LILIENTHAL V. KAUFMAN

FACTS

The Defendant, resident of Kyrgyz Republic, issued two promissory notes to the Plaintiff, resident of the Republic of Kazakhstan. The defense is that the Defendant maker has previously been declared as spendthrift by the court of KR and placed under the guardianship and the guardian has declared the obligation void. The plaintiff’s counter is that the notes were executed and delivered in RK, that the law of RK does not recognize the disability of a spendthrift, and that the KR is bound to apply the law of the place of the making of the contract.

ISSUE

Whether the promissory notes are payable under the law of the place of the making of the contract if the Defendant maker has previously been declared as spendthrift by the court of KR.

RULES

Civil Code of Kyrgyz Republic

Article 65. Restriction of Citizens' Capacity
1. A citizen that through alcohol and drug abuse worsens dramatically his family's financial position may be restricted by a court as to his capacity and may be placed under tutorship.
Such a citizen shall have a right to independently enter into small domestic transactions. He may enter into other transactions, and receive his wages, salary, pension, and other income, but may dispose of these only by consent of his tutor. However, such a citizen shall independently bear property responsibility on transactions entered into by him and for damages inflicted by him.

Article 172. The Concept and Types of Transactions
4. To create a contract, an expression of the concerted will of two parties (bilateral transaction), or three or more parties (multilateral transaction) is necessary.

Article 184. General Provisions on the Consequences of Invalidity of a Transaction
1. An invalid transaction does not entail legal consequences, except for those related to its invalidity, and it is invalid from the moment of its inception.
2. If a transaction is invalid, each party shall return to the other(s) everything acquired in the transaction, or, if it is impossible to return in kind what was acquired (including use of property, work performed, or services provided), shall reimburse its value in cash, unless other consequences of invalidity are provided by law.

Article 189. Invalidity of Transactions Made by a Citizen Who Has Been Found Incompetent
1. A transaction made by a citizen who has been found incompetent as a result of mental disorder is void.
Each party to such a transaction must return in kind to the other(s) everything acquired, or if it is impossible to return what was acquired in kind, shall reimburse its value in cash (point 2 of Article 184).
Moreover a competent party must indemnify the actual losses suffered by the other party if the competent party knew or should have known about the incompetence of the other party.

Article 192. Invalidity of a Transaction Made by a Citizen whose Legal Capacity has been Limited by a Court
1. A transaction involving the disposal of property made by a citizen whose legal capacity has been limited by a court as a result of alcohol or narcotics abuse, where the transaction has been made without the consent of his guardian, may be found invalid by the court on petition of the guardian.
Rules stipulated in point 1 of Article 189 of this Code apply when the transaction is found invalid.

Article 1174. Application of Imperative Norms
1. Rules of this section shall not touch upon the operation of imperative norms of law of the Kyrgyz Republic, regulating corresponding relationships regardless of the law subject to application.

Article 1167. Determination of Law Subject to Application to Civil Law Relations Complicated with Foreign Element

1. Law subject to application to relationships of private law with participation of foreign citizens or foreign legal entities or complicated with other foreign element shall be determined on the ground of this Code, other laws, international treaties and recognized international customs as well as on the ground of agreement of the parties.
3. In the event if in accordance with point 1 of this Article it is impossible to determine the law subject to application, the law shall be administered which is most closely connected with relationships of private law complicated with foreign elements.

Article 1177. Private Law of Physical Person
1. The personal law of an individual shall be the law of country of citizenship of this individual.

Article 1178. Legal Capacity and Operational Capability of Individual
1. Legal capacity and operational capability of the individual person shall be determined under his personal law.
4. Capacity of the individual carrying out business activity to be individual businessman and to have rights and obligations related thereto shall be determined under the law of the country where the individual is registered as an individual businessman. Should the country of registration be absent, the law of the country of basic place of individual business activity shall be administered.

Article 1199. Law Applicable to Contract in Absence of Agreement of Parties
1. Should there be no agreement of parties to the contract about the law subject to application to this contract, the latter shall be governed by the law of the countries of foundation whereabout or place of major activity of the party which is being a:
8) creditor in loan or other credit agreement.

ANALYSIS

Plaintiff and Defendant concluded a transaction under which D issued two promissory notes. At the same time, D has previously been declared as spendthrift by the court of KR.
P is arguing that the law of RK does not recognize a spendthrift.

So, first of all, we have to determine which law to apply.

Under article 1199 of Civil Code of KR the private law of creditor determines the relations under the agreement. At the same time, legal capacity and operational capability of the individual person shall be determined under his personal law under article 1178 of Civil Code.

At the same time, articles 1199 and 1178 of Civil Code shall not touch upon the operation of imperative norms of law of the Kyrgyz Republic, regulating corresponding relationships regardless of the law subject to application under article 1174 of Civil Code.

The imperative norm applicable under this case is stated in the article 192 of Civil Code that provides that “a transaction involving the disposal of property made by a citizen whose legal capacity has been limited by a court as a result of alcohol or narcotics abuse, where the transaction has been made without the consent of his guardian, may be found invalid by the court on petition of the guardian”.

Under article 172 to create a contract, an expression of the concerted will of two parties (bilateral transaction), or three or more parties (multilateral transaction) is necessary. At the same time, В could not express the “concerted will” as he has previously been declared as spendthrift under the law of KR.

Article 65 of Civil Code provides for the following:
A citizen that through alcohol and drug abuse worsens dramatically his family's financial position may be restricted by a court as to his capacity and may be placed under tutorship.
Such a citizen shall have a right to independently enter into small domestic transactions. He may enter into other transactions, and receive his wages, salary, pension, and other income, but may dispose of these only by consent of his tutor. However, such a citizen shall independently bear property responsibility on transactions entered into by him and for damages inflicted by him.

It is obvious, that by issuing the promissory notes the D entered in something more than ordinary transaction as provided by article 65 of Civil Code. This means that such transaction should have been accompanied by the concent of the guardian.

As the guardian did not provide the permission for such transaction, the promissory notes should have been declared as invalid by our court.

At the same time, the guardian did not file the petition to recognize such transaction as invalid before this case. This fact could be the evidence that the transaction is valid.

We have to take into account that in this court the guardian has declared the obligation void, which takes a form of “petition” under article 192 of Civil Code.

Thus, the court declares that the transaction is invalid under articles 1172 and 192, bearing in mind that the guardianfiled a “petition” to our court.

The D shall not be liable for the paymen of the promissory notes.

CONCLUSION

The promissory notes shall not be payable under the law of the place of the making of the contract and the law of the creditor in loan or other credit agreement if the Defendant maker has previously been declared as spendthrift by the court of KR on petition of the guardian.