Contractual autonomy: Can expert determine discount on purchase price?
Can contracting parties agree that a discount on a purchase price shall be determined by an expert? This question was recently addressed by the Supreme Court of the Czech Republic. In the article below, read how the court ruled and what it means for business practice.
In a contract on the transfer of a share in a limited liability company, the parties agreed that if in the event of a breach of representations and warranties they failed to agree on the amount of a discount on the purchase price, said discount would be determined by an expert. After the purchase of the company, the buyer reported defects consisting of false representation regarding the company's accounts, causing a decrease in the company’s profit. An expert agreed-upon in advance then prepared an expert's opinion on the company's accounts, its financial situation, and its value.
However, the seller argued that the buyer was not entitled to a discount on the purchase price. The general courts also concluded that the agreement on the amount of the discount to be determined by an expert was null (i.e., it had no legal effects, something which could not be changed additionally and had to be considered by the court even without such nullity having to be pled by the parties), as it excluded the possibility of judicial review of the conclusions of the expert's report.
The Supreme Court disagreed. It stressed that the Civil Code allows for a certain part of a contract, such as the amount of a discount, to be determined by a third party, such as an expert or a court. Such an arrangement is valid if it is not contrary to the law or public order. Thus, if such an agreement is not precluded by substantive law, the courts should grant it protection in the litigation and respect the autonomy of the will of the parties.
The Supreme Court also noted that no provision of procedural law prohibits the parties from entering into an agreement on the manner of determining the amount of the purchase price discount, nor is such an agreement contrary to the meaning and purpose of the Code of Civil Procedure. If the parties submit an expert’s report prepared in accordance with the agreement in the court proceedings, the court should only examine whether the conditions of the agreement were met, e.g., whether there indeed was a defect in the performance and whether the expert followed the agreed-upon rules when determining the discount.
The Supreme Court's decision thus confirms that contractual autonomy has its place in determining the amount of financial claims and that if an agreement on the determination of the discount by an expert is correctly formulated, it may be enforceable.