Did you sell too cheap? How to defend against unreasonable shortening?

Did you enter into a contract and only later find out that you received an unreasonably low performance? You may have the right to cancel it. Disproportionate shortening is an often underestimated but very powerful tool that allows you to cancel a contract if there is a gross disproportion between the mutual benefits. The Supreme Court, in its decision of 3 September 2024, Case No. 27 Cdo 3702/2023, confirmed that the protection of the shortened party is crucial, but also set strict rules for proving the shortcoming. What conditions must you meet? What arguments can help you? And how can the other side defend itself? You can read all this below.

Author of the article: ARROWS (Mgr. Filip Ondřej, office@arws.cz, +420 245 007 740)

What is disproportionate curtailment and why does it exist?

Disproportionate shortage has deep roots in Roman law, where there was the institution of "laesio enormis " - protection for the seller if he sold his property for less than half of its actual value. This concept has been adopted in a number of modern legal systems, including the Czech Civil Code, where this institute is enshrined in §§ 1793-1795.

The principle of disproportionate reduction is to protect contractual fairness so that neither party can benefit from the other party's ignorance or disadvantageous position. It is one of the exceptions to the principle of pacta sunt servanda (contracts are to be performed) because in some situations the continuation of the contract would result in gross injustice.

The difference between undue hardship and usury

Undue hardship is often confused with usury (§ 1796), but these are two completely different institutions:

Excessive shortage (§ 1793)

• Conditions - gross disproportionate performance (objective condition), lack of knowledge of the disproportionate performance on the part of the short-selling party and absence of exclusion of disproportionate short-selling (subjective conditions).
• Consequences - the party who has been short-changed may request the cancellation of the contract and restitution of the contract, unless the short-changing party adds what the party concerned has been short-changed (the price customary at the time and place of conclusion of the contract shall be taken into account).

Usury (§ 1796)

• Conditions - gross disproportionate performance (objective condition) and exploitation of the weakness of the other party in a manner calculated by law (subjective conditions).
• Consequence - automatic absolute nullity of the contract.

In practice, disproportionate shortage is often applied to the purchase of real estate, works of art, shares in a company or other property where it is difficult for the ordinary person to correctly estimate the market value.

Conditions for applying disproportionate shortening

The following conditions must be met in order for a contract to be rescinded on the grounds of undue hardship:

The existence of mutual performance - the principle of undue hardship applies only to contracts where both parties provide something to each other (e.g. a contract of sale).

Gross disproportionality of performance - courts usually assess disproportionality over 50%, but there is no fixed limit. If you sell a property for less than half its normal price, there may be a chance of success for the shorted party.

Lack of knowledge of the disproportion - the key question, did the shorting party know or must have known about the factors affecting the price? A challenge to the contract is precluded if the short-selling party was not and could not have been aware of the facts leading to the gross disproportionality of the consideration.

No exclusion of unconscionable shortage - no claim for unconscionable performance where there is a special relationship between the parties - for example, where one party knowingly provided part of the performance for free or where the extent of the shortage can no longer be determined. Nor is there a claim where the party who has been short-changed has expressly agreed to an abnormal price, for example, for reasons of personal preference, or where he was aware of the true value of the performance and nevertheless agreed to an abnormal price.

The disproportion already existed at the time the contract was concluded - disproportionate shortcutting cannot be claimed if the price only increased later (e.g. due to a change in the market).

The Supreme Court's current view on proving disproportionate shortage

The Supreme Court's decision in Case No. 27 Cdo 3702/2023 has brought about a significant clarification of the rules of evidence, thereby fundamentally influencing legal practice.

According to the Supreme Court, the plaintiff (the shortened party) must at least

• prove the existence of a gross disproportion - typically by expert testimony, and
• prove that he was unaware of the disproportion - for example, by relying on outdated price data or being misled.

According to the Supreme Court, the defendant (the non-abbreviated party) must also

• Prove that the defendant was not (and need not have been) aware of the disproportion - the defendant must prove that it was not (and need not have been) aware of the factors giving rise to the disproportionate consideration, since the second sentence of section 1793(1) excludes the short party from protection against unreasonable shortage, and the burden of proof is therefore on the short party; or
• alternatively, to pay the difference so that the contract is not cancelled - if the claimant pays the difference between the agreed price and the normal price, the contract should remain valid.

Where will you not be able to argue unreasonable shortage?

Under section 1793(2), the principle of undue hardship does not apply in the case of

• purchases on a commodity exchange
• a trade in an investment instrument
• a transaction carried out at auction or in a manner equivalent to a public auction
• betting or gambling
• a settlement or novation, if made in good faith

Protect your rights!

If you have sold an asset at a suspiciously low price, you have a defence. A disproportionate shortcut is an effective tool to obtain legal protection.

Don't wait! If you believe you have been disproportionately shortchanged, contact us as soon as possible.

Remember that the right to object to unreasonable delay expires within one year of the conclusion of the contract - the court will take this into account as a matter of course - it does not wait for the opposing party to object!