The concept of usury has been known since ancient times. It even has its place in the Old Testament. Today, however, it is not forbidden by the wrath of God, but by Czech legislation. It considers a contract of usury to be invalid. What characteristics must a contract have to be a usury contract? You will find out in the following text.
Quick overview
A covenant is a contract with a gross disproportion of performance.
It occurs when the distress, inexperience or weakness of the other party is exploited.
Such a contract is void.
In some cases it is also a criminal offence.
The victim can defend himself in court or by filing a criminal complaint.
If you suspect that you have signed a liquor contract, our attorney can help you assess its invalidity and prepare your next legal steps.
Usury is the granting of a loan or credit at an extremely high interest rate that is disproportionately high compared to normal interest rates. Usury is considered to be an unethical and illegal practice because it takes advantage of the financial distress or lack of information of those borrowing money.
A loan shark is a person or entity that makes such loans at unreasonably high interest rates. Usurers often take advantage of people to whom a traditional bank will not lend money (e.g. because they are already in debt) and so resort to borrowing from private individuals or non-banking companies that take advantage of their situation and charge prohibitively high interest rates.
In our practice, for example, we dealt with the case of Mr Peter who needed to borrow money quickly to pay his rent. The bank would not give him a loan, so he signed a contract with a non-banking company that promised him a quick loan without a background check.
Only later did he discover that the contract contained very high interest rates and several contractual penalties. If he had paid the instalment just a few days late, the debt could have increased significantly within a few months.
Tip: Non-bank loans – what exactly do they mean, what are their advantages and disadvantages, and what can be their dangers? You can find out in our article.
Usury is not only morally problematic, but also legally punishable in many countries. In our country, usury is defined in the Civil Code and is a criminal offence under the Criminal Code. For this reason, all contracts that contain the characteristics of usury are void.
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The Civil Code says of usury: “A contract is void if, in entering into it, a person takes advantage of the distress, inexperience, weakness of mind, agitation or recklessness of the other party and promises or gives to himself or another a performance whose property value is grossly disproportionate to the mutual performance.”
It is important to know that the law does not set an exact threshold at which usury is committed. The courts always look at the specific circumstances of the case – for example, the amount of interest, the contractual penalty or the debtor’s situation at the time the contract was signed.
Mr Petr turned to us when the creditor was already demanding an amount several times higher than the original loan. He believed that he had to fulfil the contract without reservation because he had signed it.
However, after studying the documents, we found that the terms of the contract could be tantamount to usury – in particular because of the significant disproportion between the amount granted and the performance demanded.
What exactly does gross disproportion mean? This is always assessed on an individual basis. However, we can also see 70% annual interest on loans. Alternatively, comparisons with current prices and interest rates can also be used. If it exceeds twice or more, this will probably already be considered a gross disproportion.
It also comments on disproportionate cuts. It defines this as reciprocal performance where the performance of one party is grossly disproportionate to what the other party has provided. It differs from usury in that there is no abuse of the distress, inexperience, weakness of mind, agitation or recklessness of the other party.
In this case, the other party who has been defrauded has the option of claiming rescission of the contract and restitution. However, if the other party replaces what it has shortened, the contract remains in force. This claim must be made within one year of the conclusion of the contract.
This option is not available in the case of acquisition on a commodity exchange, in the case of investment, at auction, in the case of a bet or a game, or in the case of a fair settlement or novation. Nor does it apply if the parties have a so-called special relationship with each other.
In practice, a special relationship is, for example, a situation where friends agree that the performance will be partly for a fee and partly gratuitous, i.e. that one will sell the other a computer for a nominal amount with the understanding that he or she will help him or her repair the car in return.
It also does not apply to cases where the shortened party has expressly stated that it has agreed to the disproportion (e.g. because of the collector’s value of the object of purchase to it).
Usury, as a criminal offence, is also regulated by the Criminal Code. It provides that if someone takes advantage of someone’s weakness of mind, distress, inexperience, recklessness or someone’s agitation, thereby obtaining for himself or another an advantage whose value is significantly higher than the value of what he has provided in return, or if he transfers such a claim to himself with the intention of exercising it, he shall be punished by imprisonment for up to two years, prohibition of activity or a fine.
Tip: We have discussed everything about imprisonment in our article.
Imprisonment for six months to five years or a fine is imposed if the offender obtains a substantial benefit, acts as a member of an organised group or if his or her conduct causes a state of grave distress to another. Imprisonment for three to eight years is also imposed on an offender who commits usury during a state of national emergency, during a war, during a natural disaster, etc., or if he or she has benefited to a large extent by his or her conduct.
However, the question remains as to what is meant by weakness of mind, distress, inexperience, recklessness and agitation. These conditions tend to be assessed individually, but we can nevertheless get a closer look at them by using the definitions of Constitutional Court judge and criminal law expert Pavel Šámal:
Weakness of mind is the inability of the victim to recognize the value of his or her performance or promise to the value of the offender’s reciprocal performance. The cause may be feeble-mindedness, lack or loss of intellectual capacity and other mental disorders due to mental disorder or illness or delayed development, manifested in particular by an inability to reason and think logically.
Distress means an extremely difficult situation of the injured person (or of another person whose distress is felt by the injured person as his or her own), caused by a specific and temporary urgent need, the satisfaction of which is beyond the injured person’s means. As a rule, this will be an economic hardship, e.g. the repayment of a debt, the non-payment of which may seriously jeopardise the victim’s social position or financial circumstances.
Inexperience refers to a lack of knowledge or experience in the field in which the contract is concluded. Inexperience may consist, for example, of a lack of knowledge of prices, purchasing options, usually in conjunction with a lack of trust in the perpetrator. It is primarily inexperience in dealing with property matters.
Recklessness expresses the victim’s unrealistic assessment of the situation and his failure to realise the extent and seriousness of the consequences of his own conduct, in particular the consequences of the performance or promise of performance. It may be an expression of the injured party’s lack of information about the risks involved in a particular decision or of the injured party’s underestimation of those risks, or it may be an expression of ignorance of all the relevant circumstances, particularly as regards the relative proportion of the consideration.
This is a state of violent mental agitation brought about by a certain immediately preceding event which has particularly intensely affected the emotional component of the victim’s mental life to such an extent that in that state he was unable to consider whether the value of his performance or promise of performance corresponded to the value of the offender’s performance towards him.
In situations such as this, it is important to first examine the contract itself and the circumstances of its conclusion. In Mr Peter’s case, we therefore analysed not only the amount of interest, but also the contractual penalties and other charges that could have significantly increased the debt.
On the basis of the legal assessment, we explained to the client the possible defence procedures, including the possibility of arguing that the contract was invalid.
After initiating legal action, we were able to resolve the dispute so that our client did not have to pay the full amount originally requested. Each case is of course individual, but as you can see, even a seemingly disadvantageous contract can be legally challenged.
How do you defend yourself if you have entered into a contract corresponding to usury?
1. Prevention
The best solution is always prevention. In this case, it is best not to borrow at all or to borrow only from vetted companies. Always read all contracts and terms thoroughly before signing and consult a lawyer if you don’t understand something.
2. Consult the experts
In many situations, however, prevention is not possible and if you find yourself in a situation where you have doubts about the legality or fairness of a contract, consult a lawyer. He or she will be able to tell if it is really usury and can guide you through the whole process of proving usury.
In addition, if the contract does not correspond to usury, he or she can save you considerable legal fees.
3. File a criminal complaint
If you conclude (preferably after consulting a lawyer) that your contract does indeed amount to usury as described above, you can file a criminal complaint against the creditor. Gather all the documents and contracts you have with the lender and also record all communications with the loan shark, including emails, text messages, letters and phone calls.
If you have witnesses who can corroborate the loan sharking practices, secure their statements. Then contact an attorney to file the actual criminal complaint. As a victim, you have special procedural rights that are good to know.
4. Personal bankruptcy
In extreme cases where you are already heavily in debt and unable to pay, personal bankruptcy may be the solution. This is a legal process that allows you to restructure your debts and protect you from creditors.
Situations like this are not exceptional. In practice, we often see people sign unfavourable contracts when they are under pressure or need money very quickly. It is in these cases that it can be important to have the contract assessed by a solicitor to see if it contains any signs of usury.
Usury is the practice of lending at high interest rates, well above normal rates, and taking advantage of people’s disadvantaged position. The act is not only morally reprehensible but also legally punishable. Defending against usury primarily involves prevention – not borrowing from untrustworthy entities and consulting a lawyer. If you do become a victim of usury, you should file a criminal complaint and seek professional legal advice.
Yes. Gross disproportionate performance can arise not only for interest, but also for extreme contractual penalties, default penalties or various fees associated with the loan. The court considers all the terms of the contract as a whole.
Yes. If a contract is absolutely void for usury, anyone can claim that it is void and the court can take it into account even without a petition. In practice, however, proving the circumstances of the contract may be more difficult.
Yes. Usury isn’t just about loans. It can also arise in contracts of sale where one party takes advantage of the other’s distress and obtains the property at a price significantly below its true value.
The contract is null and void and the parties must return what they have provided to each other. The borrower therefore usually only repays the principal, not any unreasonable interest or penalties.
Yes. The perpetrator can be a businessman or any natural person. It is the legal elements of usury that are decisive, not the status of the person.
Disproportionate shortening addresses the situation where one party is substantially shortchanged in the value of the performance, but its distress or weakness has not been exploited. In usury, by contrast, it is the exploitation of the other party’s weaker position that is key.
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