Legal Force of Judgments Against Third Parties

As a general rule, the legal force of a judgment is limited to the parties in the case. However, no general rule is without exception, and in a recent judgment, the Supreme Court has taken the opportunity to clarify both the meaning of a judgment’s legal force and the exceptions to the general rule regarding its limitation to the parties in the case. See the Supreme Court’s judgment of March 18, 2021, in case T 1268-20.

The specific question decided in the case was whether a judgment concerning a better right to real property has legal force in relation to a pledgee. The Supreme Court found that this was not the case.

Circumstances of the Case

A purchase agreement stated that a private individual sold their property to a company. Based on this agreement, the company applied for title registration (lagfart) and a mortgage of SEK 4 million on the property. The application was granted, and a physical mortgage deed was issued and handed over to the company’s representative.

The company’s representative then borrowed SEK 3.3 million and handed over the mortgage deed to the lender as security for the loan.

The alleged seller subsequently brought an action against the company for a better right to the property on the grounds that the signature on the purchase agreement had been forged. The claim was granted by a default judgment (tredskodom) which became legally binding, after which the seller was re-registered as the legal owner of the property.

The seller then brought an action against the lender, requesting the return of the handed-over mortgage deed.

The question in the case was whether the default judgment, which declared the seller to have a better right to the property, also had legal force (prejudicial effect) in relation to the lender who had received the mortgage deed.

The Supreme Court explains in its judgment that the legal force of the default judgment is not such that it has prejudicial effect in the dispute between the seller and the lender regarding whether the document on which the company’s ownership and title registration were based was forged or not.

On the Legal Force of Judgments

The Supreme Court begins its reasoning by explaining the meaning of legal force.

A final judgment has legal force concerning the matter that the action pertained to, and primarily means that the matter decided by the judgment cannot be re-examined in a new trial.

The judgment thus constitutes a procedural impediment in a later process; it then has so-called negative legal force (res judicata). The legal force can also mean that the judgment in which the matter has been tried has binding effect in another trial where the previously tried question is relevant to the outcome, so-called positive legal force (prejudicial effect).

The legal force of a judgment is in principle limited to the legal consequence asserted in the case, and the grounds for the judgment do not acquire legal force.

For this reason, the Supreme Court clarifies that a default judgment typically acquires legal force in the same way as a judgment issued after a substantive review.

Legal Force of Judgments Against Third Parties

The general rule is that legal force is limited to the parties. However, there are exceptions where others than the parties are affected by the judgment’s legal force.

According to the Supreme Court, the main exception to the general rule is when the change in the third party’s legal position that the legal force would entail could also have occurred through the exercise of the right of disposal over the subject of the dispute, e.g., through an agreement between the parties to the dispute. A third party can thus be affected by the legal force of a judgment if and to the extent that they would have been bound by a private law disposition over the disputed legal relationship by one party or both parties in the dispute to which the judgment pertains.

The typical example given is that a subtenant is directly affected by the legal relationship between the primary tenant and the landlord and the dispositions they make. Another example is that a judgment for payment against a limited company is binding in the assessment of a board member’s co-liability for the company’s obligation (see NJA 2015 p. 346).

The legal force of a judgment can also encompass third parties in other situations, for example:

(1) if the judgment concerns an indivisible claim,

(2) if it is a status judgment in family law cases,

(3) if a third party has succeeded to one party’s legal position after a judgment; or

(4) if the judgment concerns a legal relationship that must be regulated uniformly in relation to all stakeholders (e.g., certain environmental and property formation cases).

For real property, there is also the provision in Chapter 18, Section 9 of the Land Code, according to which an action for a better right to real property can be directed with legal effect against the person for whom title registration was most recently granted or applied for, even if that person had transferred the property before the action was brought. The judgment in such a case also acquires legal force against the person who acquired the property.

This rule in the Land Code applies to disputes concerning a better right where several parties claim ownership of the same property due to separate acquisitions. The Supreme Court clarifies that the regulation is not applicable in a dispute between someone claiming ownership of the property and a holder of a pledge right in the property. Consequently, the rule cannot be invoked to support that a judgment concerning a better right should also apply against the person to whom a pledge right has been granted in the property.

Effect of Legal Force Against Pledgees

Against this background, the Supreme Court proceeds to the question of whether a judgment concerning a better right to real property has effect against a pledgee.

Chapter 6, Section 8 of the Land Code states that if an acquisition of a property is reversed as invalid, a grant of a pledge right made after the property came out of the rightful owner’s hand is without effect, unless otherwise follows from the good faith rules in Chapter 18 of the Land Code. These rules imply that the existence of the pledge right depends on the ground for invalidity and whether the pledgee was in good faith. However, when the acquisition document has been forged, no valid pledge right can arise, despite good faith.

The rules thus mean that it is directly relevant whether, in a dispute between the pledgee and the person claiming ownership of the property, it can be used as a basis for the assessment that the alleged owner had previously lost their ownership due to the document on which the ownership was based being forged.

The judgment concerning a better right would thus, as a starting point, be relevant to the outcome in the case regarding the return of the mortgage deed (positive legal force/prejudicial effect). As mentioned above, a third party can be affected by the judgment’s legal force to the extent that they are bound by one party’s private law disposition over the disputed legal relationship (the main exception).

However, a granted pledge right in real property cannot be changed without the pledgee’s consent. The pledge right is thus outside what the property owner can dispose of unilaterally under private law. The Supreme Court exemplifies this by stating that a property owner who transfers their property cannot agree with the buyer that a pledge right in the property belonging to someone else should no longer apply.

Since the parties in the case concerning a better right thus lacked the right to dispose of the granted pledge right, the consequence of this, according to the Supreme Court, is that the main exception cannot be applied to give the judgment concerning a better right to the property legal force against the pledgee.

The Supreme Court further found that there were no grounds to allow the legal force to affect the pledgee on any other basis.

Summary and Analysis

The Supreme Court has concluded that a judgment concerning a better right to real property does not have legal force in relation to a pledgee in the property.

The reason for this is that, according to the general rule, the legal force of a judgment only binds the parties, while the pledgee is a third party.

The main exception to this general rule is that a third party is affected by the legal force of the judgment to the extent that they are bound by one party’s private law disposition over the disputed legal relationship.

The fact that a property transfer is based on forged acquisition documents means that a pledge right granted thereon is invalid. A judgment in accordance with this could thus have prejudicial effect in the subsequent dispute regarding the pledge, but since the parties in the dispute concerning a better right could not control the pledge right – with effect for the pledgee – the exception was not applicable. The judgment concerning a better right, which established the invalidity, could therefore not be given legal force in the case regarding the return of the mortgage deed, despite its direct relevance to the outcome of the case.

The outcome of the case can be considered reasonable, as otherwise the pledgee would risk losing the opportunity to fully assert their right to the pledge.

In this case, this risk was evident because it concerned a default judgment that had not been subject to a substantive review. Together with the fact that a pledge right is unconditionally without effect when granted by someone who based their acquisition on false documents, it seems reasonable that the pledgee is given the opportunity to pursue their claim unhindered by the judgment, in such a way that it can be asserted that the original acquisition occurred in a manner that does not extinguish the pledge right.

Naturally, this position, on the other hand, creates problems for the seller who must prove the invalidity twice. However, a well-reasoned judgment concerning a better right should, on the other hand, be able to have good evidentiary value in a follow-up case regarding the validity of a granted pledge right.

For those who wish to read more about the legal force of judgments, I can finally also mention a related case that came at the end of 2020. See the Supreme Court’s judgment of October 28, 2020, in case Ö 3860-19. In this case, the Supreme Court clarifies the legal force of judgments in disqualification proceedings in bankruptcy (within the framework of the monitoring procedure), on the binding effect of administrative court judgments on general courts, and on the limitation of a judgment’s legal force upon the emergence of new circumstances (facta supervenientia).

Dan Bengtsson

Attorney and Partner