(Judgment of the Supreme Court of 4 August 2026, File No. 21 Cdo 3155/2025)
In a recent ruling, the Supreme Court addressed the limits of the direct private sale of pledged collateral. The key issue was determining the legal consequences where a pledgee formally complies with the terms agreed in the pledge agreement, yet breaches its statutory duty to act with due professional care by selling the pledged collateral well below its current market price. The court also clarified the precise scope of a third-party purchaser’s good faith and how the validity of contractual clauses setting a minimum purchase price should be evaluated.
In the case at hand, the pledgee exercised its rights over an apartment unit through a direct sale. The pledge agreement stipulated that the purchase price could not fall below 60% of the value determined by an expert appraisal, while expressly permitting the use of an appraisal prepared up to five years earlier. The pledgee formally satisfied this contractual condition and sold the apartment for an amount exceeding 60% of that historical valuation. However, due to property market appreciation and deliberately unfavorable advertising, the achieved sale price fell far below the property’s actual current market value. The pledgor subsequently filed an action for a declaratory judgment of ownership, arguing that the pledgee failed to exercise due professional care and that the contractual clause constituted a prohibited arbitrary realization of collateral. The lower courts upheld the claim, challenged the purchaser’s good faith, and held that the pledgee’s unlawful conduct rendered the underlying purchase agreement invalid.
The Supreme Court rejected these conclusions and made a fundamental distinction between the validity of contractual provisions, a breach of the creditor’s obligations, and the validity of the transfer itself. It stated that the primary purpose of Section 1365(1) of the Czech Civil Code is to strike a balance between the interests of both parties. If a pledgee culpably breaches its duty and sells the collateral manifestly under value due to a lack of due professional care (such as failing to secure a current valuation), it incurs non-contractual liability toward the pledgor for resulting damages. However, this failure on the part of the pledgee does not per se render the purchase contract with the third party null and void. Consequently, in such cases, the pledgor cannot successfully claim the return of the property; instead, the proper remedy is to claim monetary compensation from the pledgee for the difference between the actual market value and the price obtained.
The Supreme Court further emphasized that, under the law, the purchaser’s good faith does not concern whether the pledgee exercised due care or realized the collateral at market price, but solely relates to the pledgee’s legal authority to realize the collateral. As for the pledge agreement itself, the Supreme Court concluded that a clause conditioning the sale on achieving at least 60% of an expert’s valuation cannot automatically be deemed a prohibited provision on arbitrary disposition. Such conditions do not objectively prevent the pledgee from fulfilling its statutory duty to act with due professional care in practice.
Legal Update 09/2026 download here.