May one perform an unilateral change of the contractual place of performance – i.e., here, a bank account? Under what circumstances may one utilize the concept of substitute performance and pay into judicial escrow?
One of the most important rulings handed down by the Supreme Court last year concerned the permissibility of a unilateral change of the place of performance – a bank account – and when and under what conditions so-called substitute performance into judicial safekeeping is admissible.
What had happened?
The parties had entered into a contract for the transfer of a share in a limited liability company for consideration. The consideration for the share was divided into two installments. The defendant duly paid the first installment. The second installment, in the amount of CZK 2 million, was to be transferred to the plaintiff’s bank account specified in the contract. The defendant ultimately paid a portion of the second installment, in the amount of CZK 1.5 million, but to an account other than the plaintiff’s account specified in the contract; he then paid another portion, in the amount of CZK 250,000, to the plaintiff in cash. Although a part of the second installment was thus paid in deviation from the original understanding between the parties – namely, partly to an account other than the one agreed and partly in cash – the plaintiff did not refund this amount.
Subsequently, the debtor was asked to pay the entire second installment (again) to a lawyer’s escrow account – again a different account than the one contractually agreed. The creditor’s representative stated that the reason for the change was the termination of the originally agreed account, and added that the creditor was currently serving a prison sentence. As a precaution, the debtor then deposited the remaining part of the second installment, amounting to CZK 250,000, into judicial safekeeping.
The court found that the plaintiff had in fact unilaterally changed the place of performance to an account other than that agreed between the parties in the plaintiff’s pre-litigation letter. However, it also concluded that the mere deposit of the amount by the defendant at the court could not discharge the contractual obligation, as there were no objective reasons for this action. The court also ruled that the debtor was obliged to pay the amount corresponding to the arrears of the second installment. The court of appeal upheld this view. The defendant (i.e. the debtor) filed an appeal on points of law against the judgment of the court of appeal with the Supreme Court.
Change of place of performance
The Supreme Court reminded the participants of the settled case law regarding the place of performance that came about under the so-called “old” regulation (i.e. under Act No. 40/1964 Coll., the Civil Code, and Act No. 513/1991 Coll., the Commercial Code), and concluded that this case law is still applicable today, under the new Civil Code (Act No. 89/2012 Coll.), as follows:
- The conditions for the proper and timely fulfillment of an obligation include fulfillment at a specific location (the so-called place of fulfillment).
- If the parties have agreed that the debtor shall make payment to the creditor’s account specified in the agreement, then this arrangement may be understood to properly determine the place of fulfillment.
- If the place of performance has been determined by mutual agreement between the parties, it cannot be changed unilaterally; instead, the consent of the other party must be obtained.
- The payment of the debt to an account of the creditor other than the account to which the payment should be made, according to the agreement, thus has no debt-discharging effect.
- If the creditor does not immediately return the money to the debtor after he has been able to determine in the ordinary course of business that the debtor transferred the consideration to another of creditor’s accounts (other than the one to which the debtor was contractually obliged to pay), one may generally conclude that he accepts the debtor’s performance into a different account; in such case, and unless the contract provides otherwise, the debtor’s obligation expires on the day on which the transferred amount is being credited to the creditor’s (other) account.
- An obligation cannot be changed at the will of either party unless the other party whose legal position is directly affected by the change has given consent.
At the same time, the Civil Code (Act No. 89/2012 Coll.) allows (in Sec. 1956) the unilateral change of the place of performance in the event of the relocation of the residence, registered office, enterprise, or business facilities of the creditor. According to the Supreme Court, this regulation may also be applied by analogy to a unilateral change of the place of performance in the case of a change of the creditor’s bank account, applying the principle of equity, provided that the creditor bears the increased costs and risks of the other party. The prerequisite is that the debtor has been duly informed of the change of place of performance, i.e. the new bank account, and has been requested to make payment to that account.
If the creditor’s (the plaintiff’s) account has been terminated and the debtor has been notified and requested to pay into a different account – which is tantamount to a unilateral change of the place of performance – the debtor was obliged, in the opinion of the court of appeal, to pay into this new account and not into judicial safekeeping.
In the present case, this means that the portion of the second installment of the purchase price in the amount of CZK 1.5 million (paid into a different account) or CZK 250 thousand (paid in cash) was duly paid – since the creditor accepted the payment (even though it was not made in the agreed place of performance) and did not return it. However, the remaining amount of the second installment of CZK 250,000 should have been transferred to the new account (i.e. the lawyer’s escrow account) – unless the conditions for payment into judicial safekeeping were met, see below.
Conditions for deposit in judicial safekeeping
As a general rule, as long as the conditions for depositing the money with the court are not met (e.g. because the creditor does not refuse performance, can be reached, and the debtor has no doubt as to whom and where to perform), the debt is not extinguished by depositing the money with the court and the debtor’s obligation to perform directly to the creditor persists.
In the above case, this would mean that the debtor did not fulfill his debt by depositing the purchase price for the performance share into the court’s account; rather, he should have transferred the remaining amount of CZK 250 thousand to the newly notified escrow account of the attorney.
However, the Supreme Court pointed out that, in view of the circumstances of the case, one must not rule out the possibility of replacing the payment into the escrow account with a substitute performance into judicial safekeeping, especially in a situation where the debtor may have reasonable doubts as to whether the payment into the newly designated account will actually discharge his obligation toward the creditor.
In the case at hand, the defendant could have had such doubts, especially because the plaintiff was imprisoned and could not be reached, and the original account had been closed for unclear reasons, possibly related to the creditor’s criminal activities. The debtor communicated at all times with the creditor’s authorized agent, the creditor’s signature on the power of attorney was not officially verified, and the demand for payment was many times higher (CZK 2 million) than the actual debt balance (CZK 250,000). The lower courts had not dealt with these circumstances in any way.
The Supreme Court also confirmed that in proceedings for the judicial safekeeping of property, the decisive aspect is not the depositor’s legal characterization of their application for the initiation of such proceedings, but the description of the reason for the deposit based on the factual circumstances.
The Supreme Court summarized the conditions for judicial safekeeping as follows: Rendering performances into judicial safekeeping has debt-discharging effect, but only if the legal reason for judicial safekeeping stated by the debtor in the application for the opening of the proceedings is fulfilled.
In proceedings for the payment of a debt (the fulfillment of which is claimed by judicial deposit), the court must examine whether the reasons stated by the debtor in the application for judicial safekeeping are fulfilled. In the proceedings at hand, the court must also assess the grounds for the substitute performance into judicial safekeeping – and it must do so not based on how the applicant (debtor) legally qualified these grounds in the application, but rather based on how he defined them factually (whereas the legal qualification, i.e. the classification under one of the statutory grounds, is incumbent on the court).
Conclusion
The Supreme Court has referred the above-described legal dispute back to the court of first instance for reconsideration. The case is therefore far from over for the parties. However, the legal community and the general public may already draw the following conclusions:
- The “old” case law on a change of the place of performance remains applicable (see above);
- Section 1956 of the Civil Code can also be applied analogously to the change of a bank account number; and
- depositing one’s performance in judicial safekeeping only has debt-discharging effect under certain conditions, i.e. not every deposit into judicial safekeeping is debt-discharging.
Source:
Supreme Court, 27 Cdo 544/2023