Update on state liability for damages in connection with emergency measures

In attempt to slow down the spread of a disease COVID-19 the legislative activity of the government and respective ministries has become quite hasty and even confusing. Significant changes in emergency measures are being adopted on daily basis and every day brings new bans, precautions and exceptions from already existing exemptions.

On 23 March the government adopted resolutions Nos 279 and 280 to repeal certain measures adopted in order to slow down the spread of COVID-19, which were in effect since 6 March. The repealed measures include restrictions on the free movement in the Czech Republic, closing most of retail stores, services and catering facilities and closing of gambling ventures, casinos and other facilities, including indoor and outdoor sporting facilities.

With effect from 24 March the above-mentioned government measures were replaced with almost identical emergency measures adopted by the Ministry of Health under the Public Health Protection Act (previous government measures were adopted under the Crisis Management Act).

The public statements of government officials suggest that the different legislative procedure was chosen in order to avoid the state’s obligation to compensate entrepreneurs for damages occurred in connection with the prohibitions and restrictive measures that have been imposed.

Are the injured persons entitled to claim compensation from the state?

We believe that they clearly are, regardless of the legislative framework of adopted emergency measures. There are several arguments supporting this conclusion. The main argument arises out of one of the key constitutional principles of a democratic rule of law:

• The right to own property can be limited only for compensation.

We would like to mention the previous court decisions regarding the state of emergency. In connection with the measures adopted after the 2002 floods, Czech courts declared that:

• If the measures are adopted during and related to the state of emergency, the state liability for damages remains unaffected, notwithstanding which authority adopted such measures.

Concerning the state’s liability for the damages caused under the Crisis Act, the courts have concluded that the state is liable for the damages in case that the following conditions are met:

  1. mergency measure was adopted and executed;
  2. damage occurred; and
  3. there is a causal link between adopted emergency measure and the occurrence of damage.

Which entities are directly affected?

Mainly the entities which – due to the emergency measures – cannot fully operate and suffer significant losses, such as:

• Organizers of sport, cultural and similar events;
• Operators of fitness and wellness facilities;
• Operators of indoor and outdoor sporting facilities;
• Store owners;
• Providers of catering and dining services.

Scope of compensations

In general, damage includes both actual damage (damnum emergens) and lost profit (lucrum cessans). The actual damage comprises not only of a loss or damage to a property (e.g. expired food or unusable goods), but also the costs incurred as a result of the emergency measures or the costs of avoiding damage, costs of damages calculation or remedying them. This applies providing that the expenses incurred necessarily and effectively. The state can only be exempted from its responsibility if it is proved, that the damage was inflected by the injured party itself. In order to claim damages incurred in connection with the emergency measures the casual link has to be proved by the injured party as well as the amount of suffered damage.

In our opinion an efficient solution of state liability for damages should include compensation for loss of income suffered by the entrepreneurs as a result of the measures adopted.

What to do next?

We advise to gather and maintain detailed evidence and documentation to support possible future claims against the state.

At the moment government officials are declaring that the state is not supposed to pay any compensation for damages resulting from the adopted emergency measures.

Regardless whether the government policy remains unchanged, the claim for damages against the state has to be raised within 6 months after becoming aware of the damages. Should the state fail to pay the damages, the claim must be brought before the court. It is quite possible that the issue of state liability for the damages will by ultimately decided by the Constitutional Court.

We believe that the compensatory measures recently adopted by the government are not sufficient. More often than not they don’t aid the subjects who suffered the most from the adopted measures. And if these subjects will be forced to cease their business activities, it will constitute a major economic burden for the entire society recovering of which will last considerably longer than the consequences of COVID-19 epidemic itself.

Our law firm keeps monitoring newly adopted measures connected to the COVID-19 epidemic and continuously evaluates their impact on rights and obligations of the clients. We are available to provide details about the current situation and answer any questions you may have.

Is your business in the Czech Republic adversely affected by coronavirus or respective preventive measures?

Then, the Czech support loan program “COVID II” is just for you. The acceptance of applications for the program commences already tomorrow, on 2 April 2020. We will be happy to assist you with their express processing!

The Ministry of Industry and Trade of the Czech Republic has announced another supporting loan program “COVID II”. It is designed to support small and medium enterprises and self-employed persons operating within the Czech Republic. Its purpose is to eliminate the impact of the coronavirus on the entrepreneurs in the Czech Republic. The program will enable access to operational financing. It is intended for those whose economic activities are restricted due to the coronavirus or related preventive measures.

The program has several advantages. The Czech-Moravian Guarantee and Development Bank will provide guarantee for commercial loans up to 80 % of the principal. It will also provide financial contributions to cover interests up to CZK 1 million. The guarantee period will be up to 3 years, free of charge. The maximum amount of the loan can be up to CZK 15 million.

Entrepreneurs can finance the costs of wages and energy, payments of rent, payments of supplier-customer invoices, pre-financing of receivables, or acquisition of material, inventory and other small assets.

The program is financed from the EU structural funds within the Operational Program Enterprise and Innovation for Competitiveness. Therefore, it is not intended for the implementation of projects in the capital city of Prague. However, applicants based in Prague may also apply if the funded establishment is located outside the capital city.

The program starts already on 2 April 2020. It can be expected that the funds from the program will run out rapidly. Therefore, we recommend to entrepreneurs to take fast action.

We offer you a legal assistance and representation in the express processing of documents and applications for receiving a guarantee for commercial loans. We offer our services for a special price of EUR 800 plus 0.25% from the amount of actually provided facility line (excluding VAT). We will be also pleased to provide you with legal assistance and representation in arranging commercial loans with the relevant banks. The price of these services is negotiated individually depending on the specific circumstances of the credit case.

If case of any questions regarding COVID II loan program, please do not hesitate to contact us. We will be happy to assist you.

Act to mitigate the consequences of the COVID-19 pandemic

The German Bundestag today unanimously adopted the act to mitigate the consequences of the COVID-19 pandemic in civil, insolvency and criminal proceedings in expedited legislative action. With this, the extensive protective measures for companies and private individuals, which the Federal Government already recommended on Monday, will enter into force soon. The law now only has to be approved by the Bundesrat and executed by the Federal President, which is generally regarded as a formality.

If you want to know more about the detailed contents of the passed legislation make sure to check out our detailed reports.

Insolvency: https://blog.actlegal.com/the-planned-changes-by-the-act-to-mitigate-the-consequences-of-the-covid-19-pandemic-in-insolvency-law/

Corporate: https://blog.actlegal.com/the-planned-innovations-in-company-law-resulting-from-the-act-to-mitigate-the-consequences-of-the-covid-19-pandemic/

Commercial/Supply Chain: http://blog.actlegal.com/rights-to-refuse-performance-for-debtors-in-the-corona-crisis-planned-creditors-can-take-countermeasures/

Banking/Finance: http://blog.actlegal.com/corona-crisis-special-features-of-lending-law-from-the-banks-perspective/

Does the tour organiser have to pay compensation in the event of package tour cancellations due to the Corona crisis?

According to § 2 (12) of the Austrian Package Travel Act, ‘unavoidable and extraordinary circumstances’ are circumstances beyond the control of the person invoking them, provided that the consequences of these circumstances could not have been avoided even if all reasonable precautions had been taken and thus apply to the current corona crisis. If travellers have cancelled a package tour free of charge with the organiser due to unavoidable and exceptional circumstances (e.g. a package tour to an area for which a travel warning exists), the organiser must refund all payments made for the package tour in accordance with § 10 (2) of the Austrian Package Travel Act. In principle, the traveller is also entitled to compensation in accordance with § 12 Package Travel Act; however, not due to travel cancellations in connection with the corona crisis: In accordance with § 12 (3) number 3 Package Travel Act, the traveller is not entitled to compensation if the tour operator proves that the lack of conformity with the contract is due to unavoidable and exceptional circumstances.

Legal Consequences of the Coronavirus Epidemic for your Contractual Relationships

Due to the COVID-19 disease, the government declared a state of emergency in the territory of the Czech Republic on March 12, 2020. In this context, the government also issued a series of crisis measures which are published as government resolutions in the Collection of Laws of the Czech Republic. Prohibitions, restrictions, and orders resulting from the state of emergency and crisis measures can have a major impact on individual parties in terms of meeting their contractual obligations. This will be particularly important in the case of long-term customer-supplier relationships, in projects in construction and energy sectors, or for investment projects.

However, the legal consequences of the current emergency situation may vary from case to case. An ongoing epidemic may be a reason to change the contract price, postpone deadlines, or waive the obligation to pay damages. In some cases, the contract may also be terminated. However, these legal consequences may not occur automatically in all cases. Each contractual relationship needs to be assessed individually.

In general, some of the following legal principles may apply in the context of an ongoing epidemic:

  • force majeure (applicable particularly in situations where the proper performance of the contract is hindered by extraordinary and unforeseeable external circumstances);
  • subsequent impossibility of performance (applicable in particular in situations where the contract objectively cannot be performed); and
  • a substantial change in circumstances (applicable particularly in situations where performance of the contract has become extremely disadvantageous to one of the parties).

A more detailed description of these legal principles and the prerequisites for the application thereof can be found in this newsletter. However, it can already be pointed out that the conditions or consequences of force majeure, a subsequent impossibility of performance, or a substantial change in circumstances may (and generally will be, in practice) be regulated individually in the relevant contracts. Therefore, when examining the legal implications of the COVID-19 outbreak to your supplier-customer relationships, it is not enough to only apply statutory rules, but primarily, it is vital to search for relevant arrangements in your contractual documentation.

1) Force Majeure

What is force majeure? There is no legal definition of force majeure in Czech law. Nevertheless, this expression is used in the Civil Code and can also be found in other Czech statutes. Generally, force majeure is considered to be an extraordinary, unforeseeable and insurmountable obstacle that arises independently of the will of the person concerned. In addition to the concept of force majeure, the Czech Civil Code also uses the words “unpredictable circumstance” and “unpredictable and insurmountable cause / obstacle”. In our opinion, it is possible that in a number of legal relationships, the current epidemic of COVID-19 could be considered an event of force majeure. In this context, for the sake of completeness, we would like to point out that force majeure will not apply if a contract has already been concluded at the time of the outbreak or with the knowledge of the ongoing epidemic. In such a situation, it will no longer be possible to regard the COVID-19 epidemic as an unforeseeable event.

What is the result of force majeure? If a force majeure event occurs, it may bring about a number of different legal consequences, which usually take the form of (i) release from a specific obligation, (ii) change to the obligation or (iii) extension of deadlines. According to the Czech legislation, it may include, for example, the following consequences:

  • the obliged party may be released from the obligation to compensate for any damages incurred by the other party;
  • the limitation period may be suspended;
  • a court may decide to increase the price of the work in question if it was determined according to a budget, or to cancel the contract for work in which price was negotiated according to a budget;
  • an entrepreneur may change some of the information in a contract concluded with a consumer which it communicated to the consumer prior to the entering into the contract;
  • an eligible party to a contract may withdraw from the contract if it had the right to choose from several variants of the performance of such a contract, but the possibility of such a choice was frustrated as a result of a force majeure event;
  • the deadlines for submitting a promissory note (bill of exchange) may be extended, etc.

At the same time, it should be noted that a force majeure event does not automatically lead to a release from the obligation to pay liquidated damages (a contractual penalty) to the other party unless such an exemption is expressly agreed in the contract. Indeed, liability for liquidated damages (a contractual penalty) generally (unless expressly agreed otherwise) arises absolutely – i.e. irrespective of fault.

The contractual arrangements for force majeure events are essential. It is customary for the parties to negotiate force majeure clauses in their contracts which govern (i) what specific events are considered to be force majeure events under the given contract and/or (ii) what specific consequences the force majeure has regarding the rights and obligations of the parties. Such individual arrangements will generally take precedence over statutory regulation of force majeure. Each contract must therefore be subject to an individual legal analysis. In this context, please note that some contract templates (e.g. FIDIC) may contain specific clauses governing force majeure events.

Beware of any international element. In the case of contracts with an international element, it is first necessary to consider the law applicable to the contract in question. This is because force majeure legislation may differ substantially from one legal system to another. In addition, it should be noted that some international treaties (e.g. the Vienna Convention on the International Sale of Goods – CISG) may contain their own rules for force majeure events.

How to proceed in case of a force majeure event? As mentioned above, the specific procedure may depend on the contractual regulation of force majeure. In general, however, the following steps may be recommended to a party to a contract affected by a force majeure event:

  • notify the other party without delay that a force majeure event has occurred;
  • carry out a legal analysis of the relevant contract to determine what your course of action should be;
  • continually assess the impact of force majeure on your obligations and provide evidence to help you demonstrate the impact of the force majeure event on your obligations;
  • try to minimize the consequences of the force majeure event.

2) Subsequent Impossibility of Performance

What is the subsequent impossibility of performance? Under the expression “impossibility of performance”, the Czech Civil Code regulates a situation in which the payment of a certain debt or complying with an obligation becomes objectively impossible. In this context, the Civil Code states that performance is impossible if it cannot objectively be fulfilled, not even (i) under difficult conditions, (ii) at a higher cost, (iii) with the assistance of another person, or (iv) after a specified period elapses.

What is the consequence of subsequent impossibility of performance? In the event that a particular performance becomes objectively impossible, the relevant obligation to provide such performance ceases to exist by operation of law. According to the Civil Code, the obligation can also completely cease to exist even if the performance is impossible only partially, but due to the nature of the obligation or the purpose of the contract (which was known to the contracting parties at the date of the contract), the performance of the remaining portion of the obligation is pointless for the entitled party (the creditor).

Contractual clauses on subsequent impossibility of performance. The consequence that an obligation automatically ceases to exist if its fulfillment is objectively impossible cannot be excluded by contract. However, the contracting parties may agree to a wider range of situations when the obligation ceases to exist (e.g. where performance is objectively possible, but only at significantly higher costs). Likewise, the parties may contractually adjust the scope of the liability for damages in the event of subsequent impossibility of performance. Each contract must therefore be subject to an individual legal analysis.

Beware of any international element. In the case of contracts with an international element, it is first necessary to consider the law applicable to the contract in question. Indeed, the rules governing the subsequent impossibility of performance (and, where appropriate, the related compensation) may differ considerably from one legal system to another.

What to do in case of subsequent impossibility of performance? As mentioned above, the specific steps to take in the event of subsequent impossibility of performance may to some extent be regulated by the contract. In general, however, the party the performance by which has subsequently become impossible should immediately notify the same to the other party. In this context, we would like to point out that under the Czech Civil Code, a contracting party which has not notified the impossibility of performance in time is obliged to compensate the other party for any damage caused by such late notification of the subsequent impossibility of performance.

For completeness, we would like to mention that subsequent impossibility of performance may in some cases be caused by governmental measures in crisis or by the announcement of the state of emergency. In such a case, compensation for damages against the state under the Crisis Act can be requested if the statutory conditions are met. You can find more information on this topic in a newsletter of our law firm dealing with this issue.

3) Change of Circumstances

What is a substantial change in circumstances? The legal regulation of substantial change in circumstances primarily regulates a disparity in the rights and obligations of the parties that occurs as a result of a change in external circumstances. Typically, it is a change of circumstances caused by war, a coup, revolution, embargo, boycott or prohibition of certain goods. However, this legislation may be also applied to changes in circumstances caused by epidemics and quarantines.

Legal regulation of substantial change in circumstances relates in particular to longer-term liabilities and facilitates. It makes easier the path to the continuation thereof despite unexpected fluctuations in important external factors. In this context, it should be noted that not every change in circumstances is a reason for a change of the obligation (typically to a contract). The mere fact that, as a result of objective external causes, the performance of the contract becomes less favorable does not alter the continuation of the obligation to perform the contract, even under these difficult conditions. From the point of view of legal implications, only a change in circumstances that brings surprising (extreme) impacts on the partiesʼ position in the contractual relationship (one that does not correspond to any reasonable review and assessment of risks) is substantial.

The Czech Civil Code lays down the following defining features of a substantial change in circumstances that must be met simultaneously: (i) the existence of a change of circumstances; (ii) the unpredictability of the change; (iii) the uncontrollability of the change; (iv) absence of acceptance of a future risk of a change of circumstances; (v) the occurrence of a particularly gross disproportion in the rights and obligations; and (vi) causal link between the change and the emergence of a particularly gross disproportion.

What is the consequence of a substantial change in circumstances? If all the above statutory prerequisites are met, then the affected party has:

  1. primarily the right to pursue a renewal of the contract negotiation (thus, the law urges the parties to reopen the contract, to consider changes that have occurred and to restore the balance that the original distribution of rights and obligations in their original arrangement was aimed at); and
  2. in the event of unsuccessful negotiations of the parties to restore balance, the right to ask the court to modify the content of the obligation by its own decision or to cancel the obligation as of the date and under the conditions specified in the decision.

Contractual clauses on substantial change in circumstances. In the basic statutory regime, the legislation is based on the principle that each contract is concluded subject to a change in circumstances. However, the parties may deviate from this legal regime in their contract. The parties may assume the risk of a change in circumstances and, as a result, bear the costs resulting therefrom. This may include assuming all risks or only some of the risks (e.g. all currency risks, technical, legal, etc.) or risks specifically laid down by the parties. Each contract must therefore be subject to an individual legal analysis of whether and to what extent the risk of change of circumstances has been assumed by either party.

Beware of any international element. In the case of contracts with an international element, it is first necessary to consider the law applicable to the contract in question. The rules governing substantial change in circumstances may, in principle, differ from one legal system to another.

What steps to take in case of a substantial change in circumstances? The party concerned (i) must exercise its right to resume contract negotiations vis-à-vis the other party, (ii) shall state the reasons on which its right is based, and (iii) prove the facts that justify its claim. The said right should be exercised within a reasonable period of time, which – as the default – the Civil Code regulates to be no later than two months after the party must have ascertained the change in circumstances. The consequence of this deadline elapsing in vain is that the party concerned loses the right to demand the subsequent restoration of the contractual balance by a court.

Liability of the state for damages in connection with the measures adopted in crisis

In order to slow down the spread of the COVID-19 virus, the government has decided to introduce the state of emergency in the Czech Republic. Subsequently, it has adopted a number of crisis measures the list of which is being extended every day. The most important measures include restrictions of the free movement of persons, closing of most shops (except groceries, pharmacies and other vital stores) and catering facilities, prohibiting of sale of accommodation services, restrictions on travel and transport and prohibiting of social, cultural and sporting events.

These measures bring significant economic consequences. There is no doubt that many entrepreneurs will suffer economic losses.

What can be claimed as damages?

According to the Crisis Management Act the state is liable for any damages incurred in connection with the emergency measures. The law stipulates that the state is obliged to compensate the injured natural and iuristic persons for the damages. In general, damages include both actual damages (damnum emergens) and loss of profit (lucrum cessans). The actual damages comprises not only of a loss or damage to property (e.g. expired food or unusable goods), but also the costs incurred as a result of crisis measures or the costs of avoiding damages, costs of damages calculation or remedying them, including the costs of related legal assistance. This applies provided that the expenses incurred necessarily and effectively. The state can only be exempted from its responsibility if it is proved, that the damage was inflected by the injured party itself.

In order to claim the damages the injured party needs to provide sufficient evidence (a) about the amount of damages incurred and that (b) suffered damages are result of adopted crisis measures. This can be difficult in many cases, especially when proving loss of profit.

Currently it is unclear how the state will handle damage claims resulting from the measures adopted under the Crisis Management Act and what will be the actual amount of compensation granted to entrepreneurs. An effective (across-the-board) solution could be compensating for the loss of income suffered by entrepreneurs as a result of the measures adopted, considering the most affected industries.

Any injured party is entitled to file a claim at court if it considers the compensation awarded by the state as inadequate.

What to do Next?

The claim for damages must be raised within 6 months after becoming aware of damages. Given the unusual nature of the situation and the extent thereof, there is no relevant previous experience or precedent in claiming damages. Historically, the courts dealt with a number of cases related to floods happening back in 2002, but the case facts are going to be very different in current situation.

We could reasonably expect that the government will take economic measures that will aim to mitigate the impacts on the most affected industries. The aforementioned provisions of the Crisis Management Act will constitute one of the possible measures to compensate suffered damages.

Currently the clear priority is to protect the health and safety of all persons. However, given the expected economic impact of the crisis, it is strongly recommended to commence immediately with gathering evidence and underlying documents to prove the cause as well as amount of the damages resulting from the crisis measures.

In summary, we would like to note that the measures undoubtedly impact certain industries and services significantly more than other industries. In our opinion, the state should aim to make sure that economic losses are borne by the whole society as the measures adopted in times of a crisis aim to protect the health and lives of all individuals.

Lessees’ claims against lessors as a result of governmental measures

In connection with efforts to slow down the spread of the COVID-19 virus, the government decided on Thursday, March 12, 2020, to declare state of emergency in the Czech Republic. In the following days, it has adopted a number of emergency measures. The list of these measures is being expanded every day and will certainly have far-reaching impacts in the economy as well. In this respect, the most important measures are the general restriction on the free movement of persons, the ban on the operation of most shops (except groceries, pharmacies and other stores selling vital goods) and catering facilities, the ban on the sale of accommodation services, restrictions of travel and transport, ban of cultural and sporting events. As a result, many entrepreneurs will suffer significant economic losses.

As a result of the governmental measures, the lessees of the establishments concerned are prevented from using the leased premises for the agreed purpose of lease and from conducting their business therein. Even short-term closures of several weeks will mean significant economic losses for the lessees.

However, the lessee may not be exempted from the obligations arising from the lease, in particular from the obligation to duly pay the rent, service charges, etc. Breach of these obligations by the lessee may be penalized by the lessors, for instance by contractual penalties, exercising retention rights, claiming for the damages or by the termination of the lease agreement.

So how can the lessee eliminate or reduce the negative impacts of the situation?

Agreement with the lessor on a reasonable compensation

First of all, it is advisable to try to make an agreement with the lessor to provide a reasonable compensation for the duration of the government restrictions, such as a rent discount, rent free or other form of compensation.

In the event that such agreement with the lessor is not possible, the lessee has several options how it can possibly unilaterally reduce its rental costs and thus reduce its damages arising in connection with the governmental restrictions.

Temporary Rent Discount

Lessees may request the lessor to provide it with a reasonable rent discount for the duration of government restrictions. From the legal point of view, such request could be based on the impossibility of using the leased premises for the agreed purpose of lease which means that there is no consideration by the lessor in relation to the paid rent.

Initiating Negotiations to Change the Conditions of the Lease Agreement

As a result of the governmental restrictions, the lessee also may have right to initiate negotiations to change the terms and conditions of the lease agreement due to change of circumstances. The lessee shall, however, initiate such negotiations with the lessor within a reasonable period of time, no later than 2 months after the change in circumstances has occurred. If the lessor does not agree with a suggested change of the lease agreement, the lessee may apply to a court to make a decision.

Termination of the Lease Agreement

The ultimate solution of the situation by the lessee may be the termination of the lease if such lease was agreed for a definite period due to the change of circumstances on which the parties apparently relied on when the obligation arising from the lease agreement was created to the extent that the lessee cannot be reasonably required to continue the lease.

The wording of the Lease Agreement is always decisive

It must be noted that lessees’ rights for rent discounts or other forms of compensation or for the termination of the contract are very often limited in the lease agreements. In the most cases, such rights are completely excluded or are set different conditions upon which they can be exercised. In order to assess the possible rights of the lessee and to determine the next steps towards the lessor, we always recommend as a first step to make a detail analysis of the lease agreement.

Compensation for Damages Caused by Crisis-related Measures

For the sake of completeness, we add that, as a result of the governmental restrictions, the lessees may be also entitled to claim damages against the state with regard to the adopted crisis measures under the Crisis Act. For more details, please see our newsletter dealing with this topic.

The measures undoubtedly impact certain industries and services significantly more than other industries. The state should aim to make sure that economic losses are borne by the whole society as the measures adopted in times of a crisis have as their goal to protect the health and lives of all of us.