Category: Czech Republic

In the European Union, competence of courts is harmonized and regulated by Brussels Ibis regulation No. 1215/2012 (the “Regulation”). The competence of courts determined by the Regulation is protected and applies unless the Regulation stipulates otherwise. Arbitration is not subject to EU harmonized regulations. It is governed by international treaties, most notably the New York Convention.

The protection of court competence under the Regulation is also obvious from the choice of court agreements. The choice of EU courts has priority over the choice of courts of a third, non-EU state. For example, a Brazilian and a German company may agree in a contract on the competence of New York courts over their disputes, but if the German company is sued before German courts (as the courts competent according to the company’s registered office), German courts will handle the case despite the existence of the agreement on the competence of NY courts. On the other hand, if competence of French courts is contractually agreed upon, the situation is different. In such a case competence of French courts has preference over that of German courts.

The same applies to arbitration clauses. Arbitration clauses define the solution of disputes outside of state courts, and parties agree on such clauses to take advantage of the traditional benefits of arbitration proceedings, such as expeditiousness, expertise of the decision-making body with the relevant industry, and each party’s ability to influence the choice of arbitrators. 

What happens if one of the parties changes its mind and decides, for any reason, not to observe the arbitration clause? In such a case, the party may initiate proceedings before a state court. If the court has competence under the Regulation, it is competent to decide on the case. 

The question is what the other party, which wants to solve the matter before the arbitration court and not the state court, may do. How may this party enforce the valid arbitration clause? 

First, the second party may object to proceedings held before the court by referring to the existence of the arbitration clause. Based on this objection the court checks the validity of the arbitration clause. If the court decides not to take the arbitration clause into account, it decides on the merits. Under the Regulation, this decision is directly enforceable in all EU Member States. 

Alternatively, the party may promptly initiate arbitration proceedings and postpone, as much as possible, the decision of the state court. In such a case, there is a chance that the final award will be rendered earlier and will be an obstacle to the enforcement of a subsequent court decision. The problem with this option is that the reference to a breach of public order is the only way to apply this obstacle. This procedure may be used if both (court and arbitral) decisions are seriously inconsistent, though there is no guarantee in this respect. 

The opinion of certain experts who say that the principle of free movement of judgments should not apply to decisions rendered by a court despite the existence of valid arbitration clauses may also be used as an argument. This opinion is based on the doctrine of broad interpretation of the exclusion of arbitration from the Regulation’s scope of applicability and the decision of the European Court of Justice in the matter of Marc Rich. There is, however, no guarantee that this argument will be accepted. 

In light of the foregoing, it is possible that two decisions on the same matter – one by a state court and one an arbitration award – may exist in the EU. If the decisions are consistent, there is no major issue. The problem arises if the decisions are inconsistent. Which one will be overruled? This is difficult to say, as these decisions are enforced under different rules. EU court decisions are enforced according to the Regulation; international awards are enforced according to the New York Convention. Preference of the decision rendered first may be a possible solution.

Finally, why should parties to a contract want to ignore the stipulation on arbitration? They may decide to do so for many reasons, such as wanting to strengthen their position in future negotiations on settlement or to complicate court proceedings.     

In short, parties wishing to rely on arbitration clauses should be aware of risks of parallel proceedings and decisions resulting from EU law.

By Barbora Urbancova, Partner, Peterka & Partners Czech Republic

This article was originally published in Issue 3.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Czech real estate market is currently being affected by two substantial changes – one already in effect and one that will soon come into being.

Changes to the Legislation on Environmental Impact Assessment (EIA) in Legislative Process

An amendment to the Czech Republic’s Construction Act is currently being discussed by the Chamber of Deputies and will likely become effective in mid-2017. This amendment addresses the chief shortcoming of the current legal framework of the EIA process – its unjustified length. The main change to be introduced is the “co-ordinated” proceeding, which will unite construction, planning permit, and EIA proceedings into one comprehensive process and which is expected to speed the whole process up. 

Still, there is a significantly, and probably also unnecessarily, high degree of public participation in the decision-making. For example, an entity created to protect environmental or public health which has existed for more than three years or which submits the supporting signatures of more than 200 individuals may exercise rights resulting in blocking a development project for several months or even years. The relevant EU directive stipulates that the concerned public should be allowed to effectively participate in the EIA process, but how should the “concerned public” be defined? The EIA Act defines it too broadly, which is unsuitable regarding an excessively strong role of the concerned public in the EIA proceedings, which includes, e.g., the ability to appeal certain administrative authority decisions. 

The EIA process has three stages. The first stage consists of notifying the competent authority of the planned project. In projects covered by the Annex to the EIA Act, fact-finding proceedings – or even the main proceedings, where the project´s environmental impact and permissibility as a whole are being assessed – follow this notification. However, the administrative authority has the power to decide that a project will be subjected to assessment in fact-finding proceedings even when this is not mandatory. 

The EIA process has always been lengthy, especially in transport infrastructure projects where the period from the commencement of the EIA to the potential project’s implementation can reach 15 years or more, and the current legislation makes this problem even worse. The lengthy process also represents an administrative burden for large-scale development and other projects and unnecessarily prolongs the period of implementation for construction projects, thus inhibiting growth in the Czech Republic’s real estate sector.

Real Estate Transfer Tax to be Paid by the Buyer

The obligation to pay the real estate transfer tax, which applies to transfers for consideration of real estate ownership, passed from the seller to the buyer as of November 1, 2016. It is no longer possible to deviate from this rule, since the contractual transfer of this obligation onto the buyer allegedly caused a burden for the Tax Administration, which faced an increase of administrative work in connection with identifying the taxpayer in most of the cases.

In past years, the buyer played the role of the statutory guarantor. This long-awaited change removes the risk that the buyer will pay the real estate transfer tax twice – once as a part of the real estate price and again as the guarantor in the event that the seller does not pay it.

While it may appear that purchase prices of immovable property will decrease due to the change of taxpayers, in fact, a significant impact on the real estate prices is not expected, as the demand for real estate in the Czech Republic has exceeded supply over several years, and sellers do not have any reason to lower them. 

Going forward, it is to be expected that the costs of purchasing real estate will increase, which could cause difficulties with mortgages. A mortgage is intended to cover the purchase itself, so buyers will now have to pay the transfer tax from their own savings. The good news for buyers is that banks may offer to finance the transfer tax from the mortgage, too. 

Considering real estate development projects where future purchase agreements concerning acquisition of land had been concluded before the change to the transfer tax was adopted, the total costs of developers in such cases will undoubtedly increase by the 4% transfer tax rate, since the tax will now not be paid by the transferor.

By David Padysak, Partner, Rovenska Partners

This Article was originally published in Issue 3.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Czech Republic has implemented a number of statutory reforms aimed at tackling corruption and fraudulent business practices. These reforms have been welcomed by Transparency International, which describes the Czech Republic as making one of the greatest advances in fighting corruption worldwide in 2015. In this context, the Czech Corporate Criminal Liability Act (CCLA), applied by prosecution authorities with growing frequency, has in particular been in the limelight.

New Legislation to Battle Fraudulent Business Behavior

The CCLA came into force on January 1, 2012, and constitutes the most crucial measure affecting the day-to-day conduct of business activities, since it allows for the criminal prosecution of companies as legal entities (and not only the individuals they consist of).

The legislature has now tightened its grip on corporate crime even more: Since December 1, 2016, when the latest amendment to the CCLA (the “CCLA Amendment”) came into force, the list of criminal offenses attributable to a company has expanded considerably. Companies may now be prosecuted for over 300 criminal offenses.

In addition, other anti-corruption instruments have been introduced. For instance, a recent amendment to the Czech Criminal Procedure Code encourages suspects of certain corruption-related offences to report them to the authorities. If the suspect meets the statutory requirements (e.g., the voluntary and timely provision of all details concerning the committed offense to the public prosecutor’s office and follow-up cooperation) he/she will not be prosecuted.

Criminal Liability of Companies in Practice

The CCLA applies to all types of companies that have their seat or branch in the Czech Republic, as well as to foreign companies conducting business or owning property in the country.

The Czech concept of corporate criminal liability is based on the “attribution principle.” According to this principle, criminal acts carried out by a company’s management, employees, or persons authorized to represent it are automatically attributed to the company, making it liable for acts committed by persons within the scope of the company’s business, generally in its interests or on its behalf. The person who actually committed such an attributable criminal act remains criminally liable and can be prosecuted individually.

Convicted companies can be penalized by fines of up to EUR 50 million, court verdict publishing, a ban on participation in public procurement or state subsidies, or even by dissolution.

Approximately 300 criminal proceedings were initiated against companies in 2015 alone, of which 100 were actually resolved in court – and the number of companies that have been investigated is much higher. Numerous investigations that often receive public attention relate to bribery. Such publicity alone is capable of compromising the company’s or its holding group’s business endeavors.

Protection from Criminal Liability

Companies were previously held liable for the criminal acts of their management, and had no ability to relieve or exonerate themselves. The CCLA Amendment allows companies to avoid the application of the attribution principle by using all reasonable efforts to prevent a criminal offense from occurring. This very point makes the implementation of stringent and effective compliance-management systems a top priority for businesses.

However, practice shows that the mere introduction of internal bylaws or employee training does not suffice. In order to protect the company and its reputation, it is recommended that internal control mechanisms and preemptive measures, as well as clear and regularly reviewed internal directives, be put in place. These have to be revised and updated on a regular basis.

Safer and Better Market Environment

Inevitably, the legislative measures have increased and will continue to increase the burden on management and the requirements on the operation of companies and their business. If the new obligations are not met, companies active on the Czech market may face significant risks which – if realized – could not only discredit companies (or their holding groups) but also adversely affect their activities. On the other hand, it is generally expected that the measures described will make the Czech Republic overall a more reliable and thus attractive market, to the advantage of everyone. Companies are therefore well advised to review and adapt their internal processes and compliance management systems. What appears to be a heavier burden now can reduce risks and costs in the future.

By Philip Smitka, Partner, and Petr Hrncir, Senior Associate, Noerr 

This Article was originally published in Issue 3.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.