In a recent decision, the Supreme Court of the Czech Republic clarified and supplemented the case law on the validity of the settlement agreement. It is clear from the approach of the Supreme Court of the Czech Republic that its interpretation always aims to maintain the validity of the settlement agreement in order to ensure legal certainty in this contractual relationship regarding the termination of the settled rights and obligations and their replacement by new rights and obligations. It is, therefore, not possible for one party, for example, to reconsider a settlement agreement after finding that its claim was not in fact contentious or doubtful. In this article, we will briefly approach a recent decision of the Supreme Court of the Czech Republic file no. 33 Cdo 1720/2019 from 21st of November 2019.
- The core of the case, the decision of the court of first instance and the court of appeal
The applicant (creditor) and the defendants (debtors) entered into an agreement in which they stated that the applicant has claims against the defendants under the credit contract which were quantified. The agreement also contained information on how much the defendants had already paid to the applicant and information on the maturity of each part of the total debt. The agreement included the acknowledgment of the debt and an agreement on the settlement of (allegedly) disputed rights. In the agreement, the parties stated the following:
“by this agreement, the parties fully settle their mutual relations arising from the credit contract (…) which amount to CZK 1,540,200 by the debtor paying the creditor to the account no. (…) until the 31st of August 2015 (…) the amount of CZK 1,300,000.”
While the court of first instance did not see a problem in the settlement agreement conceived in the aforementioned manner and upheld the lawsuit (which pursued payment according to settlement agreement) in full, the court of appeal reversed the decision of the court of first instance and partially dismissed the lawsuit. In relation to the modified statement on the merits, the court of appeal concluded that the settlement agreement contained – in addition to the acknowledgment of the debt – a settlement agreement between the parties, which is “from the outset” invalid, because it is clear, that its cause and amount were not contentious or doubtful between the parties, and it is not possible to determine which rights should have been the subject of a settlement.
In other words, the court of appeal did not allow the possibility of a valid settlement agreement where there is no doubt in the existence of the debt.
- The decision of the Supreme Court of the Czech Republic
However, the above-mentioned legal opinion of the court of appeal was unequivocally rejected by the Supreme Court of the Czech Republic, because it is also considered to be in conflict with previous case law of the Supreme Court of the Czech Republic on this issue.
The Supreme Court therefore concluded that a settlement is an agreement between the parties to the legal relationship which removes the disputed or doubtful reciprocal rights and obligations by terminating them and replacing them with new ones. The existing obligation is thus terminated and replaced by a new obligation resulting from the settlement. Settlement may govern any disputed rights and obligations between the parties, which are freely disposable by law.
However, crucial for the assessment of this issue is the nature of contentiousness of rights and obligations. The Supreme Court of the Czech Republic states that the nature of contentiousness is not objective. It is strictly a subjective category.
Entities legitimized to assess the contentiousness or doubtfulness of rights and obligations are solely the parties to the obligation in question. Therefore, a right or obligation could be contentious or doubtful even if it does not create any uncertainty in a third party – for example in court. Declaration of contentiousness or doubtfulness itself is not necessary in a settlement agreement.
Thus, if the parties have identified as contentious or doubtful the rights and obligations which are not seen as such by the court, the subjective belief of the parties takes precedence over an objective assessment of the court.
It can be concluded that the opinion of the Supreme Court of the Czech Republic is very reasonable, because if it were possible to invoke the invalidity of the settlement agreement due to objective indisputability of settled rights and obligations, there would be considerable uncertainty of the parties. In principle, everyone could, for example, reconsider settlement after finding out the circumstances that disprove the disputability of certain rights and obligations.
Such a situation would certainly be undesirable, so keep in mind that you can no longer just unilaterally reconsider a stipulation made in the settlement agreement, even if circumstances subsequently appear, under which you wouldn’t conclude the settlement agreement in the first place.
It is therefore advisable to seek counsel of a lawyer about the possible consequences and effects of a settlement agreement. Advisably beforehand. The lawyer can correctly estimate and recommend when the conclusion of a settlement agreement is advantageous and when it is not. Our office is ready to advise any client in this regard.