CZECH REPUBLIC: An Introduction to Dispute Resolution
Czech Republic: Dispute Resolution
Like most areas of society, the litigation environment in Czech Republic was considerably affected by the Covid-19 pandemic. Besides its effects on the day-to-day functioning of the courts and arbitration tribunals, the coronavirus has brought to light the importance and usefulness of online proceedings and other compensatory simplification tools, such as class action lawsuits. While the Czech Act on Collective Proceedings still awaits passage in the Parliament, a whole new category of disputes has arisen wherein these kinds of combined party lawsuits can play an important role – disputes raised against the State by entrepreneurs aggrieved by the emergency measures that the state imposed on their businesses. Below, we highlight some of the newly emerging challenges in the Czech legal market in 2021.
Class action lawsuits in Czech Republic
According to the preliminary draft of the Act on Collective Proceedings, it will create the possibility for groups of claimants to jointly initiate collective proceedings, instead of filing a number of individual lawsuits as individual plaintiffs, under certain conditions. This aims to provide a vehicle similar to class action lawsuits as known mainly from the common law systems. Initially, such collective proceedings will be applicable only to B2C disputes, but voices can already be heard demanding their applicability in a wider scope of disputes. Particularly when there is a considerable number of similar disputes wherein a minor sum is sought by the plaintiffs, it is considered to be quite ineffective to hear such cases in separate proceedings. A further advantage is that, due to the opportunity to join a collective proceeding, these claimants, who otherwise would/could not risk initiating a proceeding on their own, will be provided with simplified access to justice. This way, Czech Republic aims to comply with Directive (EU) 2020/1828 of the European Parliament and of the Council, which obliges all European Union member states to pass a similar Act by the end of 2022.
The persons entitled to initiate such collective proceedings include the individual claimants themselves (actual bearers of the claims to be collated in the joint proceedings), but also so-called “non-profit persons”, which are legal persons established under Czech law that are intended to protect the rights and interests related to the subject of the collective proceeding. Such “manager” of the collective proceedings shall be entitled to a part of any award handed down, up to a limit of 25% of the eventually awarded amount.
Before the Act on Collective Proceedings is passed into law, there are, however, certain alternatives that have been successfully used in local legal practice. BBH has, for instance, successfully pioneered an alternative approach to class action suits based on contracts concluded between the individual claimants and a third person who will act as the plaintiff in the court proceedings. Unlike the assignment of claims, which is sometimes also used as an alternative form of class action, the individual claimants do not sign away their claim, but authorise the third person to solely enforce their claim in the proceedings. The third person acts in the proceedings under their own name, but on the account of the individual claimants.
Nevertheless, it is safe to say that both class action lawsuits and such alternatives are currently growing in importance. In the recent past, the necessity of such legal tools has been proven in multiple disputes between banks or telecommunications providers and their clients regarding unlawful fees.
Claims for the recovery of lost profit caused by pandemic measures
When their businesses were closed or restricted due to the pandemic measures imposed by the State, entrepreneurs in many large sectors of the economy suffered great losses. Initially, in March 2020, these measures were issued pursuant to the Emergency Act, which constitutes the obligation of the State to compensate damage if there is a causal link between its emergency measures and the occurrence of detrimental economic effects. The wording of the Emergency Act specifies that such compensation should also entail lost profit. After the first such claims against the State were applied, instead of the Emergency Act, the State started to issue its pandemic measures pursuant to the Public Health Protection Act, in which the obligation of the State to compensate damage is not explicitly contained. Presently, there are still lawsuits pending seeking a determination of whether this approach was in accordance with law or whether the measures were issued in a way that should be declared invalid. BBH continues to be actively involved in such disputes as an advocate for affected entrepreneurs.
To succeed with their claims, entrepreneurs will face the challenge of accurately proving the amount of profit they lost due to the pandemic measures. This presents a very difficult process of assessing these profits in a hypothetical situation in which the government would not have imposed any measures but the pandemic may still have affected the ordinary course of business.
Developing trends in Czech arbitration
In the past years, significant changes have also appeared in the field of arbitration in Czech Republic.
Since December 2016, it has not been possible to conclude arbitration agreements regarding disputes that arise from contracts between businesses and consumers. Arbitration clauses used to be a common part of consumer loan agreements, for example, and were frequently used because of the shorter duration of arbitration proceedings in comparison with regular litigation. First by court determinations and eventually also by lawmakers, such arbitration clauses were found to be problematic in light of the principles of consumer protection and therefore prohibited.
On the other hand, this change has simultaneously lifted the long-standing limits on commercial arbitration, which are being reinforced by the current trends to reinvigorate arbitration, and the recent legislation is manifesting long-evolving tendencies to make the Czech Arbitration Act more reflective of the UNCITRAL Model Law on International Commercial Arbitration.
Similarly, the general courts are now following the arbitration courts’ trend of loosening the requirements on various formalities. For instance, in its recent case law, the Czech Constitutional Court stated that arbitrators are not always obliged to proceed fully in accordance with the Code of Civil Procedure when it comes to the obligation to notify the participants in a case of their current position in the proceeding as extensively as the general courts are bound to do. According to the Constitutional Court, when there are no material reasons to so notify the participants, the absence of notification shall not be seen as a reason for the annulment of the arbitration award.
Similarly, in a recent decision, the Supreme Court of the Czech Republic expressed its increasingly positive approach towards arbitration by finding the arbitration clause that was concluded between the given parties to be valid to an indefinite degree. In the proceeding, the plaintiff was denying the jurisdiction of arbitration over the dispute because the arbitration clause stated that “the disputes shall be resolved by the ICC International Court of Arbitration in Paris, in accordance with its law.” The Supreme Court stated that such arbitration clause constitutes the jurisdiction of the ICC as a permanent arbitration court under Czech law.