On the excessively formalistic interpretation of future contracts

In a ruling of August 2022, the Constitutional Court admonishes the general courts to avoid excessive formalism, and notes key aspects which should be taken into account when construing the true substance of legal transactions.

In its decision III.ÚS 129/21 of 2 August 2022, the Constitutional Court dealt with a constitutional complaint invoking wrongful actions on the part of a Regional Court (as the appellate instance) which had to assess the obligations arising from a future agreement (the “Agreement”), made between the complainant and the city of Dvůr Králové nad Labem (the “Municipality”) in 2007, i.e., at a time at which the previous Civil Code (Act No. 40/1964 Coll.) was still in force. The subject matter of the Agreement was the transfer of real property (land plots) owned by the complainant for the purpose of building a wastewater treatment plant. The intention was to delineate these land plots in greater detail in the actual purchase agreement only after the ownership relations to certain land pertaining to an apartment building would be settled, based on a surveyor’s map attached to the Agreement.

Even though the Agreement had been drafted by the Municipality, and even though the Municipality called upon the complainant to enter into the purchase agreement as anticipated by the Agreement, no purchase agreement was ultimately made. The complainant responded by seeking payment of a contractual penalty in the amount of CZK 2,000,000 plus interest and fees, as per the relevant provisions of the Agreement.

While the District Court recognized the complainant’s claim for payment of the penalty, the Regional Court endorsed the line of argument put forward by the Municipality, which invoked the nullity of the Agreement on grounds of the insufficient determination of the subject matter of transfer. The complainant thereupon brought an appeal on a point of law before the Supreme Court, which was however rejected, with the argument that the complainant did not satisfy the statutory criteria for admissibility of such special appeal (dovolání). The complainant then filed a constitutional complaint, seeking the nullification of all previous court decisions in the matter because, in the complainant’s view, they violated his constitutional rights, i.e., in particular, the right to due judicial protection as per Art. 36 of the Charter of Fundamental Rights and Freedoms.

The Constitutional Court found that the complaint had merit, and called the approach taken by both the Regional Court and the Supreme Court excessively formalistic. In this respect, the Constitutional Court called to mind one of the fundamental principles for the interpretation of contracts according to which legal transactions shall preferentially be treated as valid and existing, rather than null and void. This principle was not expressly enshrined in the 1964 Civil Code, but nonetheless inferred by the judiciary in its case law.

In addition, the Constitutional Court pointed out that, when construing the substance of any contract, one must differentiate between the respective character of the participants when it comes to their ability to use proper legal terminology and to attain a systematic and coherent contractual structure. The Constitutional Court found that the parties had known the subject matter of the Agreement with sufficient clarity at the time at which they entered into it, and that the subject of transfer was sufficiently determinate (or, as it were, determinable) given the enclosed surveyor’s map, so that the Agreement could not have been considered null and void.

Last but not least, the Constitutional Court noted that the provisions of Art. 2 (3) of the Charter of Fundamental Rights and Freedoms and of Art. 2 (4) of the Constitution guarantee the individual’s right to respect of autonomous expressions of their personality by public authority, including the expression of their free will as manifested in legal transactions. If a body of public authority denies such autonomous expressions of will their effect for purely formalistic considerations, the aforementioned fundamental rights are being curtailed and the citizen’s freedom to contract is being infringed. In assessing the validity and construing the contents of contracts, one must always take into account the actual will of the parties and their subsequent behavior, as well as the true rationale of future contracts, which may not be held to the same formal standards as the purchase agreement which they precede.

Finally, the Constitutional Court addressed the failure of the Supreme Court which had likewise taken a purely formalistic approach to the complainant’s appeal, rejecting it as inadmissible because of the supposed absence of the statutory grounds for an appeal on a point of law. According to the Supreme Court, the complainant had failed to specify which specific admissibility criterion he believed satisfied, and the complaints contained in the writ of appeal itself had not by themselves offered a basis for finding the appeal admissible. The Constitutional Court disagreed, noting that here, too, the obligation to observe the statutory criteria for the admissibility of an appeal could not justify excessive formalism. If the Supreme Court had found fault with how broadly or narrowly the question brought before it in the appeal was phrased, it could perfectly well have remedied this shortcoming itself by providing the requisite added precision.

Constitutional Court ruling III.ÚS 129/21 of 2 August 2022

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