When does debt become statute-barred?

Czech Republic: The introduction of a new concept under which the statute of limitation is suspended during settlement negotiations between creditor and debtor is fraught with problems

Part of the new Czech private law is the concept of a suspension of the statute of limitation during out-of-court settlement negotiations. The idea behind this arrangement is to make sure the limitation period will not lapse even if the debtor deliberately tries to string the creditor along until the limitation period runs out.

As a general principle, the debtor is not obliged to perform unless the corresponding right has been asserted in court before becoming statute-barred. The general limitation period is three years, but the law stipulates various special limitation periods for a variety of situations. Moreover, the parties to a contract may newly agree on their „own” diverging limitation period.

The Civil Code defines the situations in which the limitation period is stayed – i.e., in which the limitation period will for a certain time period stand still. A new way for staying the limitation period is to enter into negotiations over an out-of-court settlement (Sec. 647 of the Civil Code). If the creditor and the debtor enter into an agreement on out-of-court settlement talks, the limitation period will only continue to pass after one of the parties has expressly refused to participate further in the negotiations.

There are uncertainties as to what qualifies as an „agreement on out-of-court negotiations”. A mediation procedure certainly would qualify, but then, so would presumably any informal talks on the debt in question between the creditor and the debtor. This uncertainty (which affects both parties) as to how much of the limitation period has already lapsed may be mitigated by concluding a written agreement on out-of-court negotiations. In addition, it is advisable to keep records of any communication with the other party, as this avoids doubt and prevents an arduous evidentiary procedure during which one would have to prove that and when out-of-court negotiations were initiated, that and when one party refused to participate further in them, etc. In the case of litigation, if the debtor were to invoke the statute of limitation, it would fall upon the creditor to demonstrate that an agreement on out-of-court negotiations existed, and for how long.

Once the out-of-court negotiations have begun, the limitation period only continues after one of the parties expressly refused to participate in further negotiations. The fact of such refusal must be beyond doubt. Only future case law will tell whether, instead of an explicit refusal, it is sufficient for one of the negotiating parties to „let the matter slide”.

As soon as the obstacle to the course of the limitation period (in the form of out-of-court negotiations) is removed, the limitation period continues – however, it does not end any earlier than six months from the day on which it was resumed.

Source: New Civil Code (Act No. 89/2012 Coll.)

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