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A Change in the Interpretation of Manifest Disruption of Public Order in the Conception of Absolute Invalidity of a Legal Act

Change in the Interpretation of Manifest Disruption

Czech Republic
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On the 10th of June 2020, the Grand Chamber of the Supreme Court of the Czech Republic passed a judgment in case Ref. No. 31 ICdo 36/2020, which dealt with the validity of a contract concluded between the sole proprietor of a company and the same company represented by its sole proprietor. In this case, the Supreme Court deviated from its past decisions on the issue of interpretation of the notion of manifest disruption of public order. Whereas the Supreme Court had previously interpreted the word “manifest” as expressing the degree of intensity of public disturbance, the current decision accepted that a manifest disruption of public order could be interpreted as an undoubted or unambiguous disruption of public order, without regard to the intensity of the disruption.

Thus, the Supreme Court concluded that a contract concluded between the sole proprietor of a company and the same company represented by its sole proprietor is as a rule absolutely invalid, unless it has been concluded in the form required by law, i.e. in written form and with officially certified signatures, or as the case may be, in another form that especially evidences the date and content of the concluded legal act.

The Supreme Court was resolving a dispute over the question whether an implied contract concluded between a company represented by its sole proprietor and the same proprietor is valid. According to Section 13 of Act. No. 90/2012., regulating Commercial Companies and Cooperatives (Business Corporations Act), as amended (hereinafter the “BCA”), a contract of this type is required to be concluded in written form with officially certified signatures, unless such contract is concluded in the ordinary course of business and under terms and conditions common for that business. Understandably, a contract that does not meet these requirements is sanctioned with invalidity, but the crucial question in that dispute was whether this meant absolute or relative invalidity. No one called the invalidity of the above-mentioned implied contract into question, however if a contract that is not concluded in the prescribed form pursuant to Section 13 of the BCA were sanctioned with relative invalidity, it would then be a validly concluded contract.

In order for a legal act to be absolutely invalid, it must either manifestly go against good morals, or contradict the law and at the same time manifestly disrupt the public order. In the discussed case, there had been no manifest breach of good morals. On the other hand, the failure to comply with the prescribed form of a legal act pursuant to Section 13 of the BCA definitely contradicts the law. Furthermore, the Supreme Court concluded that the violation of Section 13 of the BCA is also a disruption of public order. According to the Supreme Court, the reason for this was that the rules of law that protect legal certainty are part of the rules of law that protect public order, and Section 13 of the BCA protects the legal certainty of third parties, which sounds reasonable. The key issue of the dispute thus remained whether non-compliance with Section 13 of the BCA could be considered a manifest disruption of public order.

Manifest disruption of public order

The Supreme Court had previously held several times that manifest disruption of public order as per Section 588 Act No. 89/2012 Coll., the Civil Code, as amended (hereinafter the “CC“) required a certain degree of intensity of disruption of the public order. So it could have been expected that in this case again the intensity of disruption of public order would be assessed in the case of non-compliance with the prescribed form of the legal act pursuant to Section 13 of the BCA. However, the Supreme Court assessed the case differently and held that manifest disruption of public order pursuant to Section 588 of the BCA meant an undoubtable or unambiguous disruption of public order.

This part of the decision is absolutely crucial and has a major impact on all private law. Essentially, the Supreme Court concluded that any legal act that (even slightly) disrupts the public order is absolutely invalid if this disruption is evident. The above-mentioned decision of the Supreme Court requires the addressees of the legal rule to respond by acting strictly in compliance with the sense and purpose of individual provisions of legal regulations.

Section 13 of the BCA impaсts even unilateral legal acts by the sole proprietor and the company represented by him/her

The Supreme Court also concluded in its decision that the requirement of written form and officially certified signatures pursuant to Section 13 of the BCA must also be applied to unilateral legal acts concluded by the sole proprietor and addressed to the company represented by its sole proprietor, namely by using argumenta a simili (per analogiam). The Supreme Court primarily used the sense and purpose of the given Section as an argument here, or more precisely, it referred to protection from retroactive “amendments” of legal acts (regarding both the content and dates of such acts), or to ensuring legal certainty and the protection of rights of third parties (creditors, etc.) against incorrect acts of the sole proprietor who is at the same time the representative of the company. The Supreme Court reached that conclusion despite the fact that in Section 13, the BCA refers expressly only to contracts (bilateral legal acts).

The above-mentioned conclusions are crucial primarily for sole proprietor companies represented by the sole proprietor to consider, for instance, when negotiating a contribution above the registered capital with a set-off agreement, in case of any type of unilateral set-offs, recognition of debts, etc. At the same time, such broad interpretation by the Supreme Court could also obviously impact the situation when an executive of a company leaves his office (if the function of executive is performed by the sole proprietor of the company). Even unilateral acts like this one would have to be concluded with officially certified signatures.

Application of the above conclusions to Section 13 of the BCA

In light of the decision of the Supreme Court discussed above, it is recommended that all legal acts (both unilateral and bilateral) between a sole proprietor company represented by such sole proprietor and the same sole proprietor be concluded in compliance with the requirements of Section 13 of the BCA, or in compliance with the sense and purpose of this Section, meaning that the date (when it was concluded) and content of the act at issue must be manifestly stated in such a way that they could not have been and cannot be additionally or subsequently amended in any possible way.

However, the Supreme Court conceded that as long as some related or subsequent legal acts demonstrate that the sense and purpose of Section 13 of the BCA have been maintained despite the fact that the act was not concluded in written form and with officially certified signatures, this act need not necessarily be absolutely invalid. Therefore, if with regard to the circumstances no doubt can be cast on the content and date of conclusion of the legal act, then such act does not disrupt the public order and is not sanctioned with absolute invalidity. Clearly, the sense and purpose of Section 13 of the BCA can be fulfilled even when a notarial deed on some other legal act is executed as a follow-up to the legal action outlined above. This notarial deed should refer in a way that is specific enough to the specific legal act concluded earlier. If a notary, for instance, among other things states in a notarial deed that the notary was presented a certain contract concluded on a specific date (even though without officially certified signatures) with certain content, it can be assumed that this would also be sufficient proof of the date of conclusion of the legal act, and most probably of its content.

Conclusion

We consider the above-mentioned decision of the Grand Chamber of the Supreme Court to be a fundamental one, because it quite significantly changes the concept of absolute invalidity in Czech private law. The Supreme Court deviated from its past legal decisions: previously, it had interpreted manifest disruption of public order as disruption of public order of a certain intensity, whereas now it interpreted it as undoubtable or unambiguous disruption, regardless of the intensity of such disruption. Legal acts that contradict the law and evidently disrupt the public order (regardless of the intensity of this disruption) are absolutely invalid, unless they fulfill the sense and purpose of the legal rules applicable to this legal act.

This decision is also groundbreaking in respect of broadening the interpretation, whereby unilateral legal acts of a proprietor of a sole proprietor company towards the company that is represented by the same proprietor, or vice versa (regardless of the grounds for the authorization to act), are also subject to the requirements stated in Section 13 of the BCA. Therefore, it is recommended that in such cases all legal acts that are concluded between such parties be in written form and with officially certified signatures, or, if necessary, in any other form that evidences the date and content of the legal act.

By Martin Subrt, Partner, Irena Kolarova, Senior Associate, and Pavel Visek, Junior Lawyer, Rowan Legal

Czech Republic Knowledge Partner

HAVEL & PARTNERS, attorneys-at-law, with offices in Prague, Brno, Bratislava, Pilsen, Olomouc, and Ostrava, has a team of 250 lawyers, tax advisors and 500 employees in total, is the largest independent law firm in Central Europe.

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