Legal practice in the CzechRepublic has long faced a serious problem based on the provisions of Section 17 of the Act on Bills of Exchange and Cheques, which states:

“Persons sued on the basis of a bill of exchange cannot argue their case in relation to the bill holder based on their relationship to the drawer or previous holders, unless the holder knowingly acted to the detriment of the debtor in acquiring the bill.”

This provision therefore excludes the use of so-called causal arguments against the plaintiff seeking payment of a bill, if the plaintiff acquired the bill by endorsement (transfer), while not knowingly acting to the detriment of the drawee (bill debtor). Causal arguments can therefore be understood as a legal instrument used by the person signing a bill of exchange in defence against steps taken by a bill holder requesting payment thereof. Such defence can, for example, be the fact that the bill was a bill of exchange securing an obligation and that the secured obligation has been discharged, or that the secured obligation is invalid due to a conflict with the law.

In practice, it occasionally occurs that someone purposefully transfers a securing bill of exchange to a third party and this party then seeks payment of the bill from the debtor. The debtor then has no defence in proceedings; even if the obligation secured by the bill has already been discharged. The debtor can thus face a situation where it is obliged to pay twice. In the case of larger sums, such an obligation can be liquidating for the debtor.

The Constitutional Court recently addressed the above problem in its ruling in case no. IV. ÚS 457/10 (hereinafter “Ruling”). In the given case, the complainant sought, among other things, a repeal of Section 17 of the Act on Bills of Exchange and Cheques.

In the case in question, the complainant received a small loan as a consumer from a credit company in the amount of CZK 6,000. A contractual fine of 0.8% of the outstanding amount was agreed for each day of default, and the complainant issued a blank bill of exchange as security.

When the complainant defaulted on the loan after paying approximately half the loan, the debt became immediately payable according to the loan contract, including contractual fines. The credit company subsequently filled in the blank bill of exchange for the amount of CZK 30,320 and transferred the bill to another company, which then sought payment of the bill at court with a petition for the issue of a bill payment order. With this step, all the complainant’s causal arguments were excluded. Therefore the complainant could not argue, for example, the invalidity of the clause on the contractual fine, which she considered unreasonably high.

In reference to Section 17 of the Act on Bills of Exchange and Cheques, the general courts did not consider the complainant’s arguments at all. Similarly, the courts did not consider the circumstances of the case, namely whether bill endorsement was not simply an expedient abuse of law that prevented the complainant’s procedural defence.

In its Ruling the Constitutional Court stated that “although the legal institute of the bill of exchange is based on the strict formality of bill relations, this formality should not bias rights arising from the bill relationship in favour of one of the participating parties.” According to the Constitutional Court, this fact must be particularly emphasised in the case of bills of exchange issued as security.

The Constitutional Court stressed that the circumstances of each case must always be examined and the question of whether bill endorsement did not result in an abuse of the law considered. According to the Constitutional Court, a situation in which someone exercises their subjective right to the unjustified detriment of someone else or a company can be considered as an abuse of the law.

If bill endorsement leads to an abuse of the law, the general court should not give such conduct legal protection, even if such conduct is permitted by law.

In the case in question, the Constitutional Court therefore concluded that it could be inferred from the circumstances of the case that bill endorsement was a purely expedient step by which the credit company abused the law, and found that the complainant’s constitutionally given rights had been infringed.

The Constitutional Court further expressed an appeal that the general courts, in a legal situation in which legislative mechanisms preventing the abuse of the institute of bill of exchange law do not exist, especially the abuse of bill endorsement for the purposes of excluding the debtor’s causal arguments, find solutions in their activity to prevent the abuse of bill of exchange law.

The Constitutional Court therefore rejected the petition to repeal Section 17 of the Act on Bills of Exchange and Cheques, as the problem according to the Constitutional Court does not lie in the provision itself, but in the excessively formalistic approach of the general courts, which do not examine the circumstances of each case or consider the possible abuse of bill endorsement, by which they infringe the constitutionally given rights of bill debtors.

In view of the above, the Ruling can be considered as very positive news for bill debtors, who were purposefully deprived of their causal arguments as a result of bill endorsement. According to the Constitutional Court, such steps do not enjoy legal protection and the general courts must examine the circumstances of bill endorsement.

For more information, please contact K&A partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz; tel.: +420604242241.