contract (in this case, a set-off agreement) was not affected by the fact that the purpose pursued by its conclusion could also have been achieved by one of the parties by means of a unilateral legal act. What is important is that a bilateral act (contract) has been agreed.

Another interesting insolvency judgment with an overlap into transaction law is judgement ref. no. 29 ICdo 133/2020. The Supreme Court dealt with the issue of whether the protection of creditors under the Transformation Act is also supplemented by other protection, i.e. the possibility of challenging transformation on the basis of actions to set aside, in this case an action to set aside under the insolvency law. The Supreme Court stated that the Transformation Act does not explicitly exclude the possibility of challenging the transformation project by means of an action to set aside, and also the Insolvency Act does not contain an exclusion in this respect. With regard to the interest of creditor protection and in accordance with the literature on the subject, the Supreme Court concludes that it finds no reason to prevent the conclusion that the de-merger project can be challenged by an action to set aside under the Insolvency Act.

Other interesting news in the case law

  • In its judgement ref. no. 29 Cdo 3552/2020, the Supreme Court dealt with a right of disposal over a bank account in relation to unjust enrichment. It found that the right of disposal over a bank account also included the right to withdraw funds. However, the further use of those funds and the lawfulness of such use is no longer a question dependent on the existence or scope of the right of disposal, but on the legal relationship between the account holder and beneficiary. In the present case, the person with the right of disposal transferred funds from the plaintiff’s bank account to their own account. In order to answer the question whether they could have been unjustly enriched at the expense of the plaintiff, the decisive factor is whether such a transfer could have been based on a proper legal reason. The lower courts considered that the disputed promissory note could not be such a sufficient reason for the transfer of funds. However, the Supreme Court did not see it so clearly and returned the case to the lower courts to take a closer look at the disputed promissory note and its validity.
  • An earlier judgment of the Supreme Court ref. No. 26 Cdo 3352/2021 addressed the question of whether the provisions of the Civil Code on the voidness of legal acts due to their vagueness or incomprehensibility apply to the resolution of the assembly meeting of the association of owners. Given that the decision of the assembly meeting of the association of owners is a legal act, the Supreme Court concluded that the provisions of the Civil Code on the voidness of legal acts also apply to it. The decision must therefore also be assessed from that perspective.

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