8 March 2023

In contractual practice, one may encounter a whole range of curious cases. In this contribution, we assess certain practical implications of a situation in which a municipality addressed a contractor with a draft settlement agreement, into the final provisions of which - out of a kind of legal caution -it incorporated a clause excluding acceptance of the offer with additions or deviations within the meaning of Section 1740(3), first sentence, of Act No. 89/2012 Coll., the Civil Code, as amended (hereinafter the “Civil Code”). It should be emphasized that, in the case under review, the offeror was the municipality - pursuant to Section 103(1) of Act No. 128/2000 Coll., on Municipalities, as amended (hereinafter the “Municipalities Act”), the municipality is represented externally by the mayor.

1. Public authority may be exercised only secundum et intra legem. This principle naturally also applies to the rules governing the management of public property. If, therefore, a contractor enters into pre-contractual negotiations with a municipality, it must bear in mind that the municipality’s will (to conclude or amend a contract, or to terminate a contractual relationship) is always determined by mandatory limits.[1] Pursuant to Section 103(1) of the Municipalities Act, although the mayor represents the municipality externally, in reality his or her contractual autonomy is subordinated to the will of the municipal council, or, as the case may be, the municipal board.[2]

2. Under Section 41(2) of the Municipalities Act, legal acts requiring approval by the municipal council, or, as the case may be, the municipal board, are invalid without such approval. As stated in the introduction, the municipality here addressed the contractor with a draft settlement agreement. It was therefore first necessary to clarify whether the settlement agreement in question fell within the category of legal acts that require approval by the municipal council for their validity. It should be added immediately that this specific draft settlement agreement envisaged, inter alia, that the municipality would waive a (disputed) receivable in an aggregate amount exceeding CZK 500,000.

3. The answer to the above question is found in Section 85(f) of the Municipalities Act, pursuant to which decision-making on the waiver of a right and the remission of a debt exceeding CZK 20,000 is reserved to the municipal council. To dispel any doubts as to the manner of decision-making by the municipal council, Section 87 of the Municipalities Act provides that a valid resolution, decision, or election of the municipal council requires the consent of a majority of all members of the municipal council, unless a special legal regulation provides otherwise. In other words, if a municipality is to waive a debt (i.e., a receivable) in an amount exceeding CZK 20,000, a resolution or decision of the municipal council (approved by a majority of all its members) is required.[3] The examined draft settlement agreement (i.e., the offer made by the mayor of the municipality to the contractor as the offeree) therefore had to be endorsed with a clause pursuant to Section 41(1) of the Municipalities Act confirming its approval by the municipal council.

4. As already mentioned, in its draft settlement agreement the municipality excluded the applicability of Section 1740(3), first sentence, of the Civil Code. According to Section 1740(3) of the Civil Code: (i) a reply with an addition or deviation that does not substantially alter the terms of the offer constitutes acceptance of the offer unless the offeror rejects such acceptance without undue delay; (ii) the offeror may exclude acceptance of the offer with additions or deviations in advance, already in the offer or in another manner that does not give rise to doubt. In other words, by excluding the first sentence (“A reply with an addition or deviation that does not substantially alter the terms of the offer constitutes acceptance of the offer unless the offeror rejects such acceptance without undue delay”), the municipality effectively notified the contractor that if it were to incorporate any addition or deviation into its acceptance, the municipality would not be bound by such acceptance at all, since unconditional concurrence between the offer and the acceptance (the so-called mirror image rule) would not have been achieved. Thus, by stating that acceptance of the offer with additions or deviations was excluded, the municipality stipulated that acceptance must correspond to the offer without reservation; otherwise, the settlement agreement could not be regarded as concluded.

5. Ultimately, however, this led to entirely unnecessary complications. The contractor essentially accepted the offer, but in the accompanying letter to the acceptance also stated that it was necessary to correct a numerical figure relating to one of the items expressing the disputed receivable on the part of the offeror. This correction did not change the substance of the matter in any way—from the acceptance it was clear that the parties had resolved their disputes, or had reached agreement on the solution to the problem. Thus, de iure, the contractor (i) did not accept the municipality’s offer in its original wording and instead (ii) by its acceptance addressed to the mayor of the municipality made a new offer to the municipality, corresponding to the original offer but modified by a minor correction of a single (!) figure (moreover, a figure of entirely marginal significance).

6. As can be seen, had the municipality not excluded in its offer the possibility of acceptance with additions or deviations, the settlement agreement could have been regarded as validly concluded at the moment the acceptance reached the offeror (and effective as of the date of publication via the Register of Contracts pursuant to Section 6(1) of Act No. 340/2015 Coll., on special conditions for the effectiveness of certain contracts, the publication of such contracts, and on the Register of Contracts, as amended). It need hardly be added that the parties envisaged concluding the agreement using electronic means of remote communication.

7. It follows from the above that, in the form of the contractor’s acceptance, the municipality received an entirely new offer (regardless of the fact that this offer was de facto identical to the wording of the offer previously addressed by the municipality to the contractor). The contracting process thus found itself once again at the very beginning.

8. Since this is an entirely new draft settlement agreement, the same public-law limits that originally conditioned the validity of the earlier (and now obsolete) wording of the draft settlement agreement must apply to it mutatis mutandis. This means that if the mayor now intends to accept the contractor’s offer, he or she must first submit it for approval by the municipal council pursuant to Section 41(2) of the Municipalities Act; otherwise, his or her acceptance addressed to the contractor would be invalid. How peculiar this procedure is hardly needs elaboration. Yet the comic aspect of the situation does not end there.

9. Leaving aside the fact that, in practice, the municipal council does not approve the mayor’s legal acts on the spot, one should also note the no less amusing circumstance that both the municipality and the contractor, in both instances, agreed on wording of the offer that was identical in substance, including the clause excluding the possibility of acceptance of the offer with additions or deviations. This means that if the municipality were now, in turn, to accept the contractor’s offer in any (even entirely insignificant) modified wording, the settlement agreement would again not be concluded, and any subsequent legal act of the mayor in the same matter (i.e., acts aimed at concluding the same settlement agreement) would again have to be submitted to the municipal council for approval. And later perhaps once more. And so on. This legal construction lends strong support to the notion that even the legal craft can assume unexpected lyrical dimensions.

Conclusion

An offeror may exclude acceptance of an offer with additions or deviations in advance, already in the offer or in another manner that does not give rise to doubt. This procedure is entirely common and is often preferred by offerors, particularly because it eliminates the risk of failing to reject a disadvantageous acceptance in a timely manner. In practice, however, situations arise where - having regard to the specific circumstances of the case - the exclusion of the possibility of acceptance of an offer with additions or deviations appears manifestly inappropriate. Nevertheless, one encounters the view that a municipality (as a responsible public-law manager) is always obliged to exclude the possibility of acceptance of an offer with additions or deviations, because the municipal council cannot, when approving individual legal acts of the municipality, anticipate the future form of modifying acceptances. The kinds of absurdities to which this view may lead the contracting parties have been demonstrated above.

Georgi Margaritov
construction lawyer and consultant