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CEELM Covid-19 Comparative Legal Guide: Contracts in Czechia

CEELM Covid-19 Comparative Legal Guide: Contracts in the Czech Republic

Covid-19 and Contracts in the Czech Republic
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Contributed by Rowan Legal

How might businesses in your jurisdiction be impacted by the Covid-19 pandemic?

Businesses are likely to be affected by similar issues faced by businesses elsewhere, such as the disruption of global supply chains and generally weaker demand in all affected countries. Companies active in travel, food & hospitality, sports, culture and many other sectors will be among those hit the hardest, while others, in particular online shops, delivery services, etc. may actually reap some benefits.

Additionally, businesses operating in the Czech Republic will be affected by the measures the government has adopted to limit the spread of the Covid-19 pandemic. These measures were adopted gradually over the course of the whole week from 9 March, and came into force as follows:

  • 10 March 2020 – closure of all primary and secondary schools and universities, and suspension of all events for more than 100 people
  • 12 March 2020 – declaration of a state of emergency, restriction of travel to and from the country, suspension of all events for more than 30 people, prohibition of entry to fitness and wellness centres, museums, galleries, public libraries etc., prohibition of entry to restaurants and bars for the public (though restaurants and bars may offer takeaways and food delivery services)
  • 14 March 2020 – closure of all shops except for food and groceries shops, pharmacies, service stations, garages and certain other necessary services
  • 16 March 2020 – nation-wide quarantine, restriction of movement within the country (travel is only possible to and from work, and to shops for food and other necessities)

These measures are likely to affect virtually all businesses, either directly (especially those in the service industry) or indirectly (especially those in the manufacturing industry, due to the weaker demand for products). All employers will need to deal with the absences of employees (due to their own illness or quarantine, or because they are caring for children or other relatives).

The Czech government is already implementing steps to help business – so far, it was announced that the deadline for submission of tax returns will be extended by 3 months and small / medium business will be able to draw a subsidized loan from the Czech-Moravian Guarantee and Development Bank to cover expenses caused by the above measures. Entrepreneurs (natural persons) will also most likely be able to apply for a “childcare allowance” if they have to take time off to take care of their children – this is normally available to employees only.

In your jurisdiction, if it becomes impossible for a party to perform its contractual obligations because of an external event beyond its control (such as the Covid-19 pandemic), can that party cancel its contract?

Under the Czech Civil Code, the impossibility to perform a contract, for example because the export of certain goods has been forbidden by the government, leads to the frustration of the contract, and thus to the cancellation of the contract by law (i.e., not by the action of the party obligated under the contract). However, the obligated party must, without delay, inform the entitled party that the frustration of the contract has occurred, otherwise it is liable for the damage incurred by the entitled party.

The frustration of the contract can be invoked only if the performance of the contract becomes impossible, not, for instance, more complicated or more expensive. The frustration of the contract can happen only if the contract was entered into before the event causing the frustration was known.

In addition, contracts with a fixed term of performance (e.g. management of an event that was planned for a certain date) expire automatically when the obligated party defaults in the performance of the contract, unless the entitled party insists on the performance of the contract.

If the contract is frustrated or expires in the above manner, the party that has already accepted payment or other consideration is obligated to return such consideration (if not, it constitutes unjustified enrichment which can be recovered by means of a civil law action).

In your jurisdiction, if a party’s performance of its contractual obligations is adversely affected by an external event beyond its control (an “FM Event”) but does not become completely impossible, can that party typically seek relief from compliance with its obligations?

Under the Czech Civil Code, it is possible to invoke an FM Event, or a “substantial change in circumstances”. In such case, the affected party may ask for the negotiation of changes to the contract, or for the change or cancellation of the contract by the court. However, it is necessary to carefully examine each contract, as B2B contracts often exclude the possibility to invoke a substantial change in circumstances.

An FM Event that presents an exceptional, unforeseeable and insurmountable obstacle may also exempt the obligated party from the liability for damages, provided that this party was not obliged to overcome such obstacle (this does not preclude the obligation to pay contractual penalties).

If yes, what considerations should be borne in mind by such parties, in particular in relation to:

Any notification obligations (Is the affected party typically required to notify any counterparties of the FM Event within a specific time period?)

If the affected party knows that it has breached, or is likely to breach, its contractual obligations due to the FM Event, it must notify the entitled party. The notification must also contain the possible consequences of the breach. The notification should be made without undue delay (there is no specific time period). In case of late notification, the affected party is liable for the damage incurred by the entitled party as a result of the delay.

There is no prescribed form for the notification (it can be done in writing or orally), but written form is highly recommended, due to possible disputes.

Any causation requirements (Is the affected party typically required to demonstrate that it would have performed its contractual obligations but for the FM Event?)

The affected party is required to demonstrate that it would have performed its contractual obligations but for the FM Event in case of a dispute, not necessarily in the notification phase (however, it is always advisable to describe in the notification in detail at least what prevents the affected party from the performance of its contractual obligations). The burden of proof is always on the party affected by the FM Event.

Any mitigation obligations (Is he affected party typically required to demonstrate that it took specific steps to avoid the impact of the FM Event as far as possible?)

For an FM Event to exempt the affected party from liability for the breach of its contractual obligations, it must be exceptional, unforeseeable and insurmountable. The affected party must try and prevent the impact of the FM Event on the performance of its contractual duties if possible. This is especially important in case that a dispute arises.

However, it is important to point out that the party otherwise entitled under the contract must also take steps to limit the damage caused by the FM Event once the affected party notifies it. The party affected by the FM Event is not liable for preventable damage incurred after the notification.

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