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A more appealing form of debt acknowledgement, thanks to our victorious complaint to the Czech Constitutional Court

Under the old Civil Code, the acknowledgement of debt was a frightfully formalistic institution. However, we successfully argued for the autonomy of the parties’ will before the Constitutional Court in the face of established practice. 

Acknowledgements of debt which came into existence when the old Civil Code (Act No. 40/1964 Coll.) was still in force are still governed by its provisions, both on terms of the established practice and in accordance with the conclusions drawn by the case law of the Supreme Court (especially in 21 Cdo 292/2018). This often represents a fundamental roadblock for all those who hold a claim vis-a-vis a debtor that came into existence prior to the year 2014, if their debtor is rather less cooperative.

This is because the acknowledgement of debt as understood by the old Civil Code was a highly formalistic legal institution. Creditors could rarely rely on their debtors’ acknowledgement of debt being valid – unless they held a physical deed entitled "Acknowledgement of Debt" whose wording was painstakingly phrased such as to be in perfect alignment with the law and with the pronouncements of the judicature.

In the case we took on, the client had a claim towards a debtor that was based on agreements referenced as "loan agreements". The receivable was somewhat older and in theory might have long become statute-barred. In any event, the parties entered into an agreement in 2015 on the waiver of interest owed. Our client assumed that, in return for waiving the interest, they would receive payment of the principal as agreed in that agreement. When this failed to happen, they asked us to represent their interests. In 2017, we filed a claim for payment with the Prague 10 Municipal District Court on behalf of the client. In the ensuing litigation, the debtor invoked the statute of limitation.

The general courts found that the 2015 agreement had really only been an agreement whereby the creditor waived the payment of interest, rejecting our argument that the agreement also qualified as an acknowledgement of debt (and thus triggered a new, ten-year limitation period), given that it fulfilled the criteria of such an acknowledgement of debt in terms of the grounds (legal title) and the amount, and given further that the circumstances clearly indicated the debtor’s intention to repay their debt.

This superficial assessment of our argument by the general courts has now been resoundingly rejected by the Constitutional Court, which found that "to the extent that a court assesses a contract made between the litigating parties, it shall not approach this task with the preconceived notion that this contract shall be perfectly without fault, but rather with the notion that the individuals wanted to express their desired goal in (and through) the contract."

In its decision, the Constitutional Court speaks of a duty of the courts to identify the economic rationale behind contracts when deciding a dispute between the contractual partners, and to strive to preserve the economic function fulfilled by such contract. In the case at hand, the courts should therefore have established that both parties intended to bind the debtor by a repayment obligation, in return for the waiver of contractual interest by the creditor.

In the view of the Constitutional Court, the explicit reference to the original loan agreements in the 2015 waiver of interest means that the debtor, by signing the waiver, reaffirms and acknowledges the obligation to repay the loan which was incorporated in the said loan agreements. This obligation to repay the loan drawn by the debtor is unaffected by the agreement on the waiver of interest.

The Constitutional Court did concede that this interpretation deviates from prior practice as far as the understanding of acknowledgements of debt as per Act No. 40/1964 Coll. is concerned, but found this approach proportionate and justified, given the circumstances – i.e., given the fact in particular that the debtor itself had voluntarily submitted to, and signed, the agreement on the waiver of interest. For the sake of completeness, the Constitutional Court noted that when the debtor appended its signature to the agreement, it created a justified expectation on the part of the creditor that they would recover their money.

Consequently, the Constitutional Court abolished all previous decisions by the general courts in the matter; the case will now be heard again by the first-instance court, and ruled upon in a more judicious manner.

Source:
The Czech Constitutional Court ruling III. US 392/20 of 10 March 2020