When the World Is Not Fair
But things are not that simple.
Legal theory defines this situation as the rule of enormous loss (laesio enormis). Under this rule, a contract under which the value of consideration owed by one party is grossly disproportionate to that of the other is not generally tolerated. This also relates to usury, which was regulated by the 1811 Civil Code. The Code included a simple rule: one party may not suffer a loss of over one half of the value of what it has provided to the other.
With various modifications, the rule is included in the Austrian, Swiss and French legal systems. It is absent, however, from the Czech system. In fact, the current Civil Code contains no provisions that explicitly address unreasonably disproportionate performance.
Prudent Approach by the Courts
Naturally, unscrupulous individuals would like to take advantage of the loophole and claim that each party is free to enter into an agreement. They do not have it so easy, however. Courts are now taking a more sensible stance with regard to unbalanced agreements. Although they do not consider an unreasonably low price as grounds to nullify a purchase agreement, they are responsive to situations in which one party deliberately tries to take advantage of the other party’s ignorance or ineptitude.
For example, the Supreme Court has held that contracts may be deemed usurious if they exhibit characteristics that are both objective (an unreasonably low or high price) and subjective (e.g. mental impairment, duress, carelessness, anxiety or lack of experience on the part of the transferor). The courts must, however, first consider all the circumstances of the case; only then can a contract be deemed invalid on the grounds of a conflict of good morals.
What constitutes good morals was summarized by the Constitutional Court, which defined the term as the sum of morals and generally preserved and acknowledged principles. It is clear that when one party knowingly – and unreasonably – damages the other most people would condemn such behavior and consider it at least immoral. On the other hand, things are never so black and white. That is why the rule of good morals needs to be handled and applied with care in order to keep it from becoming an “elastic” term into which anything and everything can be stuffed.
Coming Soon: A New Approach
The new Civil Code, which will become binding in 2014, will change the approach to the laesio enormis principle. After more than two centuries, the rules – which are currently implied by the courts – will once again be set out in writing.
An aggrieved party will have the right to request that the agreement is nullified and the original situation reinstated if there is a gross disproportion between the performance rendered by each party and the other party was – or must have been – aware and refused to make up the difference. On the other hand, this will not apply when the aggrieved party explicitly waives the right or agrees with the price (even though it was aware of the amount). The rules will not even apply if the reason for the disproportion is based on a special relationship between the parties or, in certain other cases, predefined by law (such as trading on a commodities exchange).
The new Civil Code does not, however, contain an explicit definition of the term “gross disproportion”. Nor does it revive the definition in the 1811 Civil Code, which clearly stated “one half of the price”. But this has its advantages – the courts will be able to respond flexibly to particular circumstances and thus avoid any potential rigidity that could result from more strictly defined rules.