Czech Republic: The recent comprehensive overhaul of civil law in the Czech Republic known as “recodification” has introduced numerous new aspects to legal relationships governed by Czech law.
To a large extent, the changes also affect those who seek to recover their financial claims, and such persons are therefore well-advised to pay heed to the concepts and rules brought about by the new law. In this article, we would like to outline in broad strokes some of these important new concepts and rules.
On the general mechanism for the collection of claims
The general mechanism for the collection of claims has been left untouched even after the promulgation of the New Civil Code (Act No. 89/2012 Coll.): first, one must sue for performance. Once an accommodating judgment has been obtained (and this judgment has become final and enforceable), and unless the debtor voluntarily renders performances based on the judgment, one may seek the satisfaction of the claim within a debt enforcement procedure.
When collecting a claim, one must first determine whether the underlying legal relationship is governed by the Old Civil Code (Act No. 40/1964 Coll.) or by the New Civil Code, and thus which of these laws is to be applied.
As a general rule, rights and obligations which came into existence on or after the day on which the New Civil Code entered into force (1 January 2014) are governed by the New Civil Code. Previous legal relations will be governed by the Old Civil Code, though certain specifics must be kept in mind as described below.
Above all, all lease agreements (i.e., including those made prior to 1 January 2014) are subject to the New Civil Code. In this respect, note that any and all provisions of lease agreements which are in conflict with the mandatory provisions of the New Civil Code are considered null and void as of 1 January 2014 – this includes e.g. clauses which serve to secure the discharge of tenant’s obligations by imposing a contractual penalty for non-performance.
As for collateral in general (i.e., pledge titles, guarantees, security assignments, etc.), the rights associated with such security will be governed by the Old Civil Code if the security was established prior to 1 January 2014, whereas security that was established after 1 January 2014 will be governed by the New Civil Code irrespective of whether the underlying debt is governed by the Old Civil Code or the new Civil Code.
A right to damages on grounds of a violation of the law will be governed by the Old Civil Code if the violation occurred prior to 1 January 2014, irrespective of when the actual damage occurred and when the right to demand compensation for the same came into existence. If the violation occurred after 1 January 2014, the right to damages will be governed by the New Civil Code.
Statute of limitation
The New Civil Code has unified the statutory rules regarding the limitation of claims. Previously, the Commercial Code contained the rules by which the claims of commercial entities became statute-barred, and the (Old) Civil Code contained the rules that applied to everyone else. The New Civil Code stipulates a general subjective limitation period of three years (whereas “subjective” here means that the limitation period will be triggered depending on the creditor’s awareness of the facts of relevance for the commencement of the limitation period), and an objective limitation period of ten years (which will commence depending on the moment in which the given claim has become actionable in court, irrespective of whether the creditor had knowledge of the given claim). Special limitation periods are set for certain specific rights.
For the event that an agreement on an out-of-court settlement is made between the creditor and the debtor regarding a given right (or the circumstances which give rise to such right), the New Civil Code sets forth that the limitation period begins only after the creditor or the debtor expressly refused their continued participation in the negotiations (and if the limitation period was triggered previously, then it will be stayed for as long as the settlement negotiations continue). Given the fact that the moment in which the agreement is “made” can be quite contentious (as of the moment in which the parties engage in talks? Or only upon the explicit – oral or written – conclusion of the settlement?), creditors are well-advised not to rely on this “suspension” of the statute of limitation, unless they entered into an explicit (i.e., ideally, written) understanding regarding the out-of-course settlement with the debtor according to which the suspension of the statute of limitation is one of the effects anticipated and desired by both parties.
In a departure from the previous decision-making practice of the Supreme Court, the New Civil Code allows the parties to a contract to agree that the creditor may charge compound interest. If the creditor’s claim arose because of unlawful actions on the part of the debtor then the creditor may demand payment of compound interest even in the absence of an explicit arrangement to such effect between the parties, though compound interest in such a case only begins to accrue as of the day on which the claim was raised in court. “Unlawful actions”, in this regard, comprise in our view any breach of contract and any violation of statutory law.
The New Civil Code motivates creditors to swiftly raise their claims in court without tarrying unnecessarily, in that it contains a provision according to which a creditor who for no good reason is in delay with the exercise of their right to demand payment of the debt, thus having caused the amount of interest to be now equal to the amount of the principal, may not charge any further interest. (However, even such a tardy creditor becomes entitled to further claims that may originate after the day on which the creditor finally took the debtor to court.)
Usury, laesio enormis
When entering into an agreement one must be mindful of the debtor’s potential recourse to the defense of usury or of excessive harm.
“Excessive harm” (laesio enormis) is deemed present where parties have undertaken to render each other mutual performances, but the performance owed by one party is in gross disproportion to the performance rendered by the other. In such a case, the injured party may demand that the contract be nullified and that the original state be restored, unless the other party renders supplementary performances to compensate for the disproportion (with a view to the customary value of such performances at the time and place at which the contract was made), though there exist several exceptions to this basic set of rules.
The New Civil Code stipulates that a contract is null and void if one of the parties abused the other party’s distress, inexperience, diminished mental acuity, emotional state, or recklessness such that a contract has been made under which that other party promises or renders performances to the erstwhile party (or to someone else) whose monetary value is grossly disproportionate to the counter-performance. (Such a contract is known as usurious contract.)
Given the substantial risks associated with the defense of laesio enormis, one may want to consider ruling out the relevant provisions of the law (which, in our view, are all negotiable), by way of an explicit contractual provision to such effect. In any case, the provisions of the New Civil Code on usury and on excessive harm do not apply to relationships between commercial entities.
Strictly speaking, the concept of the “pre-action letter” (i.e., a last reminder before taking legal action which must be sent to preserve certain creditor’s rights) was not introduced into Czech law in connection with the adoption of the New Civil Code. Even so, it is a relatively new concept (having come into force only as of 1 January 2013), and as it is of crucial importance for the practice of claims collection, we feel we should discuss it here.
Pursuant to the Code of Civil Procedure, a complainant who sues for performance (i.e., for payment, for surrender of a thing, etc.) is only entitled to demand that the defendant cover their costs of proceedings if they previously sent a pre-action letter to the defendant. This pre-action letter must be sent at least seven days before the lawsuit is being initiated, and must be sent to the defendant’s address for service (or, as the case may be, the last known address of the defendant). In other words, if the complainant fails to send this last reminder then they cannot seek the compensation of their costs of proceedings (i.e., in particular, the court fee and the costs of legal counsel) even if they prevailed on the merits, which, depending on the individual case, can translate into rather tangible financial loss.