In practice, it is quite common to encounter a situation where the contracting parties unknowingly continue to perform the contract on both sides, even though the contract has already expired and none of the original contracting parties is obliged to perform under the expired contract. When one of the original contracting parties discovers that for a certain period of time performance has been taking place between the parties without legal justification, the original contracting parties generally proceed to settle the mutual unjust enrichment.
In this article we will deal with the question of the effect on the creation and settlement of unjust enrichment of the fact that one of the original contracting parties was aware of the termination of the contract, while the other party continued to perform the original contract, i.e. provided and received performance under the original contract.
Unjust enrichment in general
Pursuant to Section 2991(1) of Act No. 89/2012, Civil Code, as amended (hereinafter as the „CC“), whoever enriches himself at the expense of another without just cause is obliged to give the impoverished person what he has enriched himself. According to paragraph 2 of the same provision, a person is unjustly enriched in particular if he obtains a pecuniary advantage by performing without a legal reason, by performing for a legal reason that has fallen into disuse, by unlawfully using someone else’s value or by performing for him what he should have performed himself.
In the context of synallagmatic contracts, i.e. contracts under which both parties are obliged to provide each other with conditional performance, which oblige the parties to repeated or long-term performance (typically rental agreements, leasing agreements, etc.), the parties usually negotiate their limited effectiveness linked to a time or termination clause. In the event that such a contractual arrangement results in the termination of the contract, the obligation of the original parties to continue to perform under the contract ceases, unless the parties agree otherwise.
If the original contracting parties (nevertheless) continue to perform on the basis of the expired contract, each of the original contracting parties may, in accordance with Section 2993 CC, demand that the other contracting party hand over to it what it has received. In the case of consideration (i.e. in cases of rental, leasing and similar contracts), the amount of monetary compensation for the impoverished party is determined in accordance with Section 2999 (2) CC, according to which the impoverished party is compensated in the amount of the consideration received from the former other party. The original contracting party against whom a claim for such compensation is made may defend itself by way of a counterclaim under Section 2993 CC. Thus, the former contracting parties are usually under no obligation to actually give or return anything to each other as a result of this reparation mechanism.
The condition for the application of the above-described procedure for the settlement of unjust enrichment pursuant to Section 2993 in conjunction with Section 2999 CC is that the mutually provided benefits relate to, or are attributable to, the same terminated contract and are not two separate unjust enrichments to be settled under the general regime pursuant to Section 2991 CC. This discrepancy is essential both for the determination of the amount of the claim for unjust enrichment and for the assertion of the claim or the defence of the other former contracting party against it (in particular, the need to set-off in the event of a defence against the claim).
Therefore, the question arises from the above to what extent the knowledge of one former contracting party – the recipient of the performance – that the contract between the contracting parties has already terminated and that therefore this former contracting party is not entitled to accept the performance under such a contract and at the same time under such a contract is not entitled (obliged) to provide the agreed performance to the other former contracting party, is reflected in the attributability of the performance to the terminated contract. In other words, whether or not the knowledge of one of the parties to the former contract that the contract has terminated precludes such imputability. Whether or not the performance is related to the contractual relationship must be assessed from the point of view of the recipient, who should also have given some inducement to perform, in principle according to the same rules as those applicable to the interpretation of a legal transaction.[1]
Current decisions of the Supreme Court of the Czech Republic
The Supreme Court of the Czech Republic dealt with the assessment of the above issue in its recently published decision[2] (hereinafter as the “Decision”). According to the Supreme Court of the Czech Republic, the presumption formulated in section 2993 CC, namely that the contracting party has performed “without there being a valid obligation”, is (will be) fulfilled (and the performance subject to the regime of section 2993 CC will be) also where it will be necessary to settle the performance provided because the contracting parties were mistaken in assuming that the contract continues to exist, although the condition precedent which led to its termination (for a future period) has already occurred.[3] . The question remains, however, whether the fact that one of the former contracting parties knows of the termination of the contract and yet provides and receives performance under the (now terminated) contract makes any difference to that conclusion.
In this context, the Supreme Court of the Czech Republic concluded in its decision that the application of the regulation contained in Section 2993 CC cannot depend on whether the former contracting party (in the role of subtenant in the given case) is the plaintiff in the court proceedings or whether the former contracting parties act in the opposite procedural position in the dispute. The essential point is that at least one of the recipients of the benefits provided by the former parties to each other under the now terminated contract could view the benefit received from his point of view (objectively speaking) as a contractual benefit (since he was unaware of the termination of the contract).[4]
It can therefore be summarised that the knowledge of one of the former contracting parties of the termination of the contract in question is irrelevant in the context of the claim and settlement of unjust enrichment under Section 2993 in conjunction with Section 2999 CC.
Counterclaim vs. set-off
In the event of performance by both former contracting parties under the alleged contract, each of the former contracting parties may, according to Section 2993 CC, demand that the other former contracting party hand over to it what it has received. However, the (other) former contracting party against whom such a claim is made may defend itself against such a claim by way of counterclaim. If the release of the subject matter of the unjust enrichment is not reasonably possible (typically where one of the former contracting parties has allowed the other former contracting party to use the thing on the basis of the contract in question) and at the same time such former contracting party has performed for consideration, compensation shall be granted in the amount of such consideration (typically the amount of the rent paid).
In this context, a sub-question arises as to whether, in addition to the application of the counterclaim, it is also necessary to set off (unilaterally) the former contracting party’s claim against the other contracting party for reimbursement of the monetary benefit provided on the basis of the terminated contract (e.g. rent) against the claim of the other former contracting party for monetary compensation within the meaning of Section 2999 CC. Even the existing commentary literature does not provide a definitive answer to this question. In the Decision, the Supreme Court of the Czech Republic expressly confirmed that the settlement of former contracting parties under Section 2999 CC (i.e., mutual settlement) does not require an expression of will by the entitled former contracting party aimed at “setting off” the mutual claim. In other words, there is no need to set off claims in addition to a counterclaim in order to effectively defend against a claim for the recovery of what the former contracting party has received.
The Decision is also crucial in that it provides an unambiguous answer to the question raised in the commentary literature[5], whether the court will automatically settle the monetary benefits (i.e. both in the case of reimbursement of monetary benefits and in the case of compensation under section 2999 CC) or only upon objection by the relevant former contracting party. It is clear from the Decision that the court will settle the monetary benefits on the basis of the counterclaim of the relevant party. Therefore, the court will not make the settlement automatically, but only on application.
In other words, if both parties to the contract continue to provide each other with the contractually agreed mutual performance after the termination of the contract and at least one of them accepts such performance (considered from its objectified perspective) as performance under the contract, the provisions of Section 2993 CC apply, regardless of the fact that the other party to the contract accepted the mutual performance even though it knew that it could no longer be a performance under the contract (i.e., that the contract had already ended) and regardless of whether it is the other party to the contract who subsequently raises the objection of mutuality of performance[6].
Reflection in insolvency ratios
In view of the fact that the Decision of the Supreme Court of the Czech Republic arose from insolvency circumstances, the court also explicitly addressed the overlap into this area in connection with the prohibition of set-off of mutual claims under the Insolvency Act. As already stated, the objection of mutual performance under Section 2993 CC is not in the nature of set-off and at the same time, according to the Decision, it is not necessary to set off (separate) claims for mutual settlement of monetary benefits. For this reason, the regulation limiting the set-off of certain claims in the course of insolvency proceedings (cf. in particular Section 140 of the Insolvency Act) does not prevent such a set-off.
Therefore, it can be concluded that the mutual settlement of monetary benefits or monetary compensation in accordance with Section 2993 CC is not prevented by the regulation prohibiting the set-off of certain claims during insolvency proceedings.[7]
Conclusion
The Decision is particularly important from the point of view of the settlement of unjust enrichment in the case of performance of former contracting parties on the basis of a presumed contract, and thus resolves the widespread cases in practice where the contracting parties (or one of them) unknowingly perform under a now-expired contract. The Decision also provides an unambiguous answer to the question whether it is necessary to set off mutual claims in addition to the objection of mutual performance, or whether the court will settle the claims of former contracting parties for unjust enrichment without a proposal of the relevant party. The insolvency overlap of the Decision then sheds light on whether set-off is permissible even in insolvency situations that fundamentally limit the possibility of set-off.
If you have any questions regarding settlement or recovery of unjust enrichment, or any area of civil or insolvency law, we are available to help you, please do not hesitate to contact us.
[1] SEDLÁČEK, Dušan. § 2993 [Settlement of performance from an invalid or cancelled obligation]. In: PETROV, Jan, VÝTISK, Michal, BERAN, Vladimír et al. Civil Code. 2nd edition (2nd update). Prague: C. H. Beck, 2023, marg. no. 2.
[2] Judgment of the Supreme Court of the Czech Republic of 30 November 2023, Case No. 29 Cdo 3609/2022.
[3] Judgment of the Supreme Court of the Czech Republic of 4 June 2019, Case No. 28 Cdo 694/2019.
[4] See sub 2.
[5] See sub. 1, marg. no. 6.
[6] See sub 2.
[7] See sub 2.
Mgr. Martin Heinzel, attorney-at-law – heinzel@plegal.cz
Rachel Kouklíková, legal assistant – kouklikova@plegal.cz
12. 2. 2024