An Introduction to Law
© Ing. Lucie Andreisová, Ph.D.:
© doc. JUDr. Nicole Grmelová, Ph.D.:
© Mgr. Ing. Tereza Vaňkátová:
Chapters 10, 11, and 12
Introduction, Chapters 2, 3, 4, and 5
Chapters 1, 6, 7, 8, and 9
Reviewed by: doc. Mgr. Tomáš Gongol, Ph.D.
JUDr. Ing. Radka Zahradníková, Ph.D., LLM.
Table of contents
List of abbreviations ............................................................................................................................... 8
Introduction............................................................................................................................................. 9
Chapter 1. The Concept of Law and Legal Systems ............................................................................. 10
1. What is law? .................................................................................................................................... 10
2. Functions of law .............................................................................................................................. 10
3. The concept of law .......................................................................................................................... 10
4. Law and legal systems ..................................................................................................................... 11
5. The Czech Legal System................................................................................................................... 12
6. Sources of law ................................................................................................................................. 13
7. Classification of law ......................................................................................................................... 14
8. Summary.......................................................................................................................................... 14
9. Self-assessment questions .............................................................................................................. 15
10. Further reading/listening .............................................................................................................. 15
Chapter 2. International Public Law..................................................................................................... 16
1. Origins of the International Public Law ........................................................................................... 16
2. Difference between International Public Lawand International Private Law................................ 16
3. Subjects of International Public Law ............................................................................................... 17
4. Constitutive elements of a state and succession of states ............................................................. 18
5. International Organizations............................................................................................................. 19
6. Implications of International Law with Respect to Individuals ....................................................... 19
7. Summary.......................................................................................................................................... 22
8. Self-assessment questions/tasks..................................................................................................... 22
9. Further reading/listening ................................................................................................................ 23
Chapter 3. History and Powers of the EU. EU Bodies and Institutions............................................... 24
1. A Brief Account of the History of the European Union ................................................................... 24
2. Objectives of the European Union .................................................................................................. 26
3. Division of Powers between the European Union and its Member States..................................... 26
4. EU bodies and institutions............................................................................................................... 29
1. The European Parliament......................................................................................................... 29
2. The Council and the European Council .................................................................................... 32
3. The European Commission....................................................................................................... 33
4. The Court of Justice of the European Union ............................................................................ 34
5. The Lobbyists................................................................................................................................... 34
6. Summary.......................................................................................................................................... 35
7. Self-assessment questions .............................................................................................................. 35
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3.8 Further reading/listening ................................................................................................................ 36
Chapter 4. EU Law................................................................................................................................. 37
4.1. Primary Law .................................................................................................................................... 37
2. International Treaties concluded between the EU and third countries.......................................... 38
3. Secondary Law................................................................................................................................. 39
1. Regulations ............................................................................................................................... 39
2. Diretives.................................................................................................................................... 40
4. Enforcement of EU Law by Law Courts ........................................................................................... 42
5. Extra judicial enforcement by EU Law............................................................................................. 43
1. European Ombudsman............................................................................................................. 44
2. SOLVIT....................................................................................................................................... 45
Austrian physiotherapist authorised to practice in Portugal ........................................................ 45
French company gets VAT refund from Germany......................................................................... 45
3. European Parliament´s Petitions Committee........................................................................... 46
2. Summary.......................................................................................................................................... 46
3. Self-assessment questions/tasks..................................................................................................... 47
4. Further reading/listening ................................................................................................................ 47
Chapter 5. Czech Constitutional Law and the Protection of Human Rights ....................................... 48
1. The Czech Constitution in General .................................................................................................. 48
2. Division of Powers under the Czech Constitution........................................................................... 48
1. The Legislative Power............................................................................................................... 48
2. The Executive Power ................................................................................................................ 49
3. The Judicial Power .................................................................................................................... 50
3. Three Systems of Protecting Human Rights in the Czech Republic (national system, Council of
Europe and the European Union).......................................................................................................... 51
4. Summary.......................................................................................................................................... 53
5. Self-assessment questions .............................................................................................................. 53
6. Further reading/listening ................................................................................................................ 54
Chapter 6. Contracts ............................................................................................................................. 55
1. Obligations....................................................................................................................................... 55
2. Principles of contractual law ........................................................................................................... 56
3. Contracts ......................................................................................................................................... 56
1. Changes in obligations.............................................................................................................. 57
2. Extinction of obligations........................................................................................................... 58
3. Subjects of contracts ................................................................................................................ 60
4. Division of the contracts.................................................................................................................. 60
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5. Content of the contract................................................................................................................... 61
6. Adhesion contracts.......................................................................................................................... 62
7. Consumer protection ...................................................................................................................... 62
8. Distance contracts ........................................................................................................................... 63
9. Off-premises contracts .................................................................................................................... 63
10. Summary........................................................................................................................................ 64
11. Self-assessment questions ............................................................................................................ 65
12. Further reading.............................................................................................................................. 65
Chapter 7. Civil and criminal liability ................................................................................................... 66
1. Legal liability .................................................................................................................................... 66
2. General conditions of civil and criminal liability .............................................................................66
1. Civil delicts v. crimes................................................................................................................. 66
2. Preconditions for civil liability for damage to arise.................................................................. 67
3. Delictual capacity v. criminal capacity...................................................................................... 70
4. How is the damage compensated? .......................................................................................... 71
3. Compensation for personal injuries ................................................................................................ 71
1. Compensation of pain and suffering........................................................................................ 71
2. Compensation for aggravation of social position..................................................................... 72
3. Compensation of pecuniary loss as a result of personal injury................................................ 73
4. Summary.......................................................................................................................................... 73
5. Self-assessment questions .............................................................................................................. 74
6. Further reading................................................................................................................................ 74
Chapter 8. Labor Law ............................................................................................................................ 75
1. Labour relations............................................................................................................................... 75
2. Sources of the Czech Labour Law.................................................................................................... 75
3. Basic principles of labour law .......................................................................................................... 75
1. Prohibition of discrimination.................................................................................................... 75
4. Subjects of labour relations............................................................................................................. 77
5. Establishment of an employment relationship ............................................................................... 77
1. Mandatory terms of an employment contract ........................................................................ 77
2. Term of employment......................................................................................................... 78
6. Termination of the employment relationship................................................................................. 79
1. Void Termination of an Employment Relationship ..................................................................81
7. Liability for damage caused by the employee................................................................................. 82
8. Agreements on work performed outside an employement relationship....................................... 82
9. Summary.......................................................................................................................................... 83
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10. Self-assessment questions ............................................................................................................ 84
11. Further reading.............................................................................................................................. 84
Chapter 9. Litigation ............................................................................................................................. 85
1. Definition......................................................................................................................................... 85
2. Judicial system in the Czech Republic ............................................................................................. 86
1. Administrative justice............................................................................................................... 88
2. The civil/commercial litigation ................................................................................................. 88
3. Criminal procedure................................................................................................................... 89
3. Right to a fair trial............................................................................................................................ 90
4. Alternative Dispute Resolution ....................................................................................................... 91
1. Mediation ................................................................................................................................. 91
2. Commercial arbitration ............................................................................................................ 92
5. Summary.......................................................................................................................................... 92
6. Self-assessment questions .............................................................................................................. 93
7. Further reading/listening ................................................................................................................ 93
Chapter 10. Czech Corporate Law ........................................................................................................ 94
1. Introduction to Czech business law............................................................................................... 94
1. Recodification of the Czech private law................................................................................. 94
2. Sources of the Czech business law ......................................................................................... 96
3. Principles of the Czech business law ...................................................................................... 96
4. Key legal terms & definitions ................................................................................................. 97
5. Acting on behalf of entrepreneurs......................................................................................... 97
2. Czech commercial register ............................................................................................................ 98
3. Business corporations – general provisions of the Czech corporate law......................................99
1. General introduction .............................................................................................................. 99
2. Establishment ....................................................................................................................... 100
3. Single member company...................................................................................................... 100
4. Contribution ......................................................................................................................... 100
5. Contribution administrator .................................................................................................. 100
6. Registered capital ................................................................................................................. 101
7. Business share ...................................................................................................................... 102
8. Profit share ........................................................................................................................... 102
9. Share of liquidation balance................................................................................................. 102
10. Business corporation bodies .............................................................................................. 102
11. Rules of conduct of members of corporate bodies............................................................ 103
12. Conflicts of interest rules ................................................................................................... 103
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13. Executive service agreement.............................................................................................. 104
14. Resignation......................................................................................................................... 104
15. Expulsion from office of a member of the statutory body of a business corporation....... 105
16. Nullity of a business corporation........................................................................................105
17. Dissolution and winding-up of a business corporation and liquidation provisions........... 105
4. Specific provisions of the Czech corporate law – a limited liability company ............................ 106
1. Introduction to specific provisions of the Czech Business Corporations Act....................... 106
2. Establishment ....................................................................................................................... 106
3. Registered capital ................................................................................................................. 107
4. Ownership interest............................................................................................................... 107
5. Corporate bodies.................................................................................................................. 107
6. Advantages and disadvantages of a limited liability company ............................................ 108
5. Specific provisions of the Czech corporate law – a joint stock company.................................... 108
1. Establishment ....................................................................................................................... 108
2. Shares ................................................................................................................................... 108
3. Registered capital ................................................................................................................. 109
4. Corporate bodies.................................................................................................................. 109
6. Summary...................................................................................................................................... 109
7. Self-assessment questions and tasks .......................................................................................... 110
8. Further reading/listening ............................................................................................................ 111
Chapter 11. EU Competition Law ....................................................................................................... 112
1. Introduction – the system of competition law............................................................................ 112
1. Competition law in general .................................................................................................. 112
2. Consequences of competition law breaches ....................................................................... 112
3. Protection of commercial competition in general – across majority of legal traditions and
legal systems ................................................................................................................................... 113
2. EU antitrust law ........................................................................................................................... 114
1. Introduction – what is EU antitrust law for?........................................................................ 114
2. Why is competition law awareness so important these days?............................................ 115
3. Cartels (anti-competitive agreements) ................................................................................ 115
4. Abuse of a dominant position (monopolies)........................................................................ 119
3. Competition Law Authorities and their Powers .......................................................................... 120
1. Investigatory powers of competition law authorities.......................................................... 120
2. Dawn raids............................................................................................................................ 120
3. Office for the Protection of Competition in the Czech Republic.......................................... 121
4. Mergers ....................................................................................................................................... 122
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1. Mergers in the European Union – a quick overview............................................................ 122
2. Mergers in the Czech Republic – a quick overview.............................................................. 122
5. Summary...................................................................................................................................... 122
6. Self-assessment questions and tasks .......................................................................................... 123
7. Further reading/listening ............................................................................................................ 125
Chapter 12. Corporate Governance, Ethics and Compliance in Doing Business .............................. 126
1. Introduction – management liability under Czech laws.............................................................. 126
1. Management liability under Czech laws – a quick overview................................................ 126
2. Duty to act with due managerial care ......................................................................................... 128
1. Legal assessment of the duty to act with due managerial care........................................... 128
2. Business judgement rule ...................................................................................................... 128
3. Consequences of a breach of the duty to act with due managerial care ............................ 129
4. Remuneration of managers and agreement on office performance................................... 130
5. A brief excursion into concern law....................................................................................... 131
3. Compliance programs ................................................................................................................. 131
1. Keith Packer: “You may be held liable for what your people do.”....................................... 131
2. So how does compliance help and why business ethics matter?........................................ 132
4. Criminal liability of Czech legal entities....................................................................................... 139
1. Introduction.......................................................................................................................... 139
2. A more detailed analysis of the ACLLE from the compliance perspective........................... 141
5. Summary...................................................................................................................................... 144
6. Self-assessment questions and tasks .......................................................................................... 145
7. Further reading/listening ............................................................................................................ 146
Annex 1: Selected provisions of the Czech Constitution in English.....................................................147
Constitution of the Czech Republic ............................................................................................. 147
CHAPTER ONE - Fundamental Provisions.................................................................................... 147
CHAPTER TWO - Legislative Power ............................................................................................ 148
CHAPTER THREE - Executive Power .......................................................................................... 149
CHAPTER FOUR - Judicial Power ................................................................................................ 151
Primary sources, bibliography, and documentary videos................................................................. 153
About the authors............................................................................................................................... 156
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List of abbreviations
ACLLE
Ad hoc
ADR
BCA
BITs
Brussels I Regulation Recast
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Act on Criminal Liability of Legal Entities
on a case by case basis
Alternative Dispute Resolution
Business Corporations Act
Biletaral Investment Treaties
Regulation (EU) No 1215/2012 of the European
Parliament and of the Council of 12 December 2012 on
jurisdiction and the recognition and enforcement of
judgments in civil and commercial matters
Common Agricultural Policy
Chief Executive Officer
Comprehensive Economic and Trade Agreement
Chief Financial Officer
Common Foreign and Security Policy
Court of Justice of the European Union
Committee of Permanent Representatives
Directorates General
Dispute Settlement Body (WTO)
European Court of Human Rights
European Coal and Steal Community
European Economic Community
for instance
European Monetary Union
European Union
European Parliament
European Personnel Selection Office
Free Trade Agreements
International Criminal Court
International Court of Justice
that is
Justice and Home Affairs
Member of European Parliament
National Competition Authorities
New Civil Code
Non-governmental Organization
Nomenclature of Territorial Units
Official Journal
CAP
CEO
CETA
CFO
CFSP
CJEU
COREPER
DGs
DSB
ECHR
ECSC
EEC
e.g.
EMU
EU
EP
EPSO
FTAs
ICC
ICJ
i.e.
JHA
MEP
NCAs
NCC
NGO
NUTs
OJ
Rome I Regulation Regulation (EC) No 593/2008 of the European Parliament
and of the Council of 17 June 2008 on the law applicable
to contractual obligations
Small and Medium Sized Enterprizes
Treaty on the Functioning of the European Union
Treaty on the European Union
Trans-national corporations
United Kingdom
United Nations
United States
World Trade Organization
SMEs
TFEU
TEU
TNCs
UK
UN
US
WTO
Introduction
The objective of this text book is to provide a study tool for students of the University of
Economics, Prague, majoring mainly in International Business with respect to the legal issues
they may face while doing business as professionals. To this aims, authors of the text book have
attempted to provide a comprehensive survey of all key topics which are relevant for pursuing
international business, such as understanding the concept of law, the sources of law and their
mutual hierarchy; and identifying applicable sources of law to specific real life situations.
Also, the text book surveys the key ways of law enforcement, both by way of out-of-court
settlement of disputes, and by means of judicial actions. If business disputes feature an
international element (for instance, parties to the contract are established in different states) it
is also relevant to introduce the rules defining international jurisdiction of tribunals (in
particular, the Brussel I Regulation Recast in the EU context) and rules specifying the
applicable law (in particular, the Rome I Regulation in EU law) in case the parties fail to agree
on the law applicable to the contract or they make a choice which is contrary to the overriding
mandatory provisions recognized by the states concerned.
The chapters of the text book are organized as follows: The chapters set out with a theoretical
introduction to the topic discussed, which is followed by a summary of the key principles
addressed and by a list of self-assessment questions, to make the book user friendly. Also,
practical examples are given as widely as possible to apply the theoretical concepts to practical
real life situations. Finally, a list of references to further resources analyzing the topic is
provided for those students who wish to engage in a more in-depth study of the topic or believe
they would like to elaborate on the topic in their bachelor thesis.
The text book covers the topics of the course which are discussed in lectures. It deals with the
concept of law, the different legal systems and the sources of law. The book surveys the key
topics of International Public Law, EU Institutions and EU Law, the Czech Constitutional Law
and the Protection of Human Rights in the European Union. Also, Contractual Law, the Law of
Torts, the Fundamentals of Labor Law, Corporate Law and Compliance are discussed and so is
the Enforcement of Law.
The authors believe that students will find this text book helpful, both in terms of preparing the
relevant legal vocabulary before the class, and when studying for the mid-term and final exams.
The manuscript of the text book has been completed in February 2019. Students will be notified
of the necessary updates, if any, during the lectures.
Prague, February 2019
9
Chapter 1. The Concept of Law and Legal Systems
1. What is law?
Law is a system of rules regulating the behaviour of the members of the society and the
observance of which is enforced by the state. Law is basically all around us, every one of us
deals with law on daily basis – if you go to the shop, to the canteen for a lunch, borrow books
in the library, use public transport, follow the road traffic rules when driving, etc.
The characteristics of any legal rule are that these are (i) foreseen by law, i.e. a rule relates to
social relationships which are regulated by law (not all social relationships are dealt with by
law such as how to raise a child, how to spend one’s salary, how to celebrate Christmas, how
to dress to the theater etc.), and (ii) enforceable by the means foreseen by law (typically before
the competent court and a subsequent execution). Rules which lack the above characteristics
are not legal rules. Those are, for example traditions, moral rules, ordinary customs, rules of
sport, rules of the game, religious rules or non-legal agreements between friends and family
(invitation for a cup of coffee). These rules are neither foreseen by law, nor are they enforceable.
You cannot successfully sue somebody who cheated while playing cards or somebody who
does not follow Christian traditions during Christmas etc. On the contrary, you can successfully
sue somebody who borrowed money from you and is overdue since loan agreement is regulated
by law and is enforceable by means foreseen by law.
2. Functions of law
The main function of law is to set and maintain order in society and achieve justice. Imagine,
how the world would look like without any legal rules. Nobody would be really keen to enter
into contracts without being sure that there is an independent court protecting his/her rights in
case of a dispute, there would be a chaos on the roads without any traffic rules, etc. The function
of law is also to define the limits of acceptable behaviour (the constitutional principle of what
is not prohibited, is permitted) as well as defining the consequences of certain behaviour
(sanctions for breaching legal rules). Law also prescribes procedures for the use of law and its
enforcement (for details see the chapter Litigation). Another function of law is to give authority
to agents of the state to take actions against citizens – for example police has a legal right to
use force against citizens breaching law or the executors have a right to enter the property of
the debtors.
3. The concept of law
In order for the rules to be qualified as legal, they must satisfy three criteria:
10
a)
b)
c)
a general application to society;
developed by a legitimate authority of the society;
accompanied with sanctions supporting their implementation and enforcement.
A general application to society means that legal rules relate to all who satisfy criteria set by
the hypothesis (legal rules of purchase contract relate to everybody entering into purchase
contracts, employment law relates to all employers and employees etc.) rather than to only some
specific groups (e.g. an internal rule in a firm prescribing dress code relates only to the
employee of such firm not to all employees and thus it does not satisfy the criteria of general
application).
Also, a legal rule must be developed by a legitimate authority of the society which is in the
Czech Republic a parliament (as opposed to e.g. non-legal internal rules set by a firm
prescribing a dress code).
And third, the legal rules are accompanied with sanctions for their breach. Only the threat of
sanctions which may be enforced, supports the adherence of legal rules by society.
1.4 Law and legal systems
Law is implemented through legal systems. There are five basic legal systems used around the
world. Which legal system is used in each country depends on the tradition, history and
inclination to specific legal culture. The five legal systems are the civil law systems, common
law systems, customary law systems, religious legal systems and the mixed legal systems. On
the map of the world below you can see which part of the world uses which legal system.
Legal systems in the world1
Civil law systems are used in all Europe except for the UK which is based on common law
tradition, South America and vast majority of Asian countries. Civil law systems follow the
Roman Law tradition developed in the Roman empire. Of course, national legal orders of civil
legal systems differ widely from one another, they, however, have some common
characteristics which differentiate them from the other legal systems. Firstly, nations of civil
law traditions are based on codified statutes which are the dominant source of law (Civil Code,
Commercial Code, Criminal Code etc.). Usually, these nations also have a written constitution
which is the highest legal norm of a state. Since the legal statutes have to be passed by bodies
1 Picture taken over from the web page Guide to International and Foreign Law Research, available online:
https://guides.law.sc.edu/c.php?g=315476&p=2108388; last accessed on 5 February 2018.
11
of parliament, the civil law systems is more rigid (compared to common law tradition) but also
more stable because it is not that easy to change them (there must be enough social and political
support for such change). Courts, on the other hand, are the bodies which only interpret and
apply rather than create law. Case law is thus not the official source of law, however, case law
of the higher courts has a strong persuasive power.
Common law systems are used in the UK, North America and Australia. The dominant source
of law are precedents (judge-made law) with the principle of stare decisis (principle of
following the rules established by previous judicial decision if the facts of the case are
comparable). Precedents allow for flexibility because case law can be easily changed without a
need to look for wider political support. Common Law countries of course have also written
statutes but they are not a dominant source of law. These countries can but do not have to have
a written constitution (the UK does not have a written constitution whilst the USA do).
Customary law systems are built on customs accepted and maintained by the whole society.
Such rules are handed down from generation to generation and are usually unwritten. These
legal systems do not exist in their clear form anymore but rather they can be found as a mixture
of civil or common law with these customs.
Religious legal systems are based on religious tradition. A typical example is Islamic law
which is based on Quran.
Mixed legal systems combine two or more legal system stated above.
Apart from the above national legal systems, there is also the international legal system with
the international law regulating relations between states or international organizations (UN,
NATO etc.) and the supranational legal systems such as EU law which is superior to national
laws of the member states.
To demonstrate how the legal system looks like, the picture below shows the Czech Legal
System which belongs to the civil law traditions (national law is based on codified statutes and
written constitution), the Czech Republic is a member of the EU and thus EU law is binding for
us (with superiority over the national law) and also Czech Republic is a signatory to many
international treaties.
1.5 The Czech Legal System
12
1.6 Sources of law
Formal and material sources of law
Formal sources of law are the outer forms of legal norms (legal norms are included in statutes,
international treaties, case-law, normative agreements etc. which are the formal sources of law).
These forms give the norms their legal force and validity (we know that there is a speed limit
in the towns of 50 km per hour (legal norm) and it is binding because it is written in the law
no. 361/2000 Coll., on road traffic, as amended (formal source of law). In order to find out the
legal norms from their formal sources, interpretation of such sources is needed. Formal sources
are either written (statutes approved by the Parliament, administrative rules, executive orders,
normative agreements, case-law) or unwritten (oral or implied such as recognized principles,
accepted customs).
Material sources of law are the source of substance for law – the state of society, technological
development, economic and cultural level, traditions. It is an answer to the question, why do
we need a specific legal regulation? E.g. the speed limit in the towns and villages was
introduced because it is dangerous to drive fast in places with high occurrence of people; the
technical level of the society is now so developed that the new law establishing the possibility
to vote in elections electronically is considered, etc.
Sources of law within the Continental tradition v. the Common law tradition
Continental tradition has as its dominant source of law legislative texts (written Constitution,
codes, statutes) which are passed by a formal procedure in the Parliament and thus there must
always be political will to pass such law. The main branches of law are moreover embodied in
the written codes (Civil Code includes codification of all civil law, Criminal Code a codification
of criminal law, Business Corporations Act a codification of business corporations, Labor Code
a codification of labor law etc.). In the civil law systems, case-law is, on the other hand, only
the complementary source of law which has rather interpretative function.
Common law tradition is based on plurality of sources with the precedents dominating over
statutes (in the UK this has partly changed with their membership in the EU since EU law
(directives) needs implementation into the national law through the statutes). Common law
countries also may but often do not have a written constitution while civil law countries are
typical for their written constitution. The role of the courts is dominant because they create law
(instead of the mere interpretation as in the civil law systems).
Formal sources of Czech law
As was stated above, the Czech law belongs to the civil law tradition with its characteristics.
The Czech Constitution and the Bill of the fundamental rights and freedoms (both written) are
on the top of the hierarchy of the sources of law which means that all other legal acts must be
in compliance with them and the Constitution and Bill of rights are always superior. The other
source of law are the international treaties which also have superiority over the statutes (not
over the Constitution or Bill of rights) in case such international treaties are directly applicable.
Next in the hierarchy are statutes passed by the Czech Parliament and the lowest in the hierarchy
of the sources of law is a so called derived legislation (regulations and decrees adopted by the
government, ministries and other authorities of state administration, and legislative acts of
territorial self-governing units) which must be in compliance with the statutes.
13
1.7 Classification of law
Law can be classified based on several criteria. First is the classification into the national,
international and supranational law depending on which relations (domestic or international) it
regulates. The other classifications relate to the substantive and procedural law and lastly to
private and public law.
National law relates to a particular nation and governs relations within national territory,
national citizens, residents etc.
International law governs relations between states or parties from different states.
Supranational law is a legal systems sui-generis standing above the national laws (EU law).
14
Substantive law says what the law is, i.e. it defines, describes, regulates and creates legal rights
and duties (civil law, commercial law, criminal law etc.).
Procedural law says how to enforce the substantive law, i.e. it defines the rules for the
enforcement of substantive law and establishes the methods of enforcing the rights generated
by the substantive law (civil procedural law, criminal procedural law etc.). For details of
procedural law, see the chapter Litigation.
Public law regulates relationships between one public party which is in superior position over
the other party with the power to impose duties or grant rights on the private party. The position
of the two parties is thus unequal and the private party must comply with the will of the public
party. There is always a public interest on one side and a private interest on the other
(Constitutional law, Administrative law, Criminal law).
Private law regulates relationships between the parties with equal position where the rights and
duties are the result of their mutual cooperation (rather than the power of one party to impose
duties or rights on the other party). Private law deals with the rights and duties of individuals,
families, business corporations etc. and there is no public interest in the field of private law
(civil law, family law, commercial law, most part of labor law).
1.8 Summary
This chapter was introductory and dealt with the concept of law, legal systems, the sources of
law and the classification of law. Law can be defined as the set of rules that are foreseen by law
and enforceable by the means foreseen by law. Any legal rule has a general application to
society, is developed by a legitimate authority of the society and is accompanied with sanctions
supporting their implementation and enforcement. There are five legal systems in the world the
civil law systems (characterized by written constitution, statutes as dominant source of law),
common law systems (with precedents as dominant source of law), customary law systems,
religious legal systems and the mixed legal systems. Legal rules can be found in the formal
source of law (in the continental law tradition typically the statutes) whilst material sources of
law are the source of substance for law. Law can be classified into the national, international
and supranational law, further into the substantive and procedural law and lastly to the public
and private law.
1.9 Self-assessment questions
1. What are the characteristics of legal rules?
2. Why do not rules of the games belong to legal rules?
3. What legal systems do you know?
4. Describe the main differences between the common law systems and the civil law systems.
5. What is the difference between the material and formal sources of law?
6. Describe the main difference between the public and private law.
7. What is procedural law for?
1.10 Further reading/listening
A brief video on the concept of law recorded by an American professor of law:
https://www.youtube.com/watch?v=2ds-NIFhU9s
BOBEK, Michal. An Introduction to the Czech Legal System and Legal Resources. [online].
Available at: http://www.nyulawglobal.org/globalex/Czech_Republic.html
15
Chapter 2. International Public Law
1. Origins of the International Public Law
The origins of international public law go back to the process of the creation of national states,
i.e. the 19th century. In 1815 (the Vienna Congress), the first collective security system was
established under international law to protect the monarchy. In the second half of the 19th
century the first international organizations were set up in the field of communications (the
International Telegraph Union, the International Post Union and the International Railways
Union).
In the course of its history, the practice of international public law saw the emergence of
peremptory norms (sometimes referred to as the jus cogens) which are binding upon states.
These include e.g. the observance of the principle of prohibition of the use of force, the respect
for human rights, and the protection of the environment. The breach of these norms amounts to
the breach of peace and security which may give rise to an action by the UN Security Council.
The UN Security Council consists of 15 members out of which 5 are standing (UK, US,
Russia, China and France). For a resolution of the UN Security Council to be adopted, the
consent of all 5 standing members is required. An abstention of a permanent member does not
constitute a veto. The UN Security Council may adopt traditional sanctions (arms embargo,
economic embargo etc.) which usually adversely affect the civilian population. Therefore, in
the past years the UN Security council favors the so-called smart sanctions, which are
addressed to individuals, usually political elites responsible for breaching international law.
Smart sanctions include e.g. freezing bank accounts, not issuing visas for traveling abroad, and
prohibition of trading in a stock exchange. Smart sanctions do not affect the civilian population;
that is why they are getting more and more popular.
2. Difference between International Public Law and International
Private Law
Legal scholarship makes a distinction between International Public Law on the one hand, and
the International Private Law (also referred to as Conflict of Laws) on the other. So what is the
difference between the two? Despite their denominations, only International Public Law is truly
international in terms of its origin, whereas the rules of International Private Law are generally
set by national states, even though the European Union as an international organization has
greatly contributed to the harmonization and/or unification of conflict of law rules for its
Member States.
Apart from their origin, the two legal disciplines differ in the addressees of the norms, and in
the degree of their enforceability.
The addressees of the norms of International Public Law are (usually) states and
intergovernmental international organizations, whereas the addressees of international private
law are private entities (individuals and corporations). To understand the difference in practice,
two examples have been given below.
16
(i) Example of an International Public Law treaty
17
The UN Charter, the founding treaty establishing the United Nations stipulates the conditions which have to be
met by a candidate Member State and it establishes the procedure for endorsing a new Member State by the UN
bodies. It is binding upon the Member State of the United Nations.
(ii) Example of an international private law rule applying to mutual relations between
individuals: Article 4(4) of the Rome I Regulation adopted by the EU reads as follows:
Applicable law in the absence of choice
1.To the extent that the law applicable to the contract has not been chosen [by the parties to the contract] the
law governing the contract shall be determined as follows:
(a) a contract for the sale of goods shall be governed by the law of the country where the seller has his
habitual residence; [...]
With respect to enforceability, it is much more difficult to enforce International Public Law,
since there is no international police or a global executive force. International Public Law can
be interpreted by the International Court of Justice (ICJ) which is the judiciary body of the
United Nations; however, its jurisdiction is not obligatory. The jurisdiction of the ICJ includes
contentious cases (i.e. there is a dispute between two member states concerning the delimitation
of their borders) and advisory opinions on issues of international law (i.e. the advisory opinion
on the compatibility of the unilateral declaration of independence by Kosovo with international
law). States which are not parties to the dispute may present their written opinions on questions
of international law in all proceedings before the ICJ as “friends of the court” (amicus curiae
briefs). Judges of the ICJ may express their reasoned dissenting opinion. If a judgment of the
ICJ is not complied with by a state on a voluntary basis, the UN Security Council may decide
to adopt a resolution that the act of non-compliance equals to the breach of international peace.
Also (in theory), the UN Security Council may decide to adopt some sanctions with respect to
the non-compliant state, but this is rather unlikely, since the political context of adopting
decisions in the UN Security Council is very delicate.
Some international organizations, such as the World Trade Organization (WTO), create their
own law enforcement rules. To this end, the WTO has established its quasi-judicial body
entitled the Dispute Settlement Body (DSB), which interprets the law of the WTO and often
uses rules of general International Public Law to carry out this task. If a report (which is
basically equivalent to a judgment) adopted by a panel or the appellate body of the DSB is not
complied with, the DSB may adopt economic sanctions with respect to the non-compliant state
which will also affect individuals (such as raising the customs tariffs applicable to goods to
which previously reduced or no tariffs applied).
2.3 Subjects of International Public Law
International Public Law traditionally recognizes only a limited number of subjects, i.e. entities
which have international legal personality. These include states and intergovernmental
international organizations. Nevertheless, the number of actors in international law is much
bigger and includes TNCs (trans-national corporations), and NGOs (non-governmental
organizations). Some legal instruments developed by International Public Law also protect
individuals, in particular in terms of their human rights. Both TNCs and NGOs try to influence
the creation of international rules by their lobbying activities. Also, NGOs often contribute with
their amicus curiae briefs before international courts and tribunals with the aim to participate
in the interpretation of International Public Law.
Some entities are treated as semi-subjects of International Public Law as they are in
between being a state and an international organization, such as the Holy See (Vatican), the
seat of the Roman Catholic Church. The Holy See can conclude international agreements with
states, it has an observer status with the UN and it can send and receive diplomatic
representatives. An equivalent of an ambassador representing the Holy See is called NUNCIUS.
Also, the Holy See can grant the citizenship of Holy See to high ecclesiastical hierarchy. Since
high posts in the Catholic Church can only be held by men, no woman can thus obtain the
citizenship of the Holy See. The nationality of the Holy See is not exclusive. This means the
member of the ecclesiastical hierarchy do not lose the nationality of his origin.
Another state element of the Holy See is its constitution. However, the usual division of state
power developed by the French philosopher Montesquieu, which requires the legislative,
executive and judicial power to be split among different entities, does not apply to the Vatican
constitution, where all the three powers are held by the Pope, head of the Roman Catholic
Church.
2.4 Constitutive elements of a state and succession of states
What makes a state a state? International Public Law requires four constitutive elements for
a state to enjoy an international legal capacity. First, permanent inhabitants; second, a defined
territory; third, an effective government; and fourth, a capacity to enter into international
relations.
Some areas of the world lack permanent population (such as Antarctica), where an international
regime for carrying out research has been put in place. With respect to the territory of a national
state, the definition of its boundaries proceeds in two steps. First, there is a delimitation of the
border on a detailed map, and second, there is a physical demarcation in the very border area.
The national boundaries are defined by means of a three D model, since the national territory
includes the airspace and subsoil of the state as well as the terra firma within the boundary, and
the internal waters and territorial sea, where applicable. An effective government is a
government which is able to exercise effective jurisdiction within the state territory. Some
entities fail to meet the condition of the capacity to enter into international relations, because
they have not been widely recognized by the international community, such as the Republic of
Northern Cyprus which has only been recognized by Turkey.
Some entities labeled as states cannot be considered states under International Public Law, such
as the so-called Islamic State, as they do not meet simultaneously all the four constitutive
elements of a state.
In terms of succession of states, different regimes are in place depending on whether the
succession concerns international treaties and membership in an international organization.
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All international treaties are binding for the new states, i.e. when Czechoslovakia split in 1993,
all international treaties became binding on both, the Czech and Slovak Republics respectively.
On the contrary, there is no automatic succession for membership in international organizations.
Therefore, a new application of membership has to be submitted by the succeeding states. For
instance, if Catalonia separated from Spain, it would not be able to keep its EU Membership,
but it would have to reapply to become an EU Member.
2.5 International Organizations
Only Intergovernmental International Organizations (i.e. international organizations having
national states as their members) are considered subjects of International Public Law. Private
Law organizations, such as Greenpeace, which have individuals as there members, are not
considered subjects of International Public Law. Intergovernmental Organizations are
established by means of founding documents: There are different names for the founding
documents of international organizations, such as Charter (UN Charter), Statute (Rome Statue
establishing the International Criminal Court), and Treaty (Treaty on the Functioning of the
European Union). The founding documents define the purpose and the objectives of the
organization; its powers, the conditions of membership, the organs/bodies of the international
organization; the calculation of membership contributions, the minimum number of
ratifications necessary for the organization to start its operation, its seat(s) and the manner of
amending the founding document.
As for the bodies of an international organization, all international organizations have a body
representing the common interests (e.g. the UN Security Council) and a body representing the
interests of its Member States (e.g. the General Assembly of the UN). Normally, international
organizations also have an administrative body, a secretariat headed by its Secretary General.
Some international organizations may have a judiciary body (such as the ICJ serving the UN)
or a quasi-judicial body, such as the Dispute Settlement Body resolving trade disputes between
the members of the WTO.
2.6 Implications of International Law with Respect to Individuals
Even though individuals are not subjects of International Public Law, its rules are likely to exert
influence on natural persons and legal entities in a number of real life situations, such as the
rules on granting nationality, rules governing extradition, the protection of human rights and
responsibility for internationally criminal acts.
The nationality of business people is relevant whenever they make big international
investments. If their investments have been negatively affected by actions taken by a foreign
state (for instance, raising taxes for profits resulting from investments into solar panels;
nationalizing privately owned property without a corresponding retribution) foreign investors
may rely on bilateral investment treaties (BITs) which provide them with a privileged access to
arbitration courts rather than to domestic law courts to claim compensation of damages they
incurred. National states basically rely on two principles when establishing their own rules for
granting nationality. The two principles are called jus sanguinis (nationality is derived from the
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nationality of the parents) and jus soli (nationality is derived from the place of birth). The
interplay between the principles of jus sanguinis and jus soli may lead to statelessness or
dual/multiple nationality. In order to limit the occurrence of statelessness, in 1961 a special
convention was concluded obliging the signatory states to apply corrective measures to their
national rules on acquiring nationality. The following boxes give examples of the interplay
between jus sanguinis and jus soli.
20
A Spanish couple spends their holiday in the Czech Republic. Their child is prematurely born within the Czech
territory. Since the Czech Republic applies the principle of jus sanguinis, a child born within the Czech territory
will not obtain Czech nationality unless at least one of the parents is Czech. Spain, on the contrary, applies as a
general rule, jus soli. As the child was not born within the Spanish territory, it would be born stateless, if no
corrective measures were adopted by Spain, allowing for the award of Spanish nationality to foreign born children
whose parent is Spanish.
Now, we can twist the example detailed above.
Let us imagine a Czech couple spending their holiday in Spain. Their child is born within the Spanish territory.
Following the Czech rules, the child will acquire Czech nationality and following the Spanish rules, it will also
obtain the Spanish nationality. At times, where military service was obligatory in most European countries, men
having two or more nationalities were facing the problem of committing the crime of serving in a foreign army.
Nowadays, the defense systems of European states rely largely on professional solders and military service is
mostly no longer mandatory.
Double or multiple nationality may also be linked to some advantages. If a person holding two
different passports ends up in a foreign prison (for instance for drug trafficking in Thailand),
the consuls of two countries will try to provide legal assistance to that person.
Apart from birth, nationality can be obtained by marriage, by long term residence in a foreign
country upon completion of certain requirements (usually language and civilization tests) or by
participating in investment schemes. There are currently various European Union Member
States which offer investments schemes linked to obtaining the nationality of an EU Member
State, for instance, Austria, Malta, Cyprus, and Portugal. Some of the schemes have been
criticized by the European Commission due to a security risk they may pose if no security
screening is carried out prior to awarding the nationality of an EU Member State.
Obtaining another nationality may be conditioned by giving up the previous nationality. The
Czech Republic legislation provides for the possibility of obtaining the Czech nationality
without having to give up the original one.
Having the nationality of an EU Member States gives rise to a number of privileges listed in
the founding treaty of the European Union. EU nationals shall receive national treatment in all
the other EU Member States. They shall not be treated as foreigners within the EU internal
market. This means, for instance, that they can travel to other EU Member States for work,
studies or for their leisure activities without the need to have visas or work permits. Also, EU
nationals may set up their business in another EU Member State under the same conditions as
the nationals of that state. Apart from the free movement of persons, the EU internal market
grants also the free movement of goods, services and capital. Other rights of EU nationals
include the possibility to petition the European Parliament if they believe that their national
state has misapplied EU law, to lodge a complaint to the European Ombudsman, should an EU
body or institution commit maladministration. Also, EU citizens may turn to another EU
country´s embassy for help (for instance if they lose their passports) should their own country
be not represented in the third country concerned. Countries which are not members of the EU
are called “third countries”. There are only three countries in the world, where all EU states are
represented by their respective embassies, in particular, the United States, Russia and China.
International Public Law can influence real life of individuals also with respect to extradition
rules. The Oxford Dictionary of Law defines extradition as “The surrender by one state to
another of a person accused of committing an offense in the latter.” For extradition to occur,
there must be a valid bilateral treaty (called extradition treaty) between the requesting state and
the requested state. For instance, the Czech Republic has bilateral treaties with all former
socialist countries; on the contrary, the Czech Republic has no bilateral treaty with South Africa,
a popular destination for Czech criminals trying to escape justice. The act for which extradition
is requested, must be criminal in both states concerned. Extradition cannot proceed for political
crimes. Apart from states, also international courts and tribunals (such as the International
Criminal Court) may ask states to surrender their own nationals accused of committing serious
crimes.
The impact of International Public Law on the protection of human rights will be discussed
in Chapter 5 in further detail.
Individuals, who breach rules of international law, can be held accountable for their acts
before international courts and tribunals which usually have complementary jurisdiction.
Complementary jurisdiction means a last resort jurisdiction which only applies if national states
are unwilling or unable to prosecute serious crimes against international law. In the history of
human kind, there was a number of ad hoc criminal courts which dealt with particular situations
(such as the International Criminal Court for Former Yugoslavia). In 1998 the first permanent
International Criminal Court (based in The Hague) was set up following the ratification of
the Rome Statute, its founding treaty. The International Criminal Court is not a judicial body
of the UN. It enjoys the status of a separate international legal entity.
The International Criminal Court (ICC) started being operative as of 1 July 2002. It can only
try individuals, hence it has no jurisdiction against states. The ICC can only hear cases
which occurred after 1 July 2002 and has no retroactive jurisdiction. Its jurisdiction includes
genocide, war crimes and crimes against humanity. A Member State or the UN Security Council
may refer a case to the ICC. It can also try cases where the crime was committed on the territory
of an ICC Member State or by a national of an ICC Member State. However, many big countries
have not joined (nor do they wish to join) the ICC (US, Russia, China). In the early years of its
functioning, the ICC concentrated mostly on situations in Africa. Currently, also situations in
Latin America and Asia are under investigation. The ICC has no prison (only a detention center)
of its own. If an individual has been sentenced to imprisonment, the court has to rely on the
willingness of its state parties to house the criminal in one of their national prisons. The Nordic
countries are particularly willing to provide their assistance in these cases.
The jurisdiction of the ICC is complementary, i.e. it is a court of last resort that steps in only
if the corresponding national court is unwilling or unable to try the suspect criminals itself.
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As for its composition, the ICC consists of the Presidency (comprising 3 judges), of Chambers
(pre-trial, trial and appeals chambers), of the Office of the Prosecutor and of the Registry. The
pre-trial chamber is in charge of issuing an arrest warrant. The trial chamber has to decide
whether the suspect is guilty or not and if he/she is guilty it has to decide on the length of the
sentence and on reparations to be paid to the victims. The appeals chamber can confirm, reverse
or amend the decision taken by the trial chamber or it can order a new trial. In this case, the
composition of the trial chamber has to be different to the original one. Persons sentenced to a
liberty penalty have to serve it outside the Netherlands, ideally in their home country, if this is
impossible in another ICC Member State that volunteers to execute their liberty sentence.
2.7 Summary
This chapter has discussed the origins of International Public Law, the difference between
International Public Law and International Private Law, the concept of national states and
International Organizations, the differences between subjects and actors of International Public
Law. Also, it dealt with the impacts that International Public Law can have on the legal status
of individuals, natural persons and legal entities alike.
With respect to real life situations business people may encounter in practice, the notion of
nationality was introduced as a key criterion for benefiting from the special protection provided
by bilateral investment treaties (BITs). Also, the possibility of acquiring nationality by
participating in an investment scheme was addressed. The legal conditions for extraditing
accused persons who may have committed fraud while doing their business were discussed and
so was the concept of EU nationality which grants a number of privileges to the national of EU
Member States within the EU internal market.
2.8 Self-assessment questions/tasks
1. What is the difference between International Public Law and International Private Law? Give
an example of a real life situation governed by International Public Law, on the one hand and
by International Private Law, on the other hand.
2. What is the difference between subjects and actors of International Public Law?
3. What is the name of the judicial body of the UN and of the quasi-judicial body of the WTO?
4. Can the Vatican be considered a state or an international organization?
5. What are the constitutive elements of a state? Does the so-called Islamic State meet these
criteria?
6. How is the national territory defined under International Public Law?
7. If Catalonia breaks away from Spain, will it be still part of the EU?
8. Give an example of a situation where the interplay of ius soli and ius sanguinis would cause
either double nationality by birth or statelessness by birth.
9. On which conditions will a state surrender a suspected criminal to another state?
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10. Fill out the following table to distinguish the jurisdiction of the ICJ and ICC.
23
Name of the court UN body or independent? Jurisdiction with respect to states
or individuals?
Example of a resolved case
ICJ
ICC
2.9 Further reading/listening
Printed books:
Kaczorowska, Alina: Public International Law, 5th ed., Routledge, 2015 (preview available at
books.google.com)
Online resources:
Bauböck, Rainer; Perchinig, Bernhard; Sievers, Wiebke (eds.), Citizenship Policies in the New
Europe, Amsterdam University Press, 2009 (full view available at books.google.com)
Documentary videos:
“ICC Institutional Video, 2018” available at:
https://www.youtube.com/watch?v=gwhufH4vNzY (last accessed on February 15, 2019)
“Lecture 2B: Enforcement and Interpretation in International Law” by prof. Givens
https://www.youtube.com/watch?v=2pr9ziZjpeI (last accessed on February 15, 2019)
Chapter 3. History and Powers of the EU. EU Bodies and Institutions
3.1 A Brief Account of the History of the European Union
Since most of our international students come from non-EU countries, it is expedient to provide
a brief outline of the history of European integration which started in the 1950s as an integration
stressing economic cooperation. The Maastricht Treaty which came into force in 1993 coined
the term of the European Union and extended the field of action of what used to be the European
Communities into political cooperation.
The European integration started after the Second World War in the early 1950s in a specific
sector of mutual cooperation in the field of the heavy industry, in particular by the establishment
of the European Coal and Steel Community (ECSC) in 1951. The Treaty establishing the
ECSC (also referred to as the Paris Treaty, since it was signed in Paris) comes into force on 23
July 1952. This community, unlike the two others which followed suit, was founded for a
limited period of 50 years. Its activities were later absorbed the European Community. There
were six founding members of the ECSC, in particular, Belgium, the Federal Republic of
Germany, France, Italy, Luxembourg and the Netherlands. The political idea behind setting up
this community consisted in taking an international control over Germany´s heavy industry to
make sure it would not use its carbon resources for rearming and triggering another war.
Two more communities were set up in 1957 by the same group of countries indicated above.
The Treaty establishing the European Economic Community (EEC) and the Treaty
establishing the European Atomic Energy Community (Euratom) were signed in Rome
(hence they are also referred to as the Treaties of Rome). The Rome Treaties came into force
on 1 January 1958. These treaties were revised later to take account of the current economic
and political development on a number of occasions (the Single European Act, the Maastricht
Treaty, the Treaty of Nice, the Treaty of Amsterdam and the Treaty of Lisbon, to name the most
essential reforms of the founding documents).
In July 1968 customs duties between the member states on industrial goods were completely
abolished, 18 months ahead of schedule, and a common external tariff is introduced. This is
called the customs union which means that no single Member State may establish its own
tariffs with respect to goods coming from the third countries (non-EU Member States are
referred to as third countries). However, nowadays, the EU customs union also includes some
states which are not members of the EU (such as San Marino and Andorra).
The very first enlargement takes place in 1973 when Denmark, Ireland and the United
Kingdom join the European Communities, bringing their membership to nine. Norway stays
out, following a referendum in which a majority of people voted against membership.
The first direct elections to the European Parliament are held in 1979. Prior to that date,
Member States selected some of their national deputies to represent them before the European
Parliament. Nowadays, it is no longer possible to combine the mandate of the Member of
European Parliament (MEP) with that of a national deputy.
24
In 1981 another enlargement of the European Communities takes place when Greece joins the
club, bringing the number of members to ten. In 1986 Spain and Portugal follow suit, which
raises the number of the member of the European Communities to 12.
In December 1991 a major review of the founding treaties was signed in Maastricht, laying
the foundation for a common foreign and security policy, closer cooperation on justice and
home affairs and the creation of an economic and monetary union, including a single
currency. What used to be limited to purely economic cooperation has now clear elements of
political cooperation as well. It is precisely the Maastricht Treaty which introduces the concept
of the European Union. Under the Maastricht Treaty, the European Union consists of three
pillars. The first pillar is integrated by the three communities set up in the 1950s, where
decisions are taken mostly by qualified majority. The second pillar lays down the principles of
the Common Foreign and Security Policy (CFSP) and the third pillar launches cooperation in
the Justice and Home Affairs (JHA) area. In the second and third pillar measures require
unanimity of Member States in order to be adopted.
In 1995 Austria, Finland and Sweden join the EU, bringing its membership to 15. Norway
stays out once again following a referendum in which a majority of people voted against
membership.
In 1999, the third state of the European monetary union (EMU) starts. 11 EU countries adopt
the euro, which is launched on the financial markets as ECU, replacing their currencies for noncash
transactions. The European Central Bank based in Frankfurt, Germany takes on
responsibility for monetary policy. The 11 countries are joined by Greece in 2001. In 2002 Euro
notes and coins are introduced in the 12 euro-area countries.
The biggest EU enlargement takes place in May 2004, when Cyprus, the Czech Republic,
Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia join the European
Union bringing its membership to 25. Bulgaria and Romania follow track in 2007.
The last extensive reform of the founding treaties was adopted in Lisbon in 2007 and came into
force in December 2009. The current legal regime of the EU is now embodied in the TEU
(Treaty on the European Union corresponding to its mission statement) and the TFEU (Treaty
on the Functioning of the European Union which specifies the steps how to achieve the
objectives envisaged in the TEU).
The last country to join the European Union was Croatia in July 2013, setting the number of
EU member states at 28.
The Lisbon Treaty lays down for the first time in the history of the European Communities and
the European Union a clause authorizing a member to leave the block if it wishes to do so.
Following this express authorization in the treaty, a referendum to leave the EU was held in
the United Kingdom in 2016. Slightly more than 50 per of the British population decided in
favor of leaving the EU (this is referred to as the BREXIT). The procedure to disassociate from
the EU will take a couple of years. Since the UK is not part of the Eurozone, nor is it part of the
Schengen Area the negotiations should be easier than in case of more integrated EU Member
25
States. At the time of writing there was no agreement on the conditions on which the UK would
leave the EU and which would govern the future relationship between the EU and the UK. The
“divorce“ procedure was triggered in March 2017 and the negotiations of the „divorce from the
EU“ should take 2 years to complete, but it is more than clear that there is too little time to agree
on everything before this period expired in March 2019. In cannot be discarded that no
agreement on the conditions of UK´s leaving the EU will be reached.
3.2 Objectives of the European Union
Following the Treaty of Maastricht, the objectives of the European Union are no longer limited
to the economic cooperation between the EU Member States, but have become much wider, as
summarized by Articles 2 and 3 of the Treaty establishing the European Union which read as
follows:
26
Article 2 TEU
The Union is founded on the values of respect for human dignity, freedom, democracy, equality, the rule of law
and respect for human rights, including the rights of persons belonging to minorities. These values are common
to the Member States in a society in which pluralism, non-discrimination, tolerance, justice, solidarity and
equality between women and men prevail.
Article 3 TEU
1. The Union’s aim is to promote peace, its values and the well-being of its peoples.
3.3 Division of Powers between the European Union and its Member
States
In order to achieve its objectives, the European Union requires its Member States to delegate
their powers to a supranational level and in some instances to abstain from regulating certain
fields of competence. Before joining the European Union, the Czech Republic had to change in
constitution in order to provide for the said delegation of powers to the level of the European
Union. There are basically two sets of competences exercised by the European Union: first, it
is the exclusive powers of the EU, where the EU Member States may no longer legislate, and
second, it is the shared powers between the EU and its Member States, where the EU
Member States may still adopt legislation in areas where no legislation was adopted at EU level.
Article 3 of the Treaty on Functioning of the European Union lays down an exhaustive list of
exclusive powers of the EU which include the following five areas:
(a) The customs union;
(b) the establishing of the competition rules necessary for the functioning of the internal market;
(c) the monetary policy for the Member States whose currency is the euro;
(d) the conservation of marine biological resources under the common fisheries policy; and
(e) the common commercial policy.
An indicative list of the shared powers between the EU and the Member States is included in
Article 4 of the Treaty on Functioning of the European Union. The shared powers apply to the
following principal areas:
(a) internal market;
(b) social policy, for the aspects defined in this Treaty;
(c) economic, social and territorial cohesion;
(d) agriculture and fisheries, excluding the conservation of marine biological resources;
(e) environment;
(f) consumer protection;
(g) transport;
(h) trans-European networks;
(i) energy;
(j) area of freedom, security and justice;
(k) common safety concerns in public health matters, for the aspects defined in this Treaty.
Some of these competences may require further explanation since they may sound generic in
nature but may not disclose precisely their meaning in practice. Let us start with the internal
market, which includes the four freedoms: the free movement of people, goods, services and
capital where no discrimination based on nationality is acceptable. EU nations have to be
granted national treatment in these areas. This means that they have to be treated equally as if
they were nationals of the Member States where they wish to exercise their rights resulting from
the internal market.
With respect to the social policy mentioned in the list of the shared powers, only a limited scope
of action falls within the remit of the EU. All the social security benefits (such as the
unemployment benefit or the old age pension) continue to be governed and paid out from
national budgets and the EU does not intervene in stipulated the rates of these benefits. On the
contrary, the action of the EU in the area of social policy is to promote the free movement of
people by harmonizing (rather than unifying) certain rules that would encourage people to move
across the borders, especially in order to work in a different EU Member State. To that end, the
Treaty on Functioning of the EU requires the social security agencies of the Member States to
recognize the number of years worked in another EU Member States (or a Member State of the
European Economic Area including Norway, Iceland and Liechtenstein) as if work was done
within the territory of the Member State of its origin for the purpose of calculating the duration
of active working life. Otherwise, migrating workers would force the risk of not having worked
a sufficient number of years in any Member State for an old age pension to be granted. The old
age pension of migrant workers is paid partially by the different states where the migrant worker
used to work. For instance, if an employee spent 20 years working in Slovakia and 20 years
27
working in the Czech Republic, 50 per cent of their old age pension will be paid by Slovakia
and 50 per of their old age pension will be paid by the Czech Republic.
The policy of economic, social and territorial cohesion aims at reducing economic differences
between different regions of Europe. The poorer the region, the higher the benefits it may
receive from EU structural funds to improve its infrastructure by building roads, educational
facilities, and/or sports facilities (such as cycling routes). Even though, the cohesion policy has
not managed to eliminate economic differences between all regions of Europe it has managed
to reduce them to a significant extent.
The field of the common agricultural and common fisheries policies continues to trigger
heated debated when it comes to deciding on the EU budget. In its early times, the common
agricultural policy, also well-known under its acronym of CAP, used to consume over 50 per
cent of the entire EU budget. Nowadays, its “consumption rate” has dropped to about 40 per
cent of the EU budget. The CAP should be supporting small and medium sized enterprises
(SMEs) engaged in agriculture and regional development, however, in practice, the EU funds
have been misused by big players who pretended to by small farmers. The aim of the CAP is to
subsidize European farmers in order to make their produce competitive in world markets.
Finally, the concept of the area of freedom, security and justice should be addressed. It
includes
• Policies on border checks, asylum and immigration;
• Judicial cooperation in civil matters;
• Judicial cooperation in criminal matters; and
• Police cooperation
When the European Commission proposes legislation covered by EU´s exclusive competence
it does not need to justify its proposal with respect to the sovereign powers of EU Member
States. On the contrary, when proposing legislation in the area of shared competences, the
European Commission has to justify why an action at EU level is better suited for the purpose.
This is called the principle of subsidiarity, which means that the EU can only take action if an
action taken at a lower level (for instance at the level of Member State or a region of a Member
State) would be ineffective. For instance, if the European Commission intends to set up a
supranational legal form of a business company (for instance an EU wide joint stock company)
it can take action, since the jurisdiction of a single member state is limited to the territory of
that Member State and cannot bind another Member State.
The principle of subsidiarity is defined in the Treaty as follows:
28
Under the principle of subsidiarity, in areas which do not fall within its exclusive competence, the Union shall
act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member
States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the
proposed action, be better achieved at Union level.
To sum up the principle of subsidiarity, action should be taken at the lowest possible level,
where it is still effective.
Another principle governing the exercise of shared powers by the EU is the principle of
proportionality which should leave as much room for maneuver to EU Member States as
possible. For instance, directives should be preferred to regulations, as directives leave some
level playing field to EU Member States unlike regulations. For the same reason, Framework
directives should be preferred to detailed directives.
The treaty defines the principle of proportionality as follows:
29
Under the principle of proportionality, the content and form of Union action shall not exceed what is necessary
to achieve the objectives of the Treaties.
3.4 EU bodies and institutions
The main EU institutions are listed in Article 13 TEU as follows:
— the European Parliament,
— the European Council,
— the Council,
— the European Commission,
— the Court of Justice of the European Union,
— the European Central Bank,
— the Court of Auditors.
For the purpose of this introductory course, only the European Parliament, the Council of the
EU (also referred to as the Council of ministers), the European Commission, the European
Council and the Court of Justice of the European Union will be discussed further. Each of the
institutions represents a different interest. Whereas the European Parliament should
represent the interests of EU citizens as the only directly elected institution, the Council of
Ministers represents the national interests of the individual EU Member States and the European
Commission represents the supranational interest of the international organization striving for
an ever closer European Union.
3.4.1 The European Parliament
The European Parliament exercised jointly with the Council of Ministers legislative and
budgetary functions. It also exercise political control with respect to the European Commission
and elects the President of the Commission.
The European Parliament is composed of representatives of the Union’s citizens. The
Representation of citizens based on the principle of degressive proportionality, which means
that small EU Member States are overrepresented while big EU Member States are
underrepresented.
The members of the European Parliament (MEPs) are elected for a term of five years by direct
universal suffrage in a free and secret ballot. MEPs can be reelected.
The European Parliament has three working places (Strasbourg, where plenary session are held
12 times a year for one week; Brussels where committee meetings and mini-sessions are held,
and Luxembourg which houses the Parliament´s secretariat). The official seat of the European
Parliament is in Strasbourg.
Similarly to the composition of national parliaments, the European Parliament divides its work
into 22 standing committees as follows:
30
1. Foreign Affairs (AFET)
2. Human Rights (DROI)
3. Security and Defense (SEDE)
4. Development (DEVE)
5. International Trade (INTA)
6. Budgets (BUDG)
7. Budgetary Control (CONT)
8. Economic and Monetary Affairs (ECON)
9. Employment and Social Affairs (EMPL)
10. Environment, Public Health and Food Safety (ENVI)
11. Industry, Research and Energy (ITRE)
12. Internal Market and Consumer Protection (IMCO)
13. Transport and Tourism (TRAN)
14. Regional Development (REGI)
15. Agriculture and Rural Development (AGRI)
16. Fisheries (PECH)
17. Culture and Education (CULT)
18. Legal Affairs (JURI)
19. Civil Liberties, Justice and Home Affairs (LIBE)
20. Constitutional Affairs (AFCO)
21. Women's Rights and Gender Equality (FEMM)
22. Petitions (PETI)
Even though the European Parliament should represent the interests of EU citizens, the only
committee out of the 22 listed above which has a direct contact with EU citizens is the Petitions
Committee.
Each MEP serves as a member of at least one committee and a substitute of another committee.
In the European Parliament its members do not sit next to each other based on their nationality.
Their seats are assigned based on their political affiliation. Traditionally, the European Peoples
Party has been the strongest one in the past elections having the highest number of seats,
followed by the European Socialist Party. The other parties represented in the current period of
office of the European parliament (2015-2019) include
ECR (European Conservatives and Reformists Group),
ALDE (Group of the Alliance of Liberals and Democrats for Europe),
GUE/NGL (Confederal Group of the European United Left/Nordic Green Left),
Greens/EFA (Group of the Greens/European Free Alliance),
EFDD (Europe of Freedom and Direct Democracy Group), and
ENF (Europe of Nations and Freedom).
MEPs without a specific political affiliation are considered to be independent and labeled as
“Non-attached members”.
The powers of the European Parliament include adopting both legislative resolutions (by
means of co-deciding together with the Council of Ministers) and non-binding political
resolutions adopted on European Parliament´s own initiative, for instance on the violation of
human rights in a third country. Also, the European Parliament participates in adopting the
budget and adopting discharge for the implementation of the budget. Apart from appointing the
European Commission it appoints the European Ombudsman.
To be able to vote on a proposal, at least 1/3 of the Members of European Parliament (MEPs)
have to be present. However, the EP may vote on a proposal with any number of MEPs present
(that is even less than 1/3), unless a MEP asks for the verification of the 1/3 threshold.
The speaking time in the EP is limited due to a high number of MEPs to one minute during
plenary session. However, MEPs are not limited in time when discussing reports during
committee meetings.
Interpreting of plenary sessions is done into all EU official languages. The plenary sessions
of the EP can be followed online on the official webpage of the European Parliament.
To have a more precise idea about the type of resolutions discussed by the European Parliament
during its plenary sessions, the following box gives an example of selected items included in
its agenda for its Tuesday meeting in Strasbourg on 11 September 2018:
31
09:00 - 11:30
• Debate with the Prime Minister of Greece, Alexis
Tsipras, on the Future of Europe
12:00 - 12:30 Formal sitting
• Address by Michel Aoun, President of the Lebanese
Republic
12:30 - 14:30 VOTES followed by explanations of
votes
• ***I (A8-0253/2018 - 150) SIEKIERSKI AGRI
Equivalence of field inspections
• * (A8-0260/2018 - 150) VANDENKENDELAERE
ECON
Common system of value added tax as regards the
special scheme for small enterprises
• * (A8-0271/2018 - 150) ŠKRIPEK LIBE
Implementing decision on subjecting the new
psychoactive substances cyclopropylfentanyl and
methoxyacetylfentanyl to control measures
• (A8-0272/2018 - 150) LEWANDOWSKI BUDG
Mobilisation of the European Union Solidarity Fund
to provide assistance to Bulgaria, Greece, Lithuania
and Poland
• (A8-0273/2018 - 150) MUREŞAN BUDG
Draft Amending Budget No 4/2018: mobilisation of
the European Union Solidarity Fund to provide
assistance to Bulgaria, Greece, Lithuania and
Poland
15:00 - 24:00
• (A8-0250/2018) SARGENTINI LIBE
The situation in Hungary
• ***I (A8-0245/2018) VOSS JURI
Copyright in the Digital Single Market
• Statement by the VPC/HR - Autonomous weapon
systems
• (A8-0251/2018 - 150) BROK AFET
State of EU-US relations
• Statement by the VPC/HR* - The emergency
situation in Libya and the Mediterranean
• Statement by the VPC/HR - The threat of demolition
of Khan al-Ahmar and other Bedouin villages
Vote: Thursday
• (A8-0252/2018) BELDER AFET
State of EU-China relations
• ***I (A8-0394/2017) DELVAUX, LÓPEZ
AGUILAR ECON/LIBE
Controls on cash entering or leaving the Union
*The abbreviation “VPC/HR“ stands for the VicePresident
of the Council/High Representative of the
European Union
Source: European Parliament, Agenda for the sittings of 10-13 September (Strasbourg)
3.4.2 The Council and the European Council
The Council of the EU (formerly known as the Council of Ministers) exercises jointly with the
European Parliament legislative and budgetary functions. It also carries out policy-making and
coordinating functions, especially with respect to the commercial policies of the EU Member
States.
The Council consists of a representative of each Member State at ministerial level, who may
commit the government of the Member State in question and cast its vote. Depending on the
agenda to be discussed, the Council can meet in 10 different configurations listed below:
32
1. Agriculture and fisheries
2. Competitiveness
3. Economic and financial affairs
4. Environment
5. Employment, social policy, health and consumer affairs
6. Education, youth, culture and sport
7. Foreign affairs
8. General affairs
9. Justice and home affairs
10. Transport, telecommunications and energy
When adopting legislation, Council acts by a qualified majority as a rule. There is a blocking
minority consisting of 4 Member States which have to represent at least 35 of the population of
the EU.
Qualified majority consists of two majorities: at least 55 % of the members of the Council,
representing Member States covering at least 65 % of the population of the Union.
Some exceptional topics require unanimity in the Council, e.g. taxation, but qualified majority
voting (QMV) is a rule. If a regulation or a directive is adopted by QMV against the will of a
Member State or if a Member State abstained from the vote, such a regulation or directive will
be still binding on that Member State which was outvoted.
The Council is based in Brussels. When deciding in its legislative function, its meetings are
public. Otherwise (especially when deliberating on issues linked to the Common Foreign and
Security Policy) it meets in private in order not to compromise the outcome of the negotiations.
The Council publishes the results of vote on legislative documents on its web page.
The meetings of the Council are prepared by COREPER which stands for the Committee of
Permanent Representatives. Each Member State has a permanent representation (mission) in
Brussels before the EU. The members of COREPER come from these permanent missions.
Usually, they are career diplomats working for the Ministry of Foreign Affairs of their home
country who have been seconded to Brussels for 3 or 4 years.
The Council of Ministers as a legislative body needs to be distinguished from a younger
institution first established in the 1970s, the European Council, which is a non-legislative body
exercising a political function.
The European Council shall provide the Union with the necessary impetus for its development
and shall define the general political directions and priorities thereof. The Commission can act
based on the political proposals adopted by the European Council by proposing a regulation, a
directive or a soft-law instrument.
The European Council consists of the Heads of State or Government of the Member States,
together with its President and the President of the Commission. The High Representative of
the Union for Foreign Affairs and Security Policy also takes part in its work. The Czech
Republic is represented by the Prime Minister as it is a Parliamentary Democracy. Other
Member States, such as France, are represented by their President, as France is a Presidential
Democracy. The nature of the national representative attending the meeting of the European
Council is based on the national constitutional habits.
3.4.3 The European Commission
The Commission shall promote the general interest of the Union and take appropriate initiatives
to that end. It shall ensure the application of the Treaties, and of measures adopted by the
institutions pursuant to them. It shall oversee the application of Union law [therefore it is called
the Guardian of the Treaties] under the control of the Court of Justice of the European Union
[by means of launching an infringement procedure against the Member State breaching EU
Law]. It shall execute the budget and manage programs. Also, the Commission shall exercise
coordinating, executive and management functions. With the exception of the common foreign
and security policy, and other cases provided for in the Treaties, it shall ensure the Union’s
external representation. For instance, the Commission negotiates commercial treaties with
third countries.
The Commission holds a monopoly on legislative initiative. Union legislative acts may only
be adopted on the basis of a Commission proposal. Only the Commission may propose
regulations, directives, and generally binding decisions.
The Commission’s term of office is five years. The term of office of Commissioners is
renewable if they receive the necessary political support by the government nominating them
and obtain the necessary support by the European Parliament following a hearing before the
competent Parliamentary committee.
The members of the Commission shall be chosen on the ground of their general competence
and European commitment from persons whose independence is beyond doubt.
The Commission manages Directorates General (DGs) instead of ministries. Most DGs are
located in Brussels, some of them are in Luxembourg. The Commission meets behind closed
doors.
The number of Commissioners is equal to the number of Member States. However, the
distribution of the different portfolios is very uneven. Whereas some commissioners administer
significant amounts of EU budget, the roles of others are less prominent.
33
3.4.4 The Court of Justice of the European Union
The Court of Justice of the European Union is based in Luxembourg. It includes the Court
of Justice and the General Court. It ensures the correct interpretation and application of EU law.
The Court of Justice consists of one judge from each Member State. The Court of Justice is
assisted by Advocates-General who do not represent any of the parties to the dispute, but
provide an impartial and independent assessment of the situation to compensate for the
impossibility to lodge an appeal against the decision of this highest EU court instance. To speed
up the decision making process, the Court of Justice usually decides in chambers. In cases of
significant importance judgments are adopted by a grand chamber.
The General Court includes one or two judges per Member State. There are no AdvocatesGeneral
working for the General Court as it is possible to lodge an appeal against the judgment
of the General Court to the Court of Justice.
The internal working language of the Court of Justice of the EU is French. However, the
language of procedure in case of preliminary references is the language in which the file was
submitted to the court by the national judge. Before a judgment is delivered in public it has to
be translated into all EU official languages.
Judges serving for the Court of Justice of the EU are nominated by the Member States. In case
they meet the necessary qualification criteria (excellent command of French and previous
experience of working as a judge), they are appointed for a renewable term of six years of office.
34
3.5 The Lobbyists
The founding treaties of the EU do not mention the world lobbyist. Yet, interest representatives
play an important part in the decision making process within the EU, trying to influence
legislative proposals and amendments to the legislative proposals. If lobbyists wish to contact
high EU officials within the European Commission and the European Parliament, they have to
sign up to the Transparency Register kept by the European Commission. In this register,
lobbyists are obliged to disclose the policy areas in which they operate, the number of
employees working for they and the annual volume of money earmarked for their lobbying
activities. So far, the inscription in the Transparency Register has proceeded on a voluntary
basis, but there is an ever rising trend towards more transparency of the legislative process, so
we are likely to witness compulsory inscription into the Transparency Register in the future.
The independence of the EU legislative process has been impeded on a number of occasions,
when former high level EU officials and former Commissioners have moved from their posts
in the EU institutions into the lobbying sector. This procedure is called the “revolving door“, as
those who were the regulators turned into those who are regulated but use the network of
contacts they have established while being regulators in high legislative positions.
3.6 Summary
This chapter has surveyed the history of the EU, the main EU bodies and institutions and their
mutual interactions. Each of the institutions serves a different interest. While the European
Parliament represents the interests of citizens, the European Commission the interest of the
entire international organization, the Council of Ministers the national interests of the Member
States, the unofficial activity of lobbyists favors the interests of corporations which try to
influence EU legislation in such a way as to benefit from it. Apart from the institutions
participating in the legislative process, also the role and the composition of the Court of Justice
of the EU were discussed. More details on the activity of the Court of Justice of the EU will be
provided in the next chapter dealing with EU Law.
35
3.7 Self-assessment questions
1. How did the Maastricht Treaty extend the scope of activities of the European Communities?
2. Which Treaty constitutes the last reform of the founding treaties?
3. What does the abbreviation “Brexit” mean?
4. Give an example of 3 exclusive and 3 shared powers of the EU.
5. Explain the principle of subsidiarity and proportionality?
6. What are the different interests represented by the European Parliament, the Council and the
Commission?
7. Which committee of the European Parliament is the only one having a direct contact with
EU citizens?
8. What does the principle of degressive proportionality mean with respect to the composition
of the European Parliament?
9. What are the powers of European Parliament, the Council and the Commission?
10. How is qualified majority composed in the Council?
11. What is the difference between the Council and the European Council?
12. What is the role of Advocates-General within the Court of Justice?
13. What is the internal working language of the Court of Justice of the EU?
14. What is the Transparency Register?
15. What does “revolving door” mean?
3.8 Further reading/listening
Craig, P.; de Búrca, G., Text, Cases and Materials, 5th ed., Oxford: OUP, 2011, pp. 31-57 and
pp. 78-84.
An Online resource published by the European Union:
http://europa.eu/abc/12lessons/key_dates/
Institutional video explaining the Council configurations:
http://www.consilium.europa.eu/en/council-eu/configurations/
Video on the activities of lobbyists within the EU institutions, called “The Brussels Business“:
https://www.youtube.com/watch?v=h4C5SgeVK-Q
36
Chapter 4. EU Law
The Law of the European Union a self-standing legal system different from Public International
Law and from national legal systems. There is a hierarchy of sources of EU Law: the so-called
primary law is at the top, international treaties concluded by the EU with third countries have a
lower legal rank than primary law, but higher than secondary law. In the following passages the
individual sources of EU law will be discussed as well as the mutual relations between EU Law
and national law. Finally, this chapter shall discuss the enforceability of EU Law both by
judicial and by extra judicial means in case rights and obligations resulting from EU law have
not been complied with on a voluntary basis.
4.1. Primary Law
The Primary Law is equivalent to constitutional law of national states. It has the highest legal
rank. The primary law is composed of the founding treaties concluded by the founding Member
States, its successive reforms, accession treaties of those states who joined the European
Communities or later the European Union during its existence. Also, the Charter of
Fundamental Rights of the EU is part of the EU Primary Law.
There are three founding treaties of the European Communities we mentioned in the previous
chapter. The oldest founding treaty signed in 1951 which came into effect in 1952 established
the European Community for Carbon and Steel. Since this treaty was signed in Paris, it is
referred to as the Paris Treaty. Only this first European Community for Carbon and Steel was
established for a definite period of time of 50 years, the remaining two communities were set
up for an indefinite period of time. The founding members of all three European Communities
are identical: France, Germany, Italy and the three Benelux countries (Belgium, Netherlands
and Luxembourg).
In 1957 two more communities were established by the Rome Treaties, in particular the
European Economic Community, which later evolved into the EU, and the Euratom
Community. The Rome Treaties came into effect in 1958. The founding treaties specified the
scope of activity of the individual European Communities, established the bodies of the
European Communities and detailed their powers. The founding treaties also established the
principle of mutual cooperation between the European Communities and their Member States.
The successive reforms of the founding treaties include in chronological order the Single
European Act, the Maastricht Treaty, the Treaty of Amsterdam, the Treaty of Nice and the
Lisbon Treaty. Each of the reforms of the founding treaties conceded more powers to the
European Parliament at the expense of the Council of Ministers (Council of the EU), extended
the powers of the EU at the detriment of the sovereign powers of its Member States and
extended the list of areas where the EU bodies are able to adopt secondary legislation by
qualified majority rather than by unanimity. Adopting secondary legislation by unanimity in
sensitive areas, such as taxation, has become an exception under the Treaty of Lisbon, whereas
the adoption of legislation by qualified majority vote in the Council of Ministers (Council of
the EU) has become a rule.
37
To reform the founding treaty, the wording of the reform has to be ratified by all Member
States. If a single Member States votes against the reform, it cannot come into effect. The
ratification procedure in the individual Member States is stipulated by their constitution. For
instance, in the Czech Republic, the ratification of international treaties is implemented by the
Czech Parliament, where the two chambers have to vote in favor of adopting an international
treaty, which is followed by a countersignature by the Czech President. However, there are
some EU Member States which require a referendum for adopting a reform of the founding
treaties of the EU. The adoption of reforms to the founding treaties is thus a very lengthy and
complex procedure.
EU Law as a whole takes precedence over national law. This rule is based on the case-law
of the Court of Justice of the EU and has not been enshrined into the founding treaties as yet.
4.2 International Treaties concluded between the EU and third
countries
While implementing its objectives and powers, the EU often concludes treaties with third
countries, in particular in relation to the common commercial policy which aims at liberalizing
the world trade. The EU is one of the founding members of the World Trade Organization and
it has concluded a number of free trade agreements (FTAs) promoting international trade in
goods and services. The legal nature of these international treaties has been discussed by the
Court of Justice of the EU as it we not clear whether the entire agreements continue only
elements which are part of the EU´s exclusive powers or whether they also intervene with the
shared powers between the EU and its Member States. In its opinion on the EU – Singapore
Free Trade Agreement the Court of Justice of the EU expressed its view that such a FTA has a
mixed nature. To conclude it, it is not sufficient to be ratified at EU level, but it also requires
the ratification by all EU Member States, The same mixed nature has been attributed to the
CETA, the Comprehensive Economic and Trade Agreement concluded by the EU and its
Member States on the one hand and by Canada on the other hand.
Before adopting an international treaty, its compatibility with the EU primary law may be
assessed by the Court of Justice of the EU to make sure that such a treaty is not contrary to the
principles of functioning of the EU. When the EU wished to conclude an accession treaty to the
Council of Europe´s European Convention on Human Rights, the Court of Justice of the EU
declared that the draft accession treaty is contrary to the EU legal order and thus cannot be
adopted in the proposed wording. This preliminary review is similar to a review carried out by
national constitutional courts with respect to international treaties to be ratified by national
states. For instance, the Czech constitutional court reviewed the draft Lisbon Treaty twice to
make sure it is compatible to the Czech constitution and it found that indeed it was in line with
the Czech constitutional order.
Very often, the EU´s Free Trade Agreements concluded with third countries include a chapter
on the protection of foreign direct investment which limits the sovereign capacity of EU
Member States to conclude bilateral investment treaties with countries where the EU has
already concluded or launched negotiations on the protection of foreign direct investment. EU
38
Member States must thus abstain from concluding bilateral investment treaties with such third
countries.
3. Secondary Law
The EU bodies have vested powers to adopt EU legislation which is referred to as EU secondary
law. The sources of EU secondary law, mostly regulations, directives and decisions, are
proposed by the European Commission, which holds a monopoly with respect to drafting
proposals of EU legislation. The European Parliament is not authorized to propose EU
secondary law. Once the European Commission has made a proposal for a regulation, directive
or decision, it forwards the proposal to the Council of Ministers (Council of the EU) and
to the European Parliament to be adopted. Most legislation is adopted at first reading,
however, if the two institutions disagree, a second reading will take place. If there is no
agreement at the stage of the second reading of the draft legislation, a conciliation committee
composed of an equal number of representatives of the Council of Ministers and the European
Parliament assisted by members of the European Commission meets to discuss a compromise
wording of the draft legislation. The founding treaties require the legislative process to be as
transparent as possible, however, the so called trialogue meetings which have proliferated in
the past years and have been criticized by the European Ombudsman for their lack of
transparency, have been heavily criticized by those in favor of more transparency in the work
of the EU institutions,
Once the proposed legislation has been adopted by the Council of Ministers and the European
Parliament, it is published in the Official Journal of the EU in all the EU official languages
(at the time of writing there were 24 EU official languages). Due to a lack of EU staff speaking
Gaelic (Irish), only EU regulations are published in Irish, whereas the Irish rely on the rest of
EU legislation in the English language. The adopted secondary legislation comes into effect on
the day stipulated in its final provisions. If such a date has not been specified, the act becomes
effective on the 20th day following its publication in the Official Journal of the EU. The Official
Journal of the EU is publicly available at eur-lex.europa.eu free of charge. There are two series
of the Official Journal (OJ), the L series publishes legislation, that is regulations, directives, and
decisions, whereas the C series publishes communications, for instance opinions adopted by
advisory bodies to the EU (the Committee of Regions, the European Economic and Social
Committee) or notifications by EU bodies, for instance notifications of open competitions by
the European Personnel Selection Office (EPSO) inviting candidates to submit their
applications to work for the EU.
1. Regulations
Regulations represent a binding source of EU secondary law. They are mostly adopted in the
field of EU´s exclusive powers since they leave no room for maneuver for the EU Member
States. They are binding in their entire wording and they are binding for everyone, not only the
EU Member States, but also for individuals, natural persons and legal entities alike. Regulations
are very similar to acts or statutes adopted at national level which bind everyone as well. There
is no need for EU Member States to transpose regulations into the national legal systems. The
objective of regulations is to unify the legal system of EU Member States in the specific area
39
which they govern. To this end, regulations exert what is called a direct effect. Direct effect
means that individuals can rely directly on the provisions of the regulation in their mutual
relations (this is called horizontal direct effect), but also state authorities can rely directly on
the provisions of the regulation before a law court in their dealing with individuals and vice
versa (this is called vertical direct effect).
The following box provides an example of what an EU regulation looks like.
Selected provisions of the Brussels I Recast Regulation can be found below:
40
REGULATION (EU) No 1215/2012 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 12
December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial
matters (recast)
SCOPE AND DEFINITIONS
Article 1
1. This Regulation shall apply in civil and commercial matters whatever the nature of the court or tribunal. It
shall not extend, in particular, to revenue, customs or administrative matters or to the liability of the State for
acts and omissions in the exercise of State authority (acta iure imperii).
General provisions
Article 4
1. Subject to this Regulation, persons domiciled in a Member State shall, whatever their nationality, be sued
in the courts of that Member State.
2. Persons who are not nationals of the Member State in which they are domiciled shall be governed by the
rules of jurisdiction applicable to nationals of that Member State.
FINAL PROVISIONS
Article 81
This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal
of the European Union.
It shall apply from 10 January 2015, with the exception of Articles 75 and 76, which shall apply from 10
January 2014.
This Regulation shall be binding in its entirety and directly applicable in the Member States in accordance with
the Treaties.
Done at Strasbourg, 12 December 2012.
For the European Parliament, The President, M. SCHULZ
For the Council, The President, A. D. MAVROYIANNIS
4.3.2 Diretives
Directives are another binding source of EU secondary law. They are mostly adopted in the
fields of shared powers between the EU and its Member States. They are not binding in their
entire wording, but they are binding in terms of achieving the objective envisaged in the
directive. EU Member States are obliged to transpose the directives into their national legal
orders within a period of two or three years, depending on the complexity of the issues dealt
with by the directive. Thus, directives do leave Member States with some room for maneuver,
unlike regulations, and their objective is to harmonize the legislation of EU Member States
rather than to unify it. A failure of a Member State to transpose a directive correctly and in time
has a number of consequences both for the Member States concerned, and for individuals
wishing to benefit from the corresponding directive.
If a Member State fails to transpose a directive in time, the European Commission being the
Guardian of the Treaties may initiate an infringement procedure against that state before the
Court of Justice of the European Union. In the initial stage of the procedure, the Commission
will provide the Member State concerned with some extra time to transpose the directive. If the
Member State fails to complete the transposition, the Court of Justice of the EU will decide that
the Member State has breached the founding treaties by not transposing the EU directive and it
can also impose a fine on the breaching Member State which will become part of the EU budget.
The fines are usually very high and motivate the Member State concerned to adopt the necessary
legislation to comply with the EU directive.
As for the effects of a directive which was not transposed with respect to individuals, if the
directive granted specific rights to individuals (for instance the right to terminate a contract in
case of a purchase made outside the usual business premises) and individuals have suffered
harm due to the impossibility of exercising these rights (for instance as in the famous Faccini
Dori judgment discussed below), the directive can have a limited vertical direct effect. This
means that individuals can sue the state for damages they incurred as a result of the state´s
failure to transpose a directive in time. However, the state can never rely on the directive with
respect to individuals, nor can individuals rely on the provisions of the directive in their mutual
relations before a law court. Hence, directives have no horizontal direct effect.
To have a better idea of what directives look like, you can find selected provisions from the
Services Directive in the following box.
DIRECTIVE 2006/123/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of
12 December 2006 on services in the internal market
GENERAL PROVISIONS
Article 1
Subject matter
1. This Directive establishes general provisions facilitating the exercise of the freedom of establishment for
service providers and the free movement of services, while maintaining a high quality of services.
ADMINISTRATIVE SIMPLIFICATION
Article 5
Simplification of procedures
1. Member States shall examine the procedures and formalities applicable to access to a service activity and to
the exercise thereof. Where procedures and formalities examined under this paragraph are not sufficiently
simple, Member States shall simplify them.
Article 6
Points of single contact
1. Member States shall ensure that it is possible for providers to complete the following procedures and
formalities through points of single contact:
(a)all procedures and formalities needed for access to his service activities, in particular, all declarations,
notifications or applications necessary for authorisation from the competent authorities, including
applications for inclusion in a register, a roll or a database, or for registration with a professional body or
association;
(b) any applications for authorisation needed to exercise his service activities.
FINAL PROVISIONS
Article 44
Transposition
1. Member States shall bring into force the laws, regulations and administrative provisions necessary to comply
with this Directive before 28 December 2009.
They shall forthwith communicate to the Commission the text of those measures.
When Member States adopt these measures, they shall contain a reference to this Directive or shall be
accompanied by such a reference on the occasion of their official publication. The methods of making such
reference shall be laid down by Member States.
2. Member States shall communicate to the Commission the text of the main provisions of national law which
they adopt in the field covered by this Directive.
Article 46
Addressees
This Directive is addressed to the Member States.
41
The last binding source of EU legislation in a decision. In order for a decision to be considered
a secondary source of law, it has to be proposed by the European Commission and adopted by
the Council of Ministers and by the European Parliament. Having said this, decisions adopted
by the Court of Justice of the EU are not considered secondary legislation, since they interpret
secondary legislation rather than create it. In recent years, decisions have become rather a rare
source of EU secondary legislation. If adopted, they are binding on its addressees which are
specified in the final provisions of the decision. The addressees can be either EU Member States
only, or both EU Member States and individuals.
4.4 Enforcement of EU Law by Law Courts
Since EU Law is most often applied by national courts as first instance courts, we speak
about decentralized enforcement of EU Law. The Court of Justice of the EU only provides a
binding interpretation of EU law if national courts expressly ask it to do so by means of making
a preliminary reference. Parties to national court proceedings cannot force the national court
to make a preliminary reference to the Court of Justice of the EU. It is entirely at the liberty of
the judges deciding a particular case to refer a case for a preliminary ruling to Luxembourg.
The Court of Justice does not serve as an appeals court with respect to the decisions
delivered by national courts.
Looking at the breakdown of the judicial activities of the Court of Justice of the EU, it is clear
from the figure below, that the highest judicial authority of the EU spends most of its time
resolving preliminary references which may serve as precedents for similar cases in the future.
It also resolves direct actions, such as infringements by EU Members States and it deals with
appeals against the General Court, a lower court instance which is part of the Court of Justice
of the EU.
Source: Court of Justice of the European Union, 2017 Annual Report
42
Since the decisions of the Court have to be translated into all official languages of the EU prior
to being published, it takes more than one year (between 15 and 16 months on the average) for
a judgment on a preliminary reference to be delivered.
The absolute number of cases dealt with by the Court of Justice of the European Union in 2017
is shown in the table below:
Source: Court of Justice of the European Union, 2017 Annual Report
The access of individuals as non-privileged applicants to the General Court of the Court of
Justice of the EU is extremely limited to cases when an EU body or institution breach the
rights of an individual, which does not happen very frequently. Individuals have been availed
of three different types of actions they may use. The action for annulment, the action for
damages and the action for failure to act. The first one is used most frequently in competition
cases and in cases where individuals require access to documents which have been made
inaccessible by the requested EU institution.
4.5 Extra judicial enforcement by EU Law
Since the European Commission as a Guardian of EU law cannot force national judges to decide
quickly, it promotes a number of out-of-court dispute settlement mechanisms, which can be
more speedy and cheaper for the participants in certain circumstances, such as mediation for
resolving disputes between private parties. If a public authority is involved in the dispute, an
individual may direct his or her complaint either to the European Ombudsman, to the SOLVIT
network or to the Petitions Committee of the European Parliament. The powers of these
different avenues of extrajudicial resolution of disputes differ as explained below.
43
4.5.1 European Ombudsman
The European Ombudsman is in charge of resolving cases of maladministration committed
by an EU body or an EU institution with respect to an EU citizen or an EU resident. If EU
Law was breached by a national body, the European Ombudsman cannot deal with the case,
but will inform the complainant that he or she should contact the national or the regional
ombudsman to resolve the issue.
Source: European Ombudsman, 2017 Annual Report
A typical example of maladministration committed by EU bodies is undue delay,
discrimination, and a failure to provide a document which is not classified.
Usually, the European Ombudsman manages to reach a friendly solution to a complaint in some
80 per cent of cases which are admissible. Individuals complain against the European
Commission most often, since it has the highest number of staff out of all EU institutions and
it is also most likely to come into direct contact with EU citizens.
The office of the European Ombudsman receives complaints in all EU official languages and it
strives to achieve a settlement within a period of 9 months. The services of the European
Ombudsman are operative as of 1995 and they are free of charge for the complainants. The
44
operation of the watchdog of the EU administration is fully covered by the EU budget. The
European Ombudsman has its main office in Strasbourg and a smaller office in Brussels in the
building of the European Parliament. However, there is no need for the EU citizens to lodge a
complaint in person. Online means of communication are very common, such as an interactive
web form or an email.
The European Parliament elects the European Ombudsman for a renewable period of 5 years.
The European Ombudsman regularly reports to the Petitions Committee of the European
Parliament. It also publishes its annual reports and reports on the cases resolved online. Apart
from dealing with individual complaints, the European Ombudsman may decide to launch an
investigation on its own initiative, when it appears that there is a systemic problem in the EU
public administration rather than an individual shortcoming of an EU official or of a procedure.
4.5.2 SOLVIT
The SOLVIT network is an informal problem SOLVIT network for problems of nationals of
one Member State with the public administration of another Member State. Perhaps you
are a professional and wish to work in a different Member State, where the public administration
fails to recognize your professional qualification. Your home SOLVIT center can help to
resolve this issue in terms of weeks and free of charge by contacting the lead SOLVIT center
of the target EU Member State.
Austrian physiotherapist authorised to practice in Portugal
An Austrian physiotherapist applied for professional recognition in Portugal. One year later he still had not
had a response from the Portuguese authorities. When enquired how things were progressing, he was asked to
wait until they called back.
This delay was jeopardizing his chances of working in Portugal. He had been offered a job but couldn’t take it
without having his professional qualifications recognised.
Thanks to SOLVIT Portugal, the physiotherapist obtained the recognition and was able to start working in
Portugal. Solved within 5 weeks.
Source: European Commission, 2018
SOLVIT can also be used by businesses, for instance when they have difficulties with their
VAT refund from another Member State when importing goods for further sale in their home
country.
French company gets VAT refund from Germany
A French company requested a VAT refund from the German
authorities – but the request remained unanswered for 10 months.
Thanks to SOLVIT's intervention, the procedure was speeded up and
the company received the amount it had asked for.
Solved within 6 weeks.
Source: European Commission, 2018
Apart from all EU Member States, SOLVIT centers are also operative in three more states
which are part of the European Economic Area: Norway, Iceland and Lichtenstein. The
European Commission regularly assesses the timely resolution of complaints and the success
rate of their resolution and urges lenient Member States to reinforce the staff of the SOLVIT
centers in order to maintain an efficient problem solving network.
45
4.5.3 European Parliament´s Petitions Committee
The Petitions Committee of the European Parliament is the only European Parliament
committee which has direct contact with EU citizens. It receives petitions (both individual and
collective ones) from EU citizens when national authorities violate EU law. Very often, EU
citizens complain about the breach of EU environmental law. For instance, a state authority
authorizes a construction of a housing estate or of a hotel in an area which should be protected
due to its enhanced environmental value and is part of the Natura 2000 network. Such an
authorization clearly breaches EU law. The European Parliament may decide to set up a fact
finding mission to investigate a petition, but its resources are limited. Hence, it is impossible to
set up a fact finding mission to investigate each petition in situ. Yet, if it finds the petition
substantiated, it may invite its author(s) to present it and to provide further details during the
meeting of the Petitions Committee. Also, if the breach of EU law by a Member State is
particularly serious and alarming, the Petitions Committee may decide to discuss this issue in a
plenary session. Out of some 1000 petitions received each year, fewer than 10 make it to the
plenary session of the European Parliament each year.
4.6 Summary
The European Commission may propose secondary legislation only if it has an express
authorization to do so in the finding treaties. In the field of exclusive powers, usually regulations
are proposed and adopted. In the field of shared powers, directives are preferred. The
differences between the addressees and effects of EU secondary legislation have been
summarized in the table below.
46
Addressees Effects
Regulation All Member States, natural and
legal persons
Directly applicable; binding in
their entirety
Directive Member States Binding with respect to the
intended result. Directly
applicable only under particular
circumstances
Decision Member States and/or natural or
legal persons
Directly applicable; binding in
their entirety
Recommendation Member States and/or EU
bodies/individuals
Not binding
Opinion Member States and/or EU
bodies/individuals
Not binding
4.7 Self-assessment questions/tasks
1. Who creates EU Primary Law?
2. What are the binding sources of EU secondary law?
3. What does “direct effect” mean? What is the difference between the direct effect of
regulations and directives?
4. What does decentralized enforcement of EU law mean?
5. What is the purpose of preliminary reference?
6. Who can initiate an infringement procedure and why?
7. Can EU nationals appeal to the Court of Justice of the EU if they are unhappy with a judgment
delivered by their national court(s)?
8. What is the difference between the powers of the European Ombudsman, the Petitions
Committee and the SOLVIT network? Give a practical example of a case resolved by each of
these out-of-court disputes settlement avenues.
4.8 Further reading/listening
Craig, P.; de Búrca, G., Text, Cases and Materials, 5th ed., Oxford: OUP, 2011, pp. 103-130.
Online book on EU Institutions and EU Law available at
http://europa.eu/documentation/legislation/pdf/oa8107147_en.pdf; pp. 80-114
A link to a video on how the office of the European Ombudsman works:
https://www.youtube.com/watch?v=tY_4YEyFxyM
A link to a video on how the SOLVIT network may assist EU citizens:
https://www.youtube.com/watch?v=Mc8D8KDq6iA
A link to a video on how the SOLVIT network may assist EU businesses
https://www.youtube.com/watch?v=7BeEqT6oy-g
47
Chapter 5. Czech Constitutional Law and the Protection of Human Rights
1. The Czech Constitution in General
The Czech Constitution was adopted in December 1992 and came into force on the 1 January
1993 when Czechoslovakia split up into two independent states, the Czech Republic and the
Slovak Republic. Since its adoption two major amendments to the Czech Constitution were
adopted. The first once concerned the possibility of delegating powers to an international
organization prior to our membership in the European Union. The second major constitutional
amendment changed the way of appointing the Czech president. Under the original wording of
the Czech constitution, the Czech president was elected on a common session of both chambers
of the Czech Parliament. Currently, the Czech president is elected directly by Czech citizens.
Compared to other European constitutions, the Czech one is rather short, leaving the regulation
of detailed provisions to implementing acts which can be amended more flexibly than the
constitution that has been construed as a rigid one. A rigid constitution requires qualified
majority in the Parliament in order to be amended. Some countries opted for a flexible
constitution which can be amended by simple majority.
Selected provisions of the Czech Constitution in English can be found in the Annex to this
textbook.
2. Division of Powers under the Czech Constitution
The political system of the Czech Republic constitutes a parliamentary democracy, although
the President of the Republic, who is the head of the state, is directly elected under Art. 54 (2)
of the Constitution. The Constitution defines the Czech Republic as a sovereign, unitary, and
democratic state governed by the rule of law, founded on the respect for rights and freedoms of
a person and citizen (Art. 1 (1) of the Constitution).
The legislature, the head of state and most of the executives are located in the capital city of
Prague. Supporting the idea of separation of powers both Supreme courts (the Supreme Court
as well as the Supreme Administrative Court) and the Constitutional Court are located in Brno.
Brno is also the seat of some related institutions, such as the Czech Ombudsperson.
The functions of the head of state are mostly representative; the genuine executive power is
vested in the government, which is in turn politically responsible to the Parliament (or more
precisely to its lower chamber called the Chamber of Deputies.
1. The Legislative Power
The legislative power is exercised by the Parliament of the Czech Republic, consisting of the
lower chamber (the Chamber of Deputies) and the upper chamber (the Senate).
The Chamber of Deputies has 200 members elected for a period of four years. The Chamber
holds standing sessions. Members of the Chamber of Deputies are elected according to the
principle of proportional representation.
48
The second chamber, the Senate is a permanent body composed of 81 senators elected for a sixyear
term of office. Every second year elections for one third of the senators are held providing
for a partial renewal of the Senate every two years.
The Senate has a stabilizing role in the constitutional system, since it hold a permanent session;
if the Chamber of Deputies is dissolved the Senate is empowered to adopt legislative measures
on matters, which cannot be delayed and would otherwise require enactment of a statute
(Art. 33 of the Constitution).
Ordinary statutes (zákony) are the universal form of legislative decision making adopted by the
Parliament. For a statute to be adopted, the simple majority of the present members in the
Chamber of Deputies and the simple majority of present senators (i.e. simple majority in both
houses) are required (Art. 39 (1) and (2) of the Constitution).
Senate’s legislative measure (zákonné opatření senátu) is a special type of legislation with the
force of a statute. Its objective is to keep the legislative power of the Czech Republic operational
even when the Chamber of Deputies has been dissolved. Should such a situation arise, the
Senate is empowered to adopt legislative measures concerning matters of urgency and which
would otherwise require the adoption of a statute. The legislative measures of the Senate must
be approved by the Chamber of Deputies at its first meeting after the election. Should they not
be ratified, they cease to be in force.
49
5.2.2 The Executive Power
The executive power is composed of the head of state (the president of the Republic) and the
government. The government is divided into specialized ministries, the number of which is not
laid down in the Constitution, but may vary depending on the government, as the number and
the powers of the individual ministries are specified in a legislative act that can be amended
more flexibly than a constitution.
The President of the Republic is elected directly by citizens for a term of office is five years,
which is renewable once in a row.
The government is the highest body of executive power. It consists of the Prime Minister,
deputy prime ministers and ministers.
The government is politically responsible to the Chamber of Deputies. Following a general
election, the President of the Republic designates the Prime Minister. Upon the proposal of the
designated Prime Minister, the President of the Republic appoints other members of the
government and entrusts them with the management of the respective portfolios. Within 30
days of the appointment, the government as a collegiate body shall ask the Chamber of Deputies
for a vote of confidence (see Art. 68 of the Constitution).
It is customary for the Czech Government to be composed by the party, which won the general
elections. Alternatively, the chairperson of the second largest party is to be asked to form the
Government. The Government is, however, has to be set up in such a way as to secure its support
by the Lower chamber of the Parliament.
In the Czech Republic statutes can be proposed by the government, by a single member of the
lower chamber of the Parliament, by a group of members of the upper chamber of the Parliament
and by a regional council. The legislative initiative is exercised by the Government most often
since the government has specialized civil servants working for different competent ministries
at its disposal who are in charge of drafting legislation. Also, preparing the transposition of EU
directives into the Czech legal order has been entrusted to the Czech government who shall
propose statutes by which EU directives are to be implemented in the Czech Republic.
Apart from adopting legislation, the Czech Parliament is also in charge of adopting international
treaties. All the international treaties by which the Czech Republic is bound must be published
in the Collection of International Treaties, where the authoritative foreign version, as well as
the Czech version, is published simultaneously.
Acts are published in the Collection of Laws (Sbírka zákonů, abbreviated in Czech as “Sb.”),
published in a printed version by the Ministry of Interior Affairs. The English wording of some
most common statutes is available at the official web site of the Ministry of Justice (such as the
Civil Code, and the Business Corporations Act).
50
3. The Judicial Power
The judicial power is concentrated in the hands of the courts of general/ordinary jurisdiction
(civil and criminal), administrative courts and the Constitutional Court.
The judiciary in the Czech Republic is organized as a four tier system being comprised of
• District courts
• Regional courts
• High courts and
• Supreme Courts
District courts are usually the courts of first instance in civil and criminal matters. Appeals
against the decisions of district courts are lodged with regional courts. There are two high courts
in the Czech Republic, one covering the territorial jurisdiction of Bohemia has its seat in Prague,
and the other, covering the territorial jurisdiction of Moravia has its seat in Olomouc. There are
two Supreme Courts in the Czech Republic, both having their seat in Brno. The Supreme Court
covering the jurisdiction in civil and criminal matters hears extraordinary remedies against the
decisions of high courts, whereas the Supreme Administrative Court is in charge of deciding
extraordinary remedies in administrative cases.
Specialized administrative chambers operate at regional courts (there are 14 regions but only 8
regional courts, since the regional courts follow the old structure of regions existing prior to the
accession of the Czech Republic to the EU, where the size of the regions had to be adapted to
NUTs).
The judicial system in the Czech Republic is organized as a professional career judiciary. Hence
there is no trial by jury. Judges are appointed by the President of the Republic. They must be at
least 30 years of age at the time of the appointment, must have completed their graduate degree
in law and a three-year period of specialized training within the courts. Except for constitutional
judges who are appointed for a period of 10 years, judges of general courts are appointed for
life and can be only removed following disciplinary proceedings conducted by a special judicial
ethics panel, composed of senior judges.
The Constitutional Court is based in Brno and lies outside the system of general courts. It has
the authority to protect constitutionality under Article 83 of the Constitution. It deals with both,
a concrete, and an abstract review of constitutionality.
The “abstract” review concerns the review of a compatibility of an international treaty with the
Czech constitution before ratifying such a treaty. The “concrete” review is based on decisions
on constitutional complaints against final court decisions infringing constitutionally guaranteed
fundamental rights and basic freedoms. In this proceeding, any type of act or omission of a
public authority including a judicial decision can be challenged, if the applicant claims that
his/her constitutionally guaranteed rights and freedoms have been violated by the preceding act
by public authority and after he/she has exhausted all available remedies.
The jurisdiction of the Constitutional Court also comprises ruling on impeachment of the
President of the Republic based on charges of the Senate brought with the consent of the
Chamber of Deputies.
5.3 Three Systems of Protecting Human Rights in the Czech Republic
(national system, Council of Europe and the European Union)
Apart from the Czech Constitution (Act No. 1/1993), the Czech Charter on Fundamental
Rights (Act No. 2/1993) is part of what is called the constitutional order of the Czech Republic,
having the same legal rank as the Constitution. The Charter on Fundamental Rights is one of
the three major human rights documents binding for the Czech Republic. The other two include
the European Convention on the Protection of Human Rights adopted by the Council of Europe
(a different international organization than the European Union, which was set up in 1949
having its seat in Strasbourg). The European Convention enables citizens and business to
lodge direct actions against their Member States to the European Court of Human Rights in
Strasbourg if an article of the said convention is believed to have been breached. However,
individuals bringing a claim against their Member State need to have exhausted judicial
remedies in their state to obtain access to the European Court of Human Rights in Strasbourg.
If a Member State is found to have breached the European Convention, it has to compensate
the person whose fundamental rights have been violated. Also, if the violation of fundamental
rights has been systemic, a more in-depth change to the legal system or administrative practice
of that state is required. An assembly of Ministers of the Member States oversees the
implementation of the judgments delivered by the European Court of Human Rights in
Strasbourg. With respect to the Czech Republic, the right to a fair trial (Article 6 of the European
Convention) is the most violated provision by the law courts of the Czech Republic due to an
excessive duration of judicial proceedings. As mentioned above, also the rights of businesses
can be breached by a Member State, including an unfair expropriation of property, and the right
to a fair trial.
The following box shows which rights guaranteed by the European Convention were breached
by the Czech Republic in the past with respect to businesses. Interestingly enough, even the
Czech Constitutional Court can be found to have breached the fundamental rights of a business:
51
1. Credit and Industrial Bank v. Czech Republic
21.10.2003
Decision of compulsory administration imposed on the applicant bank.
Violation of Article 6 § 1 - lack of full judicial review in the administrative proceedings
2. Vodárenská akciová společnost v. Czech Republic and Faltejsek v. Czech Republic
24.02.2004 and 15.02.2008
Excessive formalism of the Constitutional Court
Violation of Article 6 § 1
52
Source: Council of Europe, European Court of Human Rights, Press Country Profile – Czech Republic
The third system protecting fundamental rights in the Czech Republic has been enshrined in
the EU´s European Charter of Fundamental Rights which obtained its legally binding nature
in December 2009 when the Lisbon Treaty came into effect. The European Charter of
Fundamental Rights is binding on EU Member State whenever they apply EU law. This is
to say that EU Member States do not need to observe the European Charter of Fundamental
Rights in all their activities, particularly, when they apply national law only. Individuals have
no direct recourse to the Court of Justice of the European Union if they believe that an EU
Member State has breached their rights under the EU Charter. Only national courts may, on
their own discretion, refer a case to the Court of Justice of the EU if they have doubts about the
compliance of the State´s activity with the wording of the European Charter of Fundamental
Rights.
Instances where EU Member States have breached the EU Charter are being monitored by a
specialized agency established in Vienna, Austria, the European Union Fundamental Rights
agency, which publishes annual reports on Member States´ compliance with EU Human Rights
standards.
The following box shows an example of selected passages from a judgment in which the Court
of Justice of the European Union found a violation of the EU Charter on grounds of
unauthorized discrimination:
Judgment in Case C-68/17 IR v JQ (a preliminary reference made by a German Court)
Dismissal of a Catholic doctor from a managerial position by a Catholic hospital due to his remarriage after a
divorce may constitute unlawful discrimination on grounds of religion.
The requirement that a Catholic doctor in a managerial position respect the Catholic Church’s notion of
marriage as sacred and indissoluble does not appear to be a genuine, legitimate and justified occupational
requirement, which is nevertheless a matter for the German Federal Labor Court to determine in the present
case.
In that regard, the Court states that the prohibition of all discrimination on grounds of religion or belief, now
enshrined in the Charter of Fundamental Rights of the European Union, is a mandatory general principle
of EU law and is sufficient in itself to confer on individuals a right that they may actually rely on in disputes
between them in a field covered by EU law.
Source: Court of Justice of the European Union, Press Release No. 127/18
5.4 Summary
This chapter surveyed the Czech constitutional system and three different systems of protection
of human rights applicable in the Czech Republic.
Under the Czech Constitution, the Czech Republic is considered a parliamentary democracy,
where the role of the president is mainly of a representative and a ceremonial nature. The state
powers follows the classical division into the legislature, the executive power and the judiciary.
The judiciary system is based on career judges.
The Czech Constitutional Court oversees the respect of the Czech Constitution, including the
respect for fundamental rights and freedoms. Having exhausted their national remedies, Czech
citizens and foreign residents in the Czech Republic may also lodge a complaint against the
Czech Republic to the European Court of Human Rights in Strasbourg, which is the judicial
authority of the Council of Europe. Finally, also the European Union has its own system of
protecting human rights in place, however, individuals have direct recourse to the General Court
of the Court of Justice of the European Union only of their fundamental rights have been
breached by EU institutions. If national bodies breached the rights of citizens or businesses
protected by the EU´s Charter on Fundamental Rights, it is up to the national courts to decide
if the EU Charter was violated and should doubts arise, national courts can make a preliminary
reference to the Court of Justice of the EU to obtain its binding interpretation on the legal
matters.
The following table summarizes the differences between the three human rights protection
systems in place in the Czech Republic.
Source: Own compilation of date available in public databases
5.5 Self-assessment questions
1. What is the difference between a rigid and a flexible constitution? Is the Czech Constitution
rigid or flexible?
2. Who can propose legislation in the Czech Republic and who does so most frequently?
53
3. What is the difference between concrete and abstract constitutional review carried out by the
Czech Constitutional Court?
4. Which right protected by the European Convention adopted by the Council of Europe has
been breached most often by the Czech Republic?
5. Is the EU Charter of Fundamental Rights binding on EU Member States in all their activities?
6. Do individuals have direct recourse to the General Court of the Court of Justice of the
European Union if an EU Member State has breached their rights protected under the EU
Charter of Fundamental Rights?
54
5.6 Further reading/listening
Selected provisions of the Czech Constitution in English in the Annex to this textbook
Craig, P.; de Búrca, G., Text, Cases and Materials, 5th ed., Oxford: OUP, 2011, pp. 465-498
Link to an institutional video on the functioning of the European Court of Human Rights:
https://www.youtube.com/watch?v=EPWGdhgQlgk
Chapter 6. Contracts
6.1 Obligations
Contracts are the most common title (another one are delicts) for obligations to arise.
Obligations are relations between creditors and debtors where a creditor has a receivable and a
debtor has a corresponding debt.
Obligations are relative property rights where a relationship between specific subjects arises.
Relative property rights thus affect only particular subjects, i.e. creditors and debtors. As an
example we can name loan agreement where a creditor has a right to get the lent money returned
together with the interest and a debtor has a corresponding duty to return the money together
with the interest. No one else is involved in the relationship of the creditor and debtor.
Features of obligations
Any obligation has its subjects, object and its content. Subjects are, in general, a creditor and a
debtor. The particular name of subjects depends on the contract in question – in case of a
purchase contract, the subjects are a purchaser and a seller, in case of a donation contract, the
subjects are a donor and a donee etc. An object of an obligation are goods or performance to
which a contract relates. For example, if you intend to buy a house, the house would be an
object of such purchase contract. A content of an obligation then comprises rights and duties
arising out of a contract. In case of a purchase contract, the content of an obligation would be a
right of seller for a purchase price and his duty to transfer an ownership right to a buyer and
the corresponding duty of a buyer to pay a purchase price and his right to acquire an ownership
right.
Relative v. absolute property rights
As opposed to obligations (relative property rights), there are absolute property rights such as
ownership right which relate to some property rather than to a person. These rights affect all
subjects even though they are in no specific relationship to the entitled person. E.g. an owner
of a house has (an absolute property) right to use the house for living and everybody must
respect such right and not prevent the owner from using the house (by e.g. changing the locks,
occupying it etc.). Notice that there is no contract or other reason for creating any special
55
relationship between those subjects (as opposed in the case with loan agreement). The
ownership right applies to all persons who have a corresponding duty not to disturb it.
6.2 Principles of contractual law
Contractual law is based on several basic principles such as principle of freedom of contract,
pacta sunt servanda (see below), principle of the duty to behave honestly and not to harm
anyone and also on the protection of the weaker party, especially a consumer.
Freedom of contract means that everybody is, in private law, free to choose whether to enter
into a contract or not, choose the contracting partner and determine the content of the contract
through negotiations. Nobody can force you to enter into contracts in the first place. There is,
however, one exception which is a compulsory motor vehicle third party liability insurance. It
is thus obligatory for any motor vehicle operator to conclude the third party liability insurance
agreement. The motor vehicle operator is, however, free to choose an insurance company.
Pacta sunt servanda principle means that the contracts and their clauses are binding for the
parties to the contract and that the failure to fulfil them is a breach of the pact.
6.3 Contracts
Contracts are, by their definition, the expression of the will of the parties to create an obligation
between each other and to be bound by the content of such contract. Every contract starts with
an offer which must include essential terms of the contract and such offer must be accepted by
the other party unconditionally.
E.g. If one party intends to sell a cell phone, he/she must clearly express his/her will to sell it
and specify the cell phone. Only such offer is binding and may be subject to an acceptance. If
the acceptance is unconditional (no essential changes such as willingness to buy a different cell
phone than the one offered), there is a binding purchase contract. If, however, an offeree
changes the offered terms significantly, e.g. starts to negotiate about the purchase price, he/she
is making a counteroffer which is subject to acceptance of the other party (who was an offeror
before). Only once all the essential terms are agreed on by both parties, there is a binding
contract.
Every offer also has its time limit for which it is binding. An oral offer or a written offer made
towards a present person must be accepted immediately. If your friend offers you his laptop for
CZK 8000 on Monday during the class and you do not answer, he is free to offer it to somebody
else since the offer was not accepted, was made orally towards a present person and thus has
expired. If you decide next day that you would like to buy it, you basically make a new offer to
buy his laptop which he can accept if still interested (notice that the subjects are now in the
opposite position). If an offer is made in writing towards a person who is not present, such offer
must be accepted in the time limit stated by the offeror in the offer. If there is no time limit
stated in the offer, the offer must be accepted in a reasonable period of time. What would be
considered reasonable depends on several factors such as type of goods or performance (it will
definitely be longer in case of the sale of a house than in case of the sale of a cell phone), means
of communications used (longer for post than for e-mail), an established practice between
parties etc. A consideration of what is a reasonable period has to be made on a case-by-case
basis.
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Form of the contract
Czech civil law is based on the principle of informality. Most of the contracts can thus take any
form the parties choose – oral, tacit, written or notarial deed. There are, however, exceptions,
where law requires specific forms and those are contracts relating to real property which have
to be in writing or articles of association of capital companies which have to be in the form of
notarial deed. Also, according to the Czech civil code, if at least one party to the contract
requires a specific form of the contract (e.g. a written contract), a contract which does not fulfil
such form is not binding. Other contracts do not require specific form.
Offers made in catalogues or advertisements
As we said, an offer once made is binding and if accepted, a contract is established. You have
probably experienced several times that you came to the supermarket for some specific
promotion which you saw in the leaflet and there you realized that they are out of stock. Was
the offer in the leaflet binding? Is the out of stock situation a breach of the binding offer on the
side of the supermarket? It is a practical exception from the rule that the offer made in
catalogues, advertisements, leaflets etc. are binding subject to out of stock. Once the
supermarket is out of stock, the offer stops being binding.
6.3.1 Changes in obligations
In commercial practice, it is very common that obligations need to be changed during their
existence either in subject or content.
Changes in subject of the obligation
Once a contract is concluded, it is binding for both parties (creditor and debtor). If one of the
parties wishes to unilaterally release from the contract, they can do it through the change in
subject.
Change of the creditor
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(i) Creditors often sell their receivables to the third parties from various reasons, e.g.
because the debtor does not pay voluntarily and the creditor does not want to get
involved in court proceedings which is costly and risky. The sale of the receivable to
the third party is called an assignment of the receivable. To assign the receivable, a
creditor does not need to have the consent of the debtor. The content of the obligation
does not change but the debtor is now obliged to pay to the new creditor instead of the
original one.
since the adoption of the new civil code as of 1 January 2014, it is now possible to assign
the whole contract with all the rights and duties. However, only a party who has not
yet received the performance can assign the whole contract and under the condition that
the nature of the contract does not exclude it. If, for example, you entered into the
contract with a famous photographer to take pictures from your wedding, he cannot
successfully assign the contract because such performance is unique for you. In other
words, you chose him specifically and you have no interest in any other photographer.
(ii)
Change of debtor
Under specific circumstances, also a debtor can be changed during the existence of obligation.
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(i) In case of take-over of debt, an original debtor stops being a debtor and a new debtor
replaces him. The creditor must, however, give a prior consent to such take-over so that
the status of a creditor does not worsen. A creditor thus can refuse to accept a new debtor
who would have less credibility than the original one.
In case of accession to debt, both an old and a new debtor are jointly and severally
liable and thus there is no need to have consent of the creditor because the position of a
creditor gets stronger (instead of one debtor there are two of them).
(ii)
Changes in the content of obligations – rights and duties
The parties to the contract are free to change or modify their current rights or duties arising out
of the contract either because they have no interest in the original performance or they simply
want to amend the current obligation with new rights or duties. Also, it is possible that such
modification is necessary because there is some kind of dispute between the parties.
(i) Novation agreement means that either the original obligation is terminated completely
and replaced with a new one (private novation) OR the original obligation is just
amended with new rights or duties (cumulative novation).
E.g. two parties enter into the purchase contract for the sale of 20 bottles of red wine
from Moravia and before the fulfilment of the contract the purchaser changes his mind
and would like 30 bottles of white wine instead of the red wines. He communicates with
the seller who is willing to change the contract as well. This is a typical example of
private novation where the original obligation ceases to exist and is replaced by the new
one. Of course, the consent of both parties is necessary.
E.g. two parties enter into the lease agreement for an apartment in the Prague city centre
for 1 year. After the term of the lease elapsed, both parties agree to prolong the contract
under the same conditions for another year. They amend the original contract with the
respective extension of the term. This is a cumulative novation. Again, the consent of
both parties is necessary.
(ii) Settlement agreement is of use if some provisions of a contract are unclear or
disputable between parties and thus they must be replaced with new provisions in order
to remove such dispute.
6.3.2 Extinction of obligations
There are several ways how an obligation can come to an end, either with or without satisfaction
of the debt.
A. With satisfaction of the debt
(i) Fulfillment of obligation is the easiest and most preferable option for both parties
since the aim of the contract has been achieved. For example, a student comes to a
coffee shop for a cup of coffee, he orders a coffee, pays the price and gets his
cappuccino. The deal is done, the contract is fulfilled and both parties are happy. There
is no obligation left between them.
(ii) An obligation may extinct by mutual agreement of both parties. To stay with the
example with the coffee shop, imagine that the student, after he ordered his cappuccino
and paid the price realizes that he has no time left and wishes to cancel his order. If the
seller agrees, an obligation has extinct by mutual agreement and the seller will return
the money to the student.
(iii)If both parties have mutual rights and duties between each other, the claims may be
set off. To give an example how it works in practice, imagine that Charles lent Lucy
CZK 2000 because she ran out of money. A couple of days later, Charles lost his cell
phone and did not want to invest much money in the new one and so Lucy offered him
her old phone which was fully functional for CZK 2000. Charles was more than happy
for such offer and asked Lucy to set off their mutual claims – his duty to pay the
purchase price of CZK 2000 against his right to receive the loan of CZK 2000 back
from Lucy. All duties were thus cleared and neither Charles, nor Lucy had to pay
anything.
B. Without satisfaction of the debt
(i) Remission of debt is the unilateral action of the creditor who releases the debtor from
his debt. By remission, the obligation between the creditor and debtor becomes extinct.
(ii) Termination is also a unilateral way how to extinct the contract but it is of use only
where such possibility was agreed in contract or if such right arises from law.
Typically, contracts concluded for indefinite period (such as lease contracts or
employment contracts) may be terminated by the unilateral termination. The
termination must be delivered to the other party and the contract then ends after the
notice period elapsed. The length of the notice period is either agreed between the
parties or is stated by law (3 months for leases of apartments, 2 months for employment
contracts etc.).
(iii)Withdrawal from the contract is again the unilateral way how to extinct the contract
but such possibility must be explicitly agreed in contract or such right must arise from
law. Under the Czech Civil Code, it is possible to withdraw from the contract only in
case of a material breach of contract (e.g. some goods have defects even after several
repairs). The result of a withdrawal is that the obligation is cancelled from the very
beginning and thus parties must return the performance they accepted from the other
party.
(iv) Death of debtor leads to the extinction of the obligation only where the obligation
was supposed to be fulfilled by the debtor personally, otherwise the obligation is
subject of inheritance. E.g If I want to have a famous photographer on my wedding
and he dies before the wedding, such obligation becomes extinct with the death of a
photographer because I simply have no interest in his heirs taking photos of my
wedding. On the other hand, debts from loan agreement or purchase contracts with no
specific subject-matter are subject to inheritance and thus do not become extinct with
the death of debtor.
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(v) Death of creditor leads to the extinction of an obligation only if the performance was
limited to his person only, for example damages for pain and suffering. Most of the
receivables are, however, subject to inheritance.
6.3.3 Subjects of contracts
In order to have a valid contract, it must be concluded by persons who have a legal capacity to
enter into contract. A capacity to enter into contracts of natural persons is being gained
gradually until they reach 18 years of age when they get a full legal capacity. At the age of 18
thus humans have capacity to enter into all contracts no matter how complicated they are. What
about youths or even children? Can they enter into a valid contract? Yes, they can enter into
those contracts for which they are mentally and emotionally mature. It needs to be considered
individually case-by-case taking into account the age of the youth and the respective contract.
It is quite clear that a seven year old kid can buy an ice cream (a valid purchase contract) but
cannot buy a car or a house. A fifteen year old kid can buy for example a motorbike (which the
seven year old could not) and an 18 years old can buy whatever he/she likes provided that he/she
has money for it. Apart from age, humans have to lack mental illness which would make them
incapable to enter into contracts.
Legal persons (companies) get their capacity to enter into contracts upon their incorporation
(registration in the commercial register). Since legal persons are an artificial construct made by
law, they must act through their representatives – typically statutory bodies whose acts are
binding for the company or their employees. Employees may act on behalf of the company in
the field of their specialization – e.g. HR director is entitled to sign employment contracts on
behalf of the company but not to sign purchase contracts with the suppliers which is outside the
scope of his/her daily activities). In practice, these representatives of legal persons attach their
signature next to the company’s name in the contract.
6.4 Division of the contracts
A. Consensual x Real contracts
Consensual contracts are completed by the mere agreement of the contracting parties. Most of
the contracts are consensual (purchase agreement, contract for work, credit agreement,
employment contract etc.).
To complete a real contract, there must be something more than mere consent of both parties –
the transfer of a thing from one party to the other. Examples of real contracts are loan of money
or movable property pledge. A loan agreement is thus completed not in the moment both parties
agree on basic elements of the contract (amount of money, due date etc.) but only once the
money is provided to the debtor. The same is valid for movable property pledge, such contract
is completed once the movable to which the pledge relates is transferred from the pledger to the
pledgee.
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B. Formal x informal contracts
Those contracts which require specific form (either written or even the form of a notarial deed)
are called formal contracts. Such specific form might be required by law or by one or both
parties to the contract. The Czech Civil Code is based on informality of contracts and thus most
of the contracts do not require any specific form. There are some exceptions, e.g. § 560 of Civil
Code states that legal action establishing or transferring a right in rem to immovable property,
as well as legal action changing or abolishing such right requires written form (purchase or
donation contract for a house, land, apartment etc.). In the field of commercial law, articles of
association of capital companies (limited liability company, joint stock company) require the
form of notarial deed.
Informal contracts are those contracts that do not require any specific form and can thus be
concluded orally, in writing or even implicitly. Most of the contracts in the Czech law are
informal.
C. Synallagmatic x asynallagmatic contracts
Synallagmatic contracts are those contracts in which parties obligate themselves reciprocally to
one another so that the duty of one party is correlative to the duty of the other. E.g. purchase
contract (one party provides money and the other provides goods or services, an employment
contract, (the employer provides money as salary and the employee provides work), lease
agreement (rent in exchange for use of property), contract for works (works in exchange for
money) etc. Only such party who has already fulfilled its contractual duty or is ready to do so,
can require performance from the other party – e.g. only the landlord who made the apartment
accessible to the tenant may require rent.
Asynallagmatic are those contracts in which parties have no reciprocal duties. A typical
example is a donation agreement where only a donor has a duty to provide a donation and there
is no reciprocal duty of a donee.
6.5 Content of the contract
Parties to the contract either include all content into the contract itself but in commercial
business, where a lot of similar contracts are concluded very often (insurance contracts, banking
contracts,..), it is often practical to determine a part of the content of a contract by reference to
standard commercial terms. Such terms must be either attached to the offer by the offeror or the
parties must be at least aware of such terms. The pros of the commercial terms are that they are
general, usable for a wide range of contracts and thus it is easier and cheaper for the
entrepreneur to enter into contracts with many customers (a very simple contract to which
general terms including the detailed provisions which are used for all the contracts are attached).
It is also very simple to modify all the contracts by modification of general terms without the
need to modify all the contracts one by one.
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6.6 Adhesion contracts
As was said in the very beginning of this chapter, the Czech civil law is based on the principle
of the protection of weaker party. In practice, it is very common that during a contracting
process, one party is in a stronger position than the other (typically in case of an entrepreneur
contracting with a consumer but also e.g. a big corporation contracting with a sole
entrepreneur). The weaker party cannot influence (or can influence in a limited way only) the
content of such contract. Usually, such party can only accept it or reject it but not modify it (e.g.
insurance agreements, current account contract). The protection of the weaker party in these
adhesion contracts is such that they cannot include clauses that are difficult to read (very small
letters), that are difficult to understand for average person, or that are particularly
disadvantageous without any reason. It is important to note that an adhesion contract is not a
type of contract as such but it is any contract fulfilling the condition that one (weaker) party
could not influence the content of the contract (all form contracts).
6.7 Consumer protection
The Czech Civil Code is based on the protection of a weaker party, especially a consumer who
is always understood a weaker party. A consumer is every natural person who, outside his/her
trade or business, enters into a contract or acts in other way with an entrepreneur.
Every contract with one party being a consumer and the other being an entrepreneur is called
consumer contract (purchase contract concluded between an entrepreneur and a consumer,
contract for works, credit contract etc.). Again, a consumer contract is no contractual type as
such, it only expresses that one party to the contract is a consumer who benefits from the special
legal protection.
What is the protection of a consumer then? First, prohibited are such provisions that create a
material imbalance in the rights or duties of the parties to the detriment of the consumer. This
does not apply to the subject-matter of the contract or contractual price to which the consumer
protection does not relate (if a consumer agrees to pay a specific price for the goods or
performance, he/she cannot later argue that such price is higher than a competitive price).
In particular, prohibited are contractual provisions that:
- exclude or limit rights of the consumer from defective performance of the entrepreneur or that
exclude or limit right to be compensated for damage
- bind the consumer to perform his duties whereas an entrepreneur is obliged to perform his
duties upon the conditions dependent on his will
- establish right of an entrepreneur to withdraw from a contract without stating the reason but a
consumer does not have such right
- enable an entrepreneur to modify contractual rights and duties without the consent of the
consumer
- restrict the right of the consumer to file an action.
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The above provisions are prohibited by law and it is not possible to depart from such
prohibition to the detriment of the consumer. Such provision would be invalid.
Moreover, if a contractual provision allows for a different interpretation, it shall be
interpreted in the most favourable way for consumer.
6.8 Distance contracts
Further protection of a consumer relates to so called distance contracts. Those are the contracts
entered into by consumers using the means of distance communications. It means that parties
to the contracts are not simultaneously present (teleshopping, on-line shopping, catalogue, fax)
and thus a consumer has no possibility to take a look at the goods and consider whether they fit
to his/her needs. Thus, there are specific rights of a consumer (as opposed to the purchases in
the brick-and-mortar store where a consumer can see the goods, try themt, etc.) and specific
duties of an entrepreneur, such as:
- If a contract is concluded using electronic means, an entrepreneur is obliged to provide
consumer with written contract and Terms and Conditions
- An entrepreneur has information duties towards a consumer which must include: contact
details of an entrepreneur, description of the goods or service and their main characteristics,
specification of price, payment methods and delivery, costs of delivery, rights arising out
of defective performance, warranty etc.
- And most importantly, a consumer has a right to withdraw from the distance contract
within 14 days upon the delivery of the goods without any reason. This is the consequence
of the fact that a consumer cannot see or try the goods in advance. The consumer must then
return the goods without any delay (within 14 days upon the withdrawal at the latest) and
the entrepreneur must return all money including delivery costs to the consumer. The
consumer has a right to withdraw from the distance contract within 14 days upon delivery
even if the goods were ordered on-line (phone/fax etc.) and picked up in person. The term
of 14 days thus starts running on the day when the goods were picked up.
The right to withdraw from the distance contract within 14 days does not, however, apply to
customized goods, grocery, newspaper, magazines or computer programmes if the original
package was removed.
In case the entrepreneur delivers some goods which the consumer did not order (for marketing
purposes with the hope that a consumer will order the goods next time), the consumer may keep
them free of charge and does not have to even inform the entrepreneur of his/her decision.
6.9 Off-premises contracts
Special protection relates further to consumers entering into contracts outside the business
premises of the entrepreneur or with an entrepreneur who does not have business premises at
all (door-to-door contracts, contracts concluded with dealers on the street, roadshows etc.). In
these cases, the entrepreneurs use the element of surprise, pressure on consumer, inability to
compare the offer with the offers of other sellers and thus consumers are again protected.
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Consumers who entered into off-premises contracts have a right to withdraw from such
contract within 14 days upon the delivery of the goods without any reason. The consumer
must return without any delay (within 14 days upon the withdrawal at the latest) the goods and
the entrepreneur must return all money including delivery costs to the consumer.
6.10 Summary
The most common title for obligations are contracts which can be defined as an expression of
the will of the parties to create an obligation between each other and to be bound by the content
of such contract. A contract is created once an offer of the offeror is accepted by the acceptant.
If the offer is accepted with modifications relating to the essential terms, there is no contract
but it rather is a counteroffer which is subject to acceptance by the original offeror. An offer
must also be accepted on time in order to have a binding contract. In case of oral offers or
written offers toward a present person, they must be accepted immediately otherwise such offer
expires. In case of the written offers, they must be accepted within the time limit stated in them
or in a reasonable time limit. Czech Civil Code is based on informality of contracts and thus
most of the contracts may take any form (oral, written, tacit, notarial deed) with the exception
of the contracts relating to the real property which must be in writing and articles of association
of capital companies which must take a form of notarial deed. Offers made in catalogues,
advertisements, leaflets etc. are binding subject to out of stock.
The contracts may be changed in the subjects and the content. The change of the creditor is
done either through the assignment of the obligation or the assignment of the whole contract.
The change of the debtor can take the form of the take-over of the debt or the accession to debt.
The change of the content of the contract takes the form of either novation agreement where
the original obligation is terminated and replaced by the new one (private novation) or the
original obligation is amended with new rights or duties (cumulative novation) or settlement
agreement which is used for solving the disputes between parties. The obligations may become
extinct with or without the satisfaction of the debt. With satisfaction of the debt, they become
extinct upon the fulfillment of obligation, as a result of mutual agreement of both parties and
by setting off the mutual claims.
The obligations may become extinct unilaterally without a satisfaction of the debt by the
remission of the debt, the termination, the withdrawal from the contract and under some
circumstances, the obligation becomes extinct upon the death of one of the parties (creditor or
debtor).
A capacity to enter into contracts of natural persons is being gained gradually until they reach
18 years of age when they get a full legal capacity. Legal persons (companies) get their capacity
to enter into contracts upon their incorporation (registration in the commercial register).
One of the dominant principles of the Czech Contract Law is the protection of a weaker party,
especially a consumer. A consumer is every natural person who, outside his/her trade or
business, enters into a contract or acts in other way with an entrepreneur. The protection of a
consumer relates to the special information duties of the entrepreneur towards a consumer and
to the right of a consumer to withdraw from the distance contract or off-premises contract within
14 days upon the delivery of the goods without any reason. Also, the provisions that create a
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material imbalance in the rights or duties of the parties to the detriment of the consumer are
prohibited.
6.11 Self-assessment questions
1. Are the following statements true or false?
a) An oral offer must be accepted immediately.
b) One of the dominant principles of contractual law is freedom of contracts.
c) A consumer can be a legal person if he/she acts outside of his/her business.
d) Most of the contracts in Czech law do not require any specific form.
Select one correct answer:
2. What is the specific legal protection of a consumers who buy goods online (i.e. without a
possibity to actually see the product):
a) He/she can only require a detailed description of the product together with the real photos.
b) He/she can return the product without any reason within 14 days upon the delivery and
he/she gets full price back.
c) He/she can return the product within 24 months if he/she does not like it.
3. The contracts always become extinct in the following case:
a) Death of credit
b) Death of debtor
c) Fulfillment of an obligation
d) Selling the receivable to a third party
4. Answer the following questions briefly:
a) What are obligations?
b) When is a contract made?
c) When do humans get their legal capacity to enter into contracts?
d) How can an obligation arise?
5. Name one possible change of content of obligation. Explain shortlywhat such change means.
6.12 Further reading
Act no. 89/2014 Coll., Civil Code, as amended. For the English wording of the Czech Civil
Code refer to: https://www.cak.cz/assets/pro-advokaty/mezinarodni-vztahy/civil-code.pdf
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Chapter 7. Civil and criminal liability
1. Legal liability
The consequence of a breach of legal duty is a legal liability whether in the field of civil,
criminal or administrative law. E.g. if you overlook a person on a zebra crossing a hit him/her
by car, you can face a criminal proceedings for battery, you can face civil lawsuit for
compensation for personal injury and possibly you can face an administrative proceedings for
the breach of road traffic rules. The aims and results of those liabilities are different. The focus
of this chapter is on the civil liability but we will explain also the difference between the civil
and criminal liability. The administrative liability is outside the scope of this book.
2. General conditions of civil and criminal liability
Civil liability is of private nature (unlike criminal or administrative liability). Its main goal is
to compensate, not to punish. Civil liability can be defined as a secondary, negative
consequence of a breach of legal duty in the field of civil law. It means that liability may arise
only if some primary legal duty was breached. It is basically a sanction for a breach of an
original legal duty. Such original legal duty may arise directly out of legal act (statute), out of
contract or rarely out of good manners.
Criminal liability, on the contrary, is of public nature. Its main goal is to prevent criminality, to
punish criminals and to protect society against them (e.g. by detaining and imprisoning them).
1. Civil delicts v. crimes
When we talk about civil liability, we will say that a person liable committed a civil delict. In
case of criminal liability, a person liable committed a crime. What is the difference between the
two? A consequence of a civil delict is an obligation (relative property right). Obligation is a
relationship between a delinquent and a person harmed by the conduct of the delinquent. There
is no third person who would interfere with their relationship, it is just between those particular
persons.
On the contrary, committing a crime results in the criminal relationship between the criminal
and the state. The content of such relationship is the right and duty of the state to punish such
criminal and the corresponding duty of the criminal to accept such punishment. The will of the
victim of such crime is not important.
Example of civil delict:
Let’s imagine that you lend a book to your close friend for a month. After a month, you request
it back since you need to start preparing for an upcoming exam. Your friend admits that he has
lost it. As a result, you have a right for compensation because it was your book and he breached
his contractual duty to return it to you. He may either compensate you by buying exactly the
same book and giving it to you, or alternatively, by giving you a purchase price so you can buy
a new book yourself. Nevertheless, you probably feel that it is just between you two to solve
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the issue with a lost book. Equally you can be so generous and say to your friend that it does
not really matter and not claim any compensation at all. It is just up to you, there is no third
person who would interfere with. This is quite an obvious example of civil delict.
Example of crime:
On the other hand, let’s imagine that you steal a purse of your friend. The purse was very
expensive itself and moreover it contained CZK 7000 because your friend was going to buy a
new mobile phone. Unlike civil delicts, this relationship arising out of theft (which is a crime
defined in the criminal code) is not just between you and your friend. It is a state that interferes
with criminal liability because there is a general interest of the whole society to punish
criminals. So you may expect a police investigation and a punishment imposed by a criminal
court. Even if you return the purse to your friend on a voluntary basis, you would still be
investigated and eventually punished by the state. A possible forgiveness of your friend would
be of no relevance in that.
You see that in case of civil delict only compensation matters (once you buy a new book or
provide a money equivalent of the book, the relationship of you and your friend is settled),
while in case of crime, compensation is not enough. Criminal liability imposes repressive and
preventive function, so even if you compensate the victim (you return the purse and the money
to your friend) you may still expect a punishment imposed by criminal court. Such punishment
is believed to prevent people from committing crimes.
2. Preconditions for civil liability for damage to arise
There are four basic conditions which have to be cumulatively met in order for liability for
damage to arise:
1. Unlawful conduct
First is unlawful conduct (breach of primary legal duty). That is an act which is contrary to
law whether arising out of the statute, contract or good manners (that is rare in practice). If we
want to talk about the liability for damage, we always have to ask whether some legal duty was
breached at all.
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In our example with the lost book, a friend breached his duty to return the book. It was his
contractual duty arising out of the borrowing agreement. The first precondition for civil liability
for damage to arise was thus met.
7.2.2.2 Existence of damage
Second precondition is the existence of damage. It can take two forms – an actual damage, i.e.
property damage consisting in decrease, lowering, loss, destruction or other loss of value of the
property. It corresponds to the property values which have to be spent to restore the property
back to its original state (to the state it would have been in if there was no damage).
In the lost book case, the actual damage is the purchase price of the exactly same book. If you
damage a car of your neighbour, the actual damage equals to a price he needs to pay to get it
fixed.
The second form of a damage is a lost profit. It means that the property of the injured party has
not increased due to unlawful conduct of the other party. Such profit must be, however,
reasonably expectable. Some sort of hypothetical profit is not subject to a compensation.
Lost profit cases are quite typical in business contracts. Let’s imagine that you ordered premium
cotton with a delivery date by the end of this month since you have a customer who wants to
buy from you 10 shirts for CZK 2000 each. According to the contract with your customer, you
are obliged to deliver him 10 shirts by the end of next month. Unfortunately, your cotton
supplier failed to deliver you cotton by the end of this month as agreed which means that you
are not able to make the shirts on time. It is clear that you expected to earn CZK 20 000 for
those 10 shirts but due to the failure of the cotton supplier you get nothing. CZK 20 000 is your
lost profit which you can claim against the cotton supplier.
7.2.2.3 Causal link
Causal link between unlawful conduct (cause) and damage (consequence) must always be
present in order to talk about liability for damage. It means that an unlawful act must cause a
damage. There are two dominant theories how to determine whether a damage is a consequence
of a relevant conduct.
a) Theory of but-for causation which says that all actions without which certain harm
would not have occurred are material causes of such harm. This theory is more suitable
for criminal law because it is corrected by fault (see example below).
Theory of adequate causation considers relevant those causes without which harm
would not have occurred plus a damage is a typical consequence of such cause. It means
that not all actions that somehow could lead to a damage are relevant, but only those
actions that typically lead to such damage. Such damage must thus be a foreseeable
consequence of such cause. This theory is more suitable for civil delicts where objective
liability is possible.
b)
Let’s imagine the following example. During a car accident, an injury of one driver was
caused. The injury was not very serious but it required medical treatment. An injured
person was thus transported to the hospital, where, due to the medical malpractice of the
doctors, the patient dies. According to the but-for causation theory, the driver causing
the accident would be liable for the death of a patient because if there was no car
accident, the patient would not require medical treatment, he would not have been
transported to the hospital and thus there would be no death. BUT, you probably
intuitively feel that such solution is absurd. The theory of adequate causation is more
suitable in this case. According to this theory, the driver causing the accident is liable
for the minor injury of the patient but not for his death. It is because the death is not a
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typical consequence of such injury. If there was no malpractice of the doctors, the death
would not occur.
So where is the theory of but-for causation usable? Mainly in criminal law where fault
is always necessary to establish criminal liability. In the case described above, it is clear
that the death was not a fault of the driver but of the doctors (at least in the form of
negligence) so the criminal liability of the driver is not established even though we
would conclude that the car accident was one of the relevant causes of the subsequent
death. On the contrary, the driver’s fault of the minor injury of the other person is clearly
established.
7.2.2.4 Fault
Fault is the last precondition of a civil liability for damage but unlike the first three aspects
(unlawful conduct, damage, causal link), fault does not need to be present in all cases. It is a
subjective aspect which can be defined as an internal, mental relationship of the delinquent to
his/her conduct and its consequences. It requires aspects of knowledge and will. Fault may take
four forms:
(i) First is a direct intention which means that you know (aspect of knowledge) that your
conduct is unlawful and that you may cause damage and you want (aspect of will) to
cause it.
The second form of fault is an indirect intention which means that you know (aspect
of knowledge) that your conduct is unlawful and that you may cause damage and you
do not want to cause it but you accept that damage may be caused.
The third form is a so called recklessness which means that you know that your conduct
is unlawful but you unreasonably rely that damage will not be caused.
And the fourth form is a so called negligence meaning that you do not even know that
your conduct is unlawful but you should have known (ignorance of law excuses no
man).
(ii)
(iii)
(iv)
As we said already, crimes always require fault. Mostly in the form of intention (at least indirect
intention), e.g. murder always requires intention. Sometimes, however, even negligence is
enough to be criminally liable (causing bodily injury negligently is crime too).
Some civil delicts, on the contrary, do not require fault at all. It is called an objective liability
or liability for result (e.g. damage caused by operation of means of transport, damage caused
by animal or all damage caused by the breach of contractual duty).
Remember that breaching contractual duty does not require fault. This is quite a new concept
in civil law established by the Czech Civil Code effective as of 2014. It makes the position of
the claimant (a person injured) much easier since it is not necessary to claim or prove the
subjective aspect. In the example of the lost book it would thus be sufficient to prove that your
friend breached a duty to return the book (unlawful conduct), how much was the book (actual
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damage) and causal link is obvious here (his breach led to your loss). You see that it is
absolutely irrelevant why your friend lost the book. He is simply liable for the result – losing
your book.
3. Delictual capacity v. criminal capacity
1. Delictual capacity
If the liability is subjective (fault needed), a person must have capacity to commit delict,
otherwise he/she is not liable. This so called delictual capacity includes two aspects: an
intellectual one which means the capacity to presume the consequences of one’s own conduct,
and an aspect of will, i.e. the capacity to control one’s own conduct. Both aspects must be
present simultaneously in order to establish delictual capacity.
Human beings gain full delictual capacity at the age of 18 (positive assumption) provided that
they do not suffer from any mental illness which would exclude the intellectual aspect or the
aspect of will (negative assumption). Human beings who do not meet those two assumptions
for full delictual capacity may, however, have still limited delictual capacity. It is the case of
children (youths who did not reach 18 years) or persons who suffer from some sort of mental
illness. It is up to the court to consider case by case whether such person was able to presume
the consequences of his/her conduct and whether he/she was able to control his/her conduct. In
case of children, the closer the child gets to the age of 18, the more likely he/she is going to be
held at least partially liable. Jointly liable with such child or a person suffering from mental
illness is a person who neglected supervision upon them (typically parental supervision). In
case a very young child who could clearly not control his/her behaviour and is therefore not
liable at all, causes a damage, it is only the parents who are fully liable.
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It is important to note that using drugs or alcohol which objectively influence our ability to
control our conduct does not exclude or limit our liability.
If the liability is objective (no fault needed, liability for result), a person causing the damage
does not have to have delictual capacity and is still liable.
What about legal persons (corporations)? They get delictual capacity since their incorporation,
i.e. their registration in the commercial register.
7.2.3.2 Criminal capacity
In the Czech Republic, every human being is criminally liable once he/she reaches 15 years of
age and sanity (the capacity to presume the consequences of their own conduct and the capacity
to control their own conduct). Youth criminals (who reached 15 years but did not reach 18 years
of age) must moreover be sufficiently mature in order to be liable. This is to be considered case
by case.
Contributory fault
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If the damage was partly caused (or was increased) by the fault of the injured party, the injured
party is partly liable and the liability of the breaching party is lowered accordingly. Typically
in case of a car accident with a cyclist. Even though the car driver caused an accident and the
cyclist suffered serious injuries, we always have to think whether the cyclist could have avoided
or at least lowered his injuries by e.g. wearing the helmet. It would be the question for expert
opinion to say whether wearing the helmet would affect the scope of the injuries and how.
7.2.4 How is the damage compensated?
The Czech Civil Code is based on the preference of restitution, i.e. a return to previous state.
In the case of lost book, the preference would be that your friend buys you a new book. There
are two exceptions from the restitution. First, sometimes restitution is not possible. E.g. if
somebody damaged your original painting from Picasso, you can hardly be compensated by
some other painting, it is just unique. The other exception is the case when the injured party
requires pecuniary (money) compensation rather than restitution. So if you say to your friend
that you require the purchase price of the book rather than buying a new book, he is obliged to
provide you with the money.
3. Compensation for personal injuries
So far we talked mainly about damage, i.e. material harm which is relatively easy to express by
money equivalent. If you remember the case with the lost book or damaged car, the damage in
those cases can be quite easily determined because it equals to the loss of value of some
property.
But what about personal injury? If a person is injured by somebody else, it is obvious that an
injured person suffered harm (non-pecuniary) which is, however, not that simply expressible
by money equivalent. However, such non-pecuniary harm is always to be compensated by
reasonable satisfaction in money.
What are the potential claims of a person injured?
There are several potential claims a person injured can claim against a person who caused the
injury. Again, in order to establish liability at all, the three, or four basic assumptions must be
met: unlawful conduct, harm (injury), causal link and (fault – this is not the case of e.g. injury
caused by operating means of transport because such liability is objective).
1. Compensation of pain and suffering
When personal injury is caused, it is always linked to some degree of pain and suffering. The
intensity of that differs according to the seriousness of the injury. The aim of the compensation
is to fully compensate pain and other non-pacuniary harms which include stress, discomfort,
and fear from serious health injuries or death. It is of course not possible to calculate pain or
stress in money but the Supreme Court created guidelines on the compensation of non-
pecuniary loss for personal injuries which contain a set of rules granting the compensation of
such injuries. Such guidelines are supposed to create legal certainty and help judges to apply
general legal rules on particular cases. The guidelines are based on the system of points. In each
case an expert (a medical doctor) should examine a patient and allocate certain number of points
to each pain he/she suffered. One point equals to 1 % of an average gross monthly salary (in
2014 it was a gross amount of CZK 251 for 1 point). This system is more flexible than the
previous one which allocated CZK 120 to one point. If the economy grows, the compensation
for personal injury will grow too. It is, however, still very low. Just to make few examples, if
somebody breaks your rib, you get a compensation of approximately CZK 5000. For a broken
tight, you would get CZK 38 000.
7.3.2 Compensation for aggravation of social position
Another dominant compensation a person injured can get is a compensation for aggravation of
social position. It is important to note that this compensation comes into play only in case of
permanent consequences of the harm. If a person suffers an injury which did not have
permanent consequences, he/she does not have this claim at all (unlike pain and suffering
compensation). To be able to say whether a person has any (and what) permanent consequences,
it is necessary to wait for some time, usually one year, to let the health condition get stabilized.
Such compensation then includes limitations in all thinkable aspects of human life, mainly
work, communication, movability, self-care, life in household. This concept is really wide and
includes also frustration from permanent injury, stress, loss of opportunities, an abstract loss of
the ability to be employed and to participate in all aspects of human life.
The seriousness of the permanent injury is expressed as a percentage of loss of life opportunities
(loss of better future) in all aspects of human life. Here again, the guidelines of the Supreme
Court are applicable. In case of 100 % limitation in all aspects of human life, i.e. a person is
still alive but basically cannot participate in any aspects of human life, the compensation equals
to CZK 10 051 200. It is again up to the court in the cooperation with the expert to determine
the percentage of such limitation in each aspect of human life. It should be applied on the caseby-case
basis, i.e. the court should distinguish whether such permanent consequences were
suffered by a young or old person, whether a person was active in some sport or whether there
are any further circumstances which would justify an increase of the compensation. According
to the guidelines, the courts have a possibility to increase the compensation by 10 % if the harm
was caused to a person in the age of 35 – 44, by 20 % if the harm was caused to a person in the
age of 25-34 and by 30 % for a person in the age of 0-24. On the contrary, the base amount is
decreased by 10 % in case of 55-69 years old person or by 20 % in case of a person 70 years
old or older. The courts shall take into consideration also the activity in social life of an injured
party before the injury. The compensation can be increased by 10 % if a person was more active
than average, by 20 % if its activity was exceptionally intense, by 30 % when absolutely
extraordinary.
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7.3.3 Compensation of pecuniary loss as a result of personal injury
Usually also some pecuniary losses are connected to personal injury such as medical bills, loss
of income (in case a person injured was either employed or self-employed), loss of pension.
In case of death, it is clear that a victim has hardly any claims against a person who caused it.
However, there may be a number of persons who suffer mentally from such death. They are
especially a husband, a parent, a child but even other close persons. These persons have a right
to be compensated financially for their mental suffering. The guidelines of the Supreme Court
are not applicable to these secondary victims and thus it is only up to the courts to determine
the exact amount. The amount will of course depend on the closeness of relationship with the
victim or for example on the dependency on the victim (typically in case of a child-parent
relationship).
In its case law the Supreme Court expressed the opinion that in a standard case (if there are no
specific circumstances such as a special relationship between a person who died and his/her
relative), the basic compensation for a child, parent and husband should be CZK 240.000 –
500.000 each.
7.4 Summary
This chapter addressed the basics of the civil liability in the Czech Republic and how it differs
from the criminal liability.
Civil liability is of private nature and its main goal is to compensate a person harmed, while
criminal liability is of public nature meaning that it is a state that investigates criminal offences
and punishes criminals.
The general conditions of civil liability are (i) unlawful conduct, (ii) existence of damage, (iii)
causal link between unlawful conduct and the damage, (iv) fault (fault, however, does not need
to be present always – objective liability).
If the liability is subjective, a person must have capacity to commit delict, otherwise he/she is
not liable. Such capacity includes an intellectual aspect and an aspect of will. Human beings in
the Czech Republic gain full delictual capacity at the age of 18 provided that they do not suffer
from any mental illness which would exclude the intellectual aspect or the aspect of will. Legal
persons gain their full delictual capacity upon their incorporation.
Criminal capacity is a capacity to commit a crime and is gained at the age of 15 on the condition
of full sanity. The youths between 15 and 18 years old must moreover be sufficiently mature to
consider consequences of their criminal behaviour in order to be liable.
The Czech Civil Code prefers the compensation of damage in the form of restitution, i.e. the
return to the state before the breach. Thus, if you lose the book of your friend, you should
primarily buy exactly the same book and return it to your friend rather than paying the purchase
price. There are, however, two exceptions from this rule. First, if the harmed party wishes
money equivalent rather than restitution, such pecuniary compensation prevails. Second, if
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restitution is impossible (e.g. it is not possible to get such book in the shops anymore), the
pecuniary compensation also prevails.
Personal injuries (non-pecuniary harm) is always to be compensated by reasonable satisfaction
in money.
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7.5 Self-assessment questions
1. What are the general requirements for liability for damage to arise?
2. What potential claims does a person injured by some other person have?
3. When does a natural person obtain full delictual liability?
4. What does the theory of adequate causation mean?
5. How is the property damage primarily compensated? What are the exceptions?
7.6 Further reading
Selected provisions (section 2894 and subseq.) of the Czech Civil Code no. 89/2012 Coll., in
English available at: http://obcanskyzakonik.justice.cz/images/pdf/Civil-Code.pdf
Chapter 8. Labor Law
1. Labour relations
Labour law regulates relations between the employers and the employees. These are the
relations arising in connection with the performance of dependent work. A dependent work (as
opposed to entrepreneurship) is carried out within the relationship of the employer's
superiority and his employee's subordination in the employer's name and according to the
employer's instructions (orders) and that is performed in person by the employee for his/her
employer, performed for wage, salary or other remuneration, at the employer's cost and
liability, at the employer's workplace or some other agreed place within the working hours
(40 hours weekly).
An entrepreneurship is, on the contrary, defined by independency, it is a profit-making activity
carried out on the entrepreneur’s own account and responsibility with an intention to do so
systematically and for the purpose of making the profit.
2. Sources of the Czech Labour Law
The basic source of the labour law in the Czech Republic is the act no. 262/2006 Coll., Labour
Code, as amended. Also, labour law is regulated by the act no. 435/2004 Coll., on Employment,
as amended, an act no. 2/1991 Coll, on Collective Bargaining, as amended, and further acts.
3. Basic principles of labour law
Even though labour law belongs rather among private law fields (as civil law, commercial law,
family law etc.), the labour relationships are much more strongly regulated than other private
relationships. The freedom of contract in the field of labour law is limited and the employee
who is understood a weaker party is protected.
The labour law is thus characterized by several basic principles, such as the specific legal
protection of the employee status, requirement of satisfactory and safe working conditions for
performance of work, fair remuneration for an employee as well as a proper performance of
work by an employee in accordance with the employer’s justified interests and the equal
treatment of employees and prohibition of their discrimination (i.e. principle of equal treatment
for all employees as regards working conditions, remuneration for work, vocational
(professional) training and opportunities for career advancement (promotion).
1. Prohibition of discrimination
As is mentioned above already, one of the basic principles of labour law is the prohibition to
discriminate employees as regards their working conditions, remuneration for work, vocational
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training and opportunities for their promotion. The main principles of prohibition of
discrimination can be found in the act no. 198/2009 Coll., on Equal Treatment and on the Legal
Means of Protection against Discrimination and it relates also to the access to employment.
Equal treatment is thus required even before employment relationship commences (interviews,
job advertisements etc.).
The act distinguishes direct and indirect form of discrimination where both forms are equally
prohibited. Direct discrimination is more obvious, easier to identify. It can be defined as
treating one person less favourably than other person in a comparable situation, on the basis of
sex, race, ethnical origin, nationality, religion, age, sexual orientation, health disability, etc.
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A typical example of a direct discrimination would be different remuneration of men and
women or job advertisement looking only for male lawyers because the boss of the law firm
believes that men are better lawyers than women.
The indirect form of discrimination means the application of a seemingly neutral provision,
criterion or practice which however leads to the less favourable position of one person against
others.
Imagine that 20 % of all employees in the firm are women taking care of small children and for
this reason working only afternoons. The boss who is aware of that starts organizing morning
trainings for all employees which subsequently leads to the promotion of the employees who
attend them. At first sight, such practice seems to be equal for all employees because in theory,
every employee can attend the trainings. However, due to the fact that all mothers work only
the afternoons and thus cannot, in practice, attend the trainings and thus achieve the promotion.
They are indirectly discriminated as regards career advancement.
8.3.1.1 Exceptions from prohibition of discrimination
Even though prohibition of discrimination is a general and broad principle, there are few
exceptions from such prohibition. It means, there are cases when unequal treatment is not
prohibited, simply because it is, for some reason, justified.
The first category of such exception relates to the nature of occupational activities. If the nature
of work requires different treatment, such unequal treatment is justified and thus not prohibited.
E.g. If you require a couple of dancers and you already have a man, you can require that only
women apply for the position without breaching discrimination prohibition.
The second category relates to the protection of specific groups of employees such as pregnant
women or disabled persons.
E.g. If an employer requires that all employees work full time (does not allow for part-time jobs
in his/her firm) except for pregnant women who can get flexible part-time job upon their
request, it is quite obvious that such treatment is unequal for the benefit of the pregnant women
who belong to the protected group and thus it is justified.
And the third category of exceptions belong to specific jobs where requiring minimum age,
specific qualification or duration of practice is necessary for its due performance. It relates to
the positions of judges, attorneys, architects, auditors etc.
4. Subjects of labour relations
The labour relationship is two-sided with an employer on one side and the employee on the
other. An employer can be any natural or legal person (it is very common to be employed by
the corporations represented by its directors). The capacity of an individual to assume rights
and duties in labour relations as an employer through own legal acts arises on the attainment of
the age of 18 years. Legal persons gain such capacity upon their incorporation, i.e. typical upon
their registration in the commercial or other register. An employee, on the other hand, can only
be a natural person with the capacity to bear rights and duties as an employee as well as the
capacity to acquire these rights and take on such duties through his own legal acts. Such capacity
is gained on the day such person reaches the age of 15 years on the condition that he/she has
completed the compulsory education.
5. Establishment of an employment relationship
In the vast majority of cases the employment relationship is established by the employment
contract, i.e. a bilateral legal action. An employment contract requires a written form but if the
contract was concluded orally and the employee starts working according to the contract, the
employment relationship has been validly established even without an employment contract.
This is an expression of the special protection of an employee principle. On the other hand, if
an employment contract has been concluded only orally and an employee changes his/her mind
and does not start working according to such contract, an employer cannot force him/her
anyhow since there simply is no employment contract. The protection relates only to the
employee. The employer who is understood a professional should have known that employment
contract requires a written form and cannot benefit from the orally (and thus invalidly)
concluded contract.
1. Mandatory terms of an employment contract
An employment contract may be very simple. Its obligatory contents include only (i) the type
of work to be carried out by the employee, (ii) the place or places where an employee will
perform work and (iii) the date of commencement of an employment. Why are these terms so
necessary? First, the type of work matters so much because it clearly defines the working duties
of an employee. It says what activities an employee is obliged to do according to the contract
and what activities not.
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Imagine that a lady is hired by a law firm as a receptionist. She is thus obliged to answer the
phones, welcome clients, etc. If the boss requires that she starts vacuum cleaning the whole
office or doing his/her personal shopping, these activities are clearly outside the scope of the
contract (out of the scope of receptionist’s work) and thus she is not obliged to do them.
The place of work means usually the specification of town, it is thus not necessary to include a
precise address since it would be very unpractical to amend all the employment contracts in
case of moving the employer to another office. However, it is necessary to specify the town(s)
because it again protects an employee who cannot be required to move to a different town for
work.
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E.g. if an employer is based in Prague but has a subsidiary in Brno, it is possible that he/she
will require that some of the employees go from time to time to Brno to do some work over
there. The employees who have Prague as their place of work in the contract may refuse to go
to Brno because they are simply not obliged to go there. And if they agree to go, it will be
considered a business trip with all the compensation such as travel costs, meal vouchers etc.
The date of commencement is an obligatory element of any employment contract because that
is the day on which an employee is obliged to start performing the work according to his/her
employment contract within the scheduled weekly working hours and comply with the duties
arising from his employment relationship and an employer is obliged to assign work to an
employee, pay the wage and create all conditions for due performance of work.
You may have noticed, from your own working experience, that usually an employment
contract includes also a wage, a trial period or holiday (4 weeks for private sector and 5 weeks
for state employees). Those are very common but not obligatory elements of such contract.
Thus they might be missing in the contract as such and may arise from some internal rules of
the employee. Such solution is quite practical because they may be easily changed by a
unilateral amendment of such internal rule without the need to amend all the employment
contracts.
Apart from employment contract which is definitely the most common way of establishing an
employment relationship, such relationship can arise also out of an appointment. An
appointment relates, however, mostly to the top managerial positions in the public sector and
we are not going to describe it in detail here.
8.5.2 Term of employment
An employment relationship may be agreed to last for a specific period of time or for an
indefinite period. As we know already, the term is not an obligatory element of an employment
contract so what if a specification of term is missing in the contract? In such case the term of
an employment is for an indefinite period which is convenient for an employee (as we explain
in the subchapter about the termination of an employment relationship below). The same is
valid in case both parties agree that the employment shall last for more than 3 years – such
contractual provision is invalid and thus indefinite period of employment applies. You can see
that the contractual freedom is limited for the benefit of the employee for whom the indefinite
period is convenient. To sum it up, an employer and an employee may agree in the contract on
the term of up to 3 years. If they agree on longer term or if they skip this element (which is not
obligatory), the term is automatically for an indefinite period of time.
Another form of protection of an employee relates to the continuation of employment after the
expiry of the fixed term. Where after expiry of the agreed term (up to 3 years) the employee
continues to perform his/her work and the employer is aware of it, such employment
relationship shall be deemed to change into an employment relationship for an indefinite period.
8.6 Termination of the employment relationship
An employment relationship may be terminated by several specific legal reasons: (a) mutual
agreement; (b) termination within the trial period; (c) notice of termination; (d) immediate
termination, (e) death of an employee, (f) the expiry of the agreed period (in case of fixed-term
employment).
(a) Agreement on termination of the employment relationship
An agreement to terminate employment relationship is definitely the smoothest way how to
terminate an employment. It is simple and quick and the only thing that both parties must adhere
to is an obligatory written form of such agreement. This agreement, as any other agreement, is
a bilateral legal action which means that both an employer and an employee must agree with
such termination – and that is usually the problem due to which many employments must be
terminated by other ways. If, however, both parties agree to terminate the employment
relationship, they also agree on the date as to which the relationship ends and possibly to some
other conditions.
(b) Termination within the trial period
The trial period is an agreed period between an employer and an employee which starts in the
beginning of the employment and lasts up to three months. The goal of the trial period is to
allow both parties to find out whether they are happy in this type of relationship and if they
wish to continue further. During this period, the relationship is very flexible for both parties
and it is very easy (compared to the rest of the term) to terminate it. Both parties may, if they
are not happy, unilaterally terminate employment within this period immediately even without
stating the reason. Such termination must be in writing and must be delivered to the other party
but apart from that, it is very informal. The mere letter stating that the employee terminates the
relationship within the trial period and does not show up at work next day is completely lawful.
Such termination must be made on the last day of the trial period at the latest.
(c) Notice of termination
In case that one party of the employment relationship wishes to terminate it but the above
mentioned ways (an agreement or termination within trial period) cannot be used (e.g. because
the other party does not agree or the trial period has already elapsed), the employment
relationship may be unilaterally terminated by a notice of termination.
The notice of termination must again be in writing and must be properly delivered to the other
party. While an employee may terminate the employment by notice for any reason or even
without any reason, an employer may terminate the employment with an employee only for
specific reasons. These reasons are:
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(i)
(ii)
(iii)
the employer's undertaking, or its part, is closed down;
the employer's undertaking, or its part, relocates;
the employee becomes redundant owing to the decision of the employer to change the
activities (tasks), to reduce the number of employees for the purpose of increasing labour
productivity (efficiency);
(iv)
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(vi)
the employee is not allowed to perform his/her current work due to an industrial injury,
an occupational disease or due to threat of an occupational disease;
(v) the employee has lost, long-term, his/her capability to perform his/her current work due
to his/her state of health;
there are reasons on the employee's side due to which the employer could immediately
terminate the employment relationship, or if the employee has seriously breached some
obligation arising from statutory provisions and relating to work performed by him/her.
In case that the employment relationship is terminated by the notice (by any party), an
employment will come to an end upon the expiry of the notice period lasting 2 months.
E.g. An employee delivers the notice of termination to the employer on 15 September 2018.
The notice period of 2 months starts on 1 October (always from the next month following the
delivery of the notice) and will elapse on 30 November. The employment ends on 30 November
2018.
If the employer terminates the employment relationship for the reasons stated in a) – c) above,
the employee is entitled to receive redundancy payment at least in the amount equal to once
his/her average (monthly) earnings if an employment relationship to the employer lasted less
than one year, twice his/her average monthly earnings if an employment relationship to the
employer lasted at least one year and less than two years, triple his average monthly earnings if
an employment relationship to the employer lasted at least two years.
(d) Immediate Termination of an Employment Relationship
Apart from the notice of termination, both parties may unilaterally terminate the employment
relationship by an immediate termination which means without any notice period. Such
immediate termination, however, requires a serious reason for both parties. It is thus, as opposed
to the termination notice, not that easy for an employee to terminate the employment
immediately. Again, such termination must be done in writing and must be properly delivered
to the other party. If an immediate termination is valid, the employment relationship ends upon
the delivery of the termination.
An employer may immediately terminate an employment relationship only:
(i) if an employee has been sentenced, under a final verdict, for an intentional criminal
offence to a term of an unconditional imprisonment of over one year or for an
intentional criminal offence committed in connection with the performance of work to
a term of an unconditional imprisonment of over 6 months.
if an employee has breached an obligation that arises from the statutory provisions and
relates to his/her work performance in an especially gross manner. What constitutes
such a vague notion of “especially gross manner” has to be considered case by case.
You would probably agree that being 5 minutes late in the morning is not that serious
breach which could justify an immediate termination to such employee. Also, you
probably feel that having some residual alcohol in blood after the birthday party is
(ii)
different in case of a secretary and in case of a bus driver. Quite a typical example of
such especially gross breach is an embezzlement of an employer’s assets.
An employer may never, however, immediately terminate the employment relationship
with an employee belonging to the protected group such as pregnant woman, a female
employee who is on maternity leave or an employee who is on parental leave. These
employees fall under the specific protection which does not mean that even if they commit
some serious breach, an employer cannot fire them – it only means that an employer cannot
give them an immediate termination but will need to terminate such employment with a
notice period.
An employee may immediately terminate his/her employment relationship only if:
(i) an employee cannot perform his/her work any longer without a serious threat to his/her
health and the employer has not transferred the employee to perform some suitable alternative
work within 15 days
(ii) an employer has not paid the wage within 15 days after the due date
An employee who immediately terminated an employment relationship is entitled to receive
compensatory wage in the amount of his/her average earnings for a period equal to the length
of the notice period (2 months).
(iii) the employment relationship always ceases by death of an employee
(iv) if the employment was agreed as fixed-term, it also ends upon the expiry of the agreed
period.
8.6.1 Void Termination of an Employment Relationship
Most legal disputes in the field of labour law relate to the termination of an employment
relationship which one of the parties considers void. Such nullity of the termination (either
notice of termination or an immediate termination, rarely the agreement to terminate an
employment relationship) may be caused by e.g. oral instead of written form of such
termination, the lack of proper delivery of such termination to the other party or absence of
valid reason to terminate (apart from the notice of termination given by an employee who does
not include any reason). Such nullity can be claimed by either party before the competent court
(district court in the district in which the seat of the defendant is) within two months after the
employment relationship was supposed to end according to such termination.
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E.g. An employer gives the notice of termination to an employee on 20 September 2018. An
employee, however, considers it invalid because it does not include a legal reason for such
termination. According to the notice, the employment relationship would end on 30 November
2018 (2 month notice period). On 1 December 2018 thus starts a period of 2 months for filing
an action before a competent court. Such action must be filed on 31 January 2019 at the latest.
But what happens in the period before the competent court decides whether the termination was
valid or not? It is clear that both parties are in dispute – one claims that the employment
relationship has already finished and the other claims that the employment relationship still
lasts. If notice or the immediate termination given by the employer is void, the employee should
inform the employer in writing that he/she insists on being further employed by this employer,
the employer shall thus pay compensatory wage or salary to this employee for the period before
the legal dispute is resolved. We talk about compensatory wage because obviously the
employee does not work during this period (because the employer does not count with him/her
anymore) but since the termination was invalid, formally the employment relationship lasted
and thus an employee is entitled to get his/her money.
If notice or the immediate termination given by the employee is void, the employer should
notify this employee in writing of his/her insistence on the employee's continuation of work
performance. If the employee does not comply with the employer's notification, the employer
may apply for compensation of damage caused.
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E.g. Imagine that an employee was supposed to work on a very important project which had to
be finished on a specific date. The employee terminated his/her employment relationship by a
notice which the employer considers invalid (for example because it was oral). If the employer
notifies the employee that he/she insists on the employee’s continuation of work performance
on this project and the employee does not comply with that, the employer can apply for
compensation of damage caused by not finishing the project on time (suppose that the employer
does not get paid for the project by his client).
7. Liability for damage caused by the employee
An employee can, while performing his/her work tasks, cause a damage to his/her employer.
For example if a worker breaches, by accident, a very expensive machine or if a junior lawyer
misses the deadline for filing an action to the court and thus loses the case or the bus driver
having an accident and destroys a bus. All of these breaches lead to damage on the side of the
employer and may, sometimes, way exceed the earnings of the employee. As we said in the
beginning of this chapter, labour law is based on the principle of a special protection of an
employee which is visible also in these kind of cases. The liability of an employee is usually
limited to 4,5 times of average monthly wage of such employee. It means that an employee
earning CZK 20 000 monthly will be liable for CZK 90 000 maximum even if he/she causes
much bigger damage. Such limitation, however, does not apply if the damage was caused
intentionally or under the influence of alcohol or other drugs.
In order to hold an employee liable for damage at all, the general conditions for such liability
must be claimed and proved. They are (i) breach of duty of the employee, (ii) damage on the
part of an employer, (iii) causation, and (iv) fault – in the form of negligence or intention. For
more details about the general conditions of liability for damage see the respective chapter.
8. Agreements on work performed outside an employement
relationship
So far we have focused on an employment relationship established by an employment contract.
In practice, however, sometimes more flexible legal forms of performing work are of bigger
use. Typically, if you look for a summer job or some part-time flexible job during your studies,
it may be cheaper and more flexible for both parties to choose other form of cooperation than
an employment contract. The two basic forms for such work are:
(i) An agreement to complete a job, and
(ii) An agreement to perform work.
Both agreements are less formalized but must still be in writing. The flexibility consists in their
easier and quicker termination for both parties (notice period of 15 days rather than 2 months),
it usually does not include any right for paid holiday which makes it cheaper for the employers.
Agreement to Complete a Job
The work performed under this type of contract may not exceed 300 hours in one calendar year
for one employer. It is thus suitable for ad hoc works or even regular works with limited
monthly hours. If the earnings do not exceed CZK 10 000, the health insurance and social
security insurance is not payable so net earnings are relatively high. On the other hand, if such
employee gets sick, he/she has not right to obtain sickness benefits.
Agreement to Perform Work
The work performed under this type of contract may not exceed 20 hours per week (1/2 of the
standard working hours). Health insurance and social security insurance is payable once the
monthly salary exceeds CZK 2500.
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8.9 Summary
This chapter addressed the basics of labor law in the Czech Republic.
Labor relationships were distinguished from entrepreneurship and the notion of a dependent
work was defined. Even though labor law belongs rather among the private law disciplines, it
is regulated much more strictly for the benefit of an employee who is understood a weaker
party.
The basic principles of labor law are thus a specific legal protection of the employee status,
requirement of satisfactory and safe working conditions for the performance of work, fair
remuneration for an employee as well as a proper performance of work by an employee in
accordance with the employer’s justified interests and also equal treatment of employees and
prohibition of their discrimination. The special protection of employees is expressed also by
the limitation of their liability for damages which is an exception from other civil liabilities.
An employment contract which is the dominant legal title for establishing the employment
relationship must include the type of work, the place of work and the commencement date. All
other elements are optional.
An employment relationship may be terminated for several specific legal reasons: (a) mutual
agreement; (b) termination within the trial period; (c) notice of termination; (d) immediate
termination, (e) death of an employee, (f) the expiry of the agreed period (in case of fixed-term
employment).
8.10 Self-assessment questions
1. What are the basic features of every employment contract?
2. The easiest way to terminate the employment for both parties is to terminate it in the
period.
3. Compare an entrepreneurship with a dependent work.
4. For how long is the employment concluded if no specific term is stated in the contract?
5. Name at least three ways how to terminate the employment relationship.
6. Is the liability of an employee for damage somehow limited? If so, how?
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8.11 Further reading
Selected provisions of the Czech Labour Code no. 262/2006 Coll., in English available at:
https://www.mpsv.cz/files/clanky/3221/Labour_Code_2012.pdf
PICHRT, Jan a Martin Š TEFKO. Labour law in The Czech Republic. Second edition. Alphen
aan den Rijn, The Netherlands: Kluwer Law International, [2015]. ISBN 9041156739.
Chapter 9. Litigation
9.1 Definition
The preceding chapters mostly related to substantive law, i.e. to the law which defines rights
and duties of individuals. The knowledge of substantive law is important but without the
knowledge of procedural rules, it is of little practical use. In other words, you have to know
what your right is but also you need to know how to enforce such right. And the set of
procedural rules defining how to enforce substantive law is what we call procedural law. The
legal proceeding in a court is then called litigation.
The purpose of litigation
The purpose of ligation is thus to enforce rights or duties stemming from substantive law.
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E.g. If you enter into the loan agreement as a creditor, the loan agreement says that a debtor is
obliged to return you the money in one year. That is what we call substantive law because it
clearly defines your right. If, however, the debtor does not return the money to you in one year,
you have to enforce your substantive right before the competent court to actually get the money
back. That is what we call litigation.
From the legal point of view it is quite simple. If you have a substantive right, you can file an
action before a competent court to enforce such right. Is, however, a business point of view
always the same as the legal one? There are many cases where a person has a right and does
not file an action. Sometimes you have to think whether it is worth to enforce your right or not
from the perspective of the costs and benefits of such action. It is always the decision made
under uncertainty because you never know surely if your action will be successful, what the
costs of litigation will be and how much you actually get in the end. For that reason, not all
substantive rights are actually enforced in practice because it is not always worth it. We can
conclude that from the business point of view, the purpose of litigation is to find an efficient
and fair resolution of a dispute.
The subjects of litigation
The subjects of any litigation always include a court with its independent position and the
parties of a dispute. The function of the court is to hear both parties and fairly decide the case.
The position of the parties is usually contradictory – they have the opposite interest. These
parties are called a plaintiff and a defendant. The plaintiff (together with his/her solicitors)
sits on the right hand side of the justices and the defendant on the left hand side of the justices.
The types of procedure in the Czech Republic and the judicial system
The basic types of procedures in the Czech Republic are civil, criminal and administrative ones
and a special constitutional procedure. The court system in the Czech Republic is pretty simple.
Most civil law cases start before district courts which are the lowest instances. Only more
specific, complicated civil cases will start straight at the regional level (regional courts) such as
intellectual property cases, disputes arising out of mergers and acquisitions, competition law
disputes etc. Similarly, most criminal cases start before a district court and again, more serious
criminal cases start straight at the regional level, such as all crimes punishable by deprivation
of liberty for a minimum of 5 years, crimes allowing for exceptional punishment (lifetime
imprisonment), acts of terrorism, human trafficking etc. The administrative cases typically start
before regional courts and rarely (matters relating to political parties or disputes about authority
of different courts to resolve the case) before the Supreme Administrative Court which is a
specialized court for solving administrative cases. The special constitutional law cases are
resolved before the Constitutional court which is a separate judicial authority, standing outside
the system of ordinary jurisdiction.
9.2 Judicial system in the Czech Republic
The judicial system in the Czech Republic consists of the “ordinary system of courts” (district
courts, regional courts, high courts, the Supreme Court and the Supreme Administrative Court)
and the Constitutional court which stands outside the ordinary system of courts.
Figure 1 Judicial system in the Czech Republic
District courts
There are 74 district courts in the Czech Republic and these courts decide most civil and
criminal cases as the courts of first instance. They mostly decide by a single judge and rarely
by a chamber composed of one judge and two lay judges (labour law cases, criminal law cases
punishable by deprivation of liberty for a maximum of 5 years).
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Regional courts
There are 8 regional courts in the Czech Republic and they mostly work as appellate courts in
civil and criminal law – in that case they always decide by senate composed of three judges.
They, however, also decide some severe criminal cases, highly specialized civil (commercial)
law cases and all administrative law cases as the courts of first instance. If a regional court is a
first instance court, it usually decides in a chamber and where stated by law, it decides by a
single judge (some commercial cases, insolvency cases).
High courts
There are two high courts in the Czech Republic (Prague and Olomouc) and these courts decide
appeals in cases where a regional court was the first instance court. They always decide in
chambers.
Supreme Court
The Supreme Court is the highest instance in all fields except for administrative law cases (for
which the Supreme Administrative Court has been established). The seat of the Supreme Court
is in Brno and it decides cases only in chambers. Its main function is to unify case-law by
deciding about extra-ordinary remedies and writing opinions on judgements of lower courts.
Supreme Administrative Court
The Supreme Administrative Court is the highest instance in administrative law, its seat is again
in Brno and it also decides in chambers. Most of its agenda is composed of extraordinary
remedies in the field of administrative law (cassation complaint). It also decides some
specialized administrative law cases as a first instance court (disputes relating to political
parties, disputes about the authority of different courts to decide a case etc.).
Constitutional Court
As was already mentioned, the Constitutional Court is out of the ordinary judicial hierarchy. Its
seat is also in Brno and it serves as the main body for the protection of the Constitution. Its
tasks include the review of the constitutionality of statutes and the protection of constitutional
order and fundamental rights guaranteed by the Constitution.
The Court consists of 15 Justices, all appointed by the President with the consent of the Senate.
The Justices are appointed for a 10-year term of office, and there is no
restriction on their reappointment.
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9.2.1 Administrative justice
As is already stated in the above sub-chapters, the administrative cases are resolved by the
specialized chambers of regional courts and by the Supreme Administrative Court. The aim of
the administrative justice is to protect the public subjective rights of individuals and legal
persons.
In particular, the Courts of administrative justice decide on:
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a) complaints against decisions made in the sphere of public administration (these create
the vast majority of the whole workload of administrative courts and they may relate to
e.g. review of decisions on permanent residence, decision imposing a fine for damaging
environment, decision imposing a fine for illegal employment etc.),
protection against the inaction of an administrative authority (e.g. you apply for building
permit to the building authority and the building authority has not decided within the
statutory deadline – you may file an action before the administrative court who can then
issue an order to the building authority to take a decision),
protection against an unlawful interference of an administrative authority,
competence complaints (disputes over the authority of different courts to
decide a case).
b)
c)
d)
Courts of administrative justice furthermore decide on
a) election matters and in the matters of a local referendum, and
b) matters concerning political parties and
(Act no 150 / 2002 Coll, Code of Administrative Justice).
political movements.
9.2.2 The civil/commercial litigation
The aim of civil litigation is to protect, as opposed to the administrative one, private subjective
rights of individuals and legal persons by deciding legal disputes in the field of private law
(civil law, family law, commercial law, corporate law, IP law etc.).
The rules of litigation are set by the Civil Procedure Code (Act no. 99/1963 Coll.).
Such litigation is initiated upon a motion of a plaintiff who submits an action before a competent
court. Thus, typically there must be a plaintiff who submits an action in order for the court
proceedings to commence (with some exceptions where a court can initiate a proceedings itself,
such as custody over minors’ cases). The plaintiff has to pay a court fee for the initiation of the
litigation (the amount differs depending on the type of proceedings – for example in case of an
action for payment the fee is 5 % of the requested amount). Such fee is an income of the state
budget and helps to finance the judiciary system. If the plaintiff does not pay the fee, the
litigation will be stopped by the court except for cases when the plaintiff cannot afford paying
it without endangering his/her sustenance (ill people who cannot work, retired people who
spend most of their pension for rent etc.). In such case, the court may relieve the plaintiff of
his/her duty to pay a court fee.
It is not necessary to be represented by an attorney before a court of ordinary jurisdiction except
for filing an extraordinary remedy to the Supreme Court.
An action to be complete must include:
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a)
b)
c)
d)
e)
f)
g)
Name of the court it is addressed to
Names of both parties of the dispute and their address (including their representatives)
Type of the action (what is claimed)
Description of relevant facts
Description of evidence suggested by the plaintiff
The particular plea (a suggestion how the court should decide)
Date and signature
If some of these elements are missing, the court will request their completion.
How can such an action look like?
To the District Court of Prague 3
Plaintiff: Jan Novak, Italska 8, Prague 2
Defendant: David Richter, Seifertova 20, Prague 3
Action on damages
On 8 August, 2017, the defendant drove his car negligently and hit my car (Evidence:
photos, testimony of a witness, a police report). He caused damage which had to be repaired
and which cost CZK 20 000 (Evidence: a bill from a garage). Hereby I claim that the defendant
is responsible for the damages.
I suggest that the court orders to the defendant the following:
The Defendant is obliged to pay to the plaintiff CZK 20 000 within 3 days following the legal
force of this judgement.
In Prague on 25/09/2017
Jan Novak
(signature)
9.2.3 Criminal procedure
The aim of criminal procedure is to find out if a crime was committed, who is the perpetrator
and then decide on guilt, impose a penalty and enforce it.
All the rules of criminal procedure are set by Criminal Procedure Code (Act no. 141/1961
Coll.).
Any criminal procedure has several stages with different prosecuting authorities involved. In
the beginning of any criminal procedure, it is a police that investigates whether a crime was
committed at all and looks for suspects. In this stage, a prosecutor supervises police and is
allowed to instruct them. The role of the court in this stage is rather marginal – it decides on
custody, approves search warrants etc.
After an investigation is finished and an individual person is charged, a second stage of a
criminal procedure commences – a stage before a competent court. At this stage, the role of
police is marginal and the dominant prosecuting authorities are now a court as an independent
body that decides on guilt and imposes penalty, and a prosecutor who is in a contradictory
position of an accused and who aims to prove his/her guilt.
After a court decides on guilt and imposes penalty, a third stage of a criminal procedure
commences – an execution. An imposed penalty has to be executed, it means that a convicted
person will serve a prison sentence, pay a monetary penalty etc.
9.3 Right to a fair trial
Right to a fair trial guarantees an independent and an impartial judiciary and thus belongs to
the main pillars of any legal and democratic state. This right guarantees that anybody can look
for protection of his/her rights before an independent court. Right to a fair trial is one of the
fundamental human rights guaranteed by the Charter of fundamental human rights and
freedoms and many international treaties, primarily stated in the Article 6 of the European
Convention on Human Rights (ECHR) which is one of the broadest and most important articles
of the whole convention. Article 6 of the European Convention on Human Rights relates not
only to criminal proceedings, but also to the civil and administrative ones. It, however,
establishes fundamental rights of persons charged with criminal offence and thus has a special
importance in the field of criminal proceedings.
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Article 6 of ECHR reads as follows:
1. In the determination of his civil rights and obligations or of any criminal charge against
him, everyone is entitled to a fair and public hearing within a reasonable time by an
independent and impartial tribunal established by law. Judgment shall be pronounced
publicly but the press and public may be excluded from all or part of the trial in the interest
of morals, public order or national security in a democratic society, where the interests of
juveniles or the protection of the private life of the parties so require, or the extent strictly
necessary in the opinion of the court in special circumstances where publicity would
prejudice the interests of justice.
2. Everyone charged with a criminal offence shall be presumed innocent until proved guilty
according to law.
3. Everyone charged with a criminal offence has the following minimum rights:
• to be informed promptly, in a language which he understands and in detail, of the
nature and cause of the accusation against him
• to have adequate time and facilities for the preparation of his defence
• to defend himself in person or through legal assistance of his own choosing or, if he
has not sufficient means to pay for legal assistance, to be given it free when the
interests of justice so require
* In some EU Member States, such as Bulgaria, a negotiated mediation agreement is directly enforceable. This
means that parties to mediation do not need to have the agreement approved by the court to have it enforced.
91
• to examine or have examined witnesses against him and to obtain the attendance and
examination of witnesses on his behalf under the same conditions as witnesses against
him
• to have the free assistance of an interpreter if he cannot understand or speak the
language used in court.
If any of the articles of the European Convention on Human Rights are breached, you may
submit a special action before the European Court of Human Rights based in Strasbourg (for
more details see the chapter 5 Czech Constitutional Law and the Protection of Human Rights
of this book).
4. Alternative Dispute Resolution
So far we have dealt with litigation as a way of dispute resolution which is guaranteed by state
and may be used for any legal dispute even without the consent of the defendant. Sometimes,
however, quicker, cheaper and more flexible ways of dispute resolution may be used. We call
it Alternative Dispute Resolution (ADR) which means that these methods are alternatives to
litigation which is of general use.
There are several ways how to resolve a legal dispute outside the courtroom. We will shortly
deal with the most popular ones – the mediation and commercial arbitration.
1. Mediation
Mediation is a method for dispute resolution using an independent and impartial mediator who
tries to lead the parties to the agreement which would resolve the dispute and would be
acceptable for both of them. This method, unlike litigation, is fully voluntary and is not
necessarily about finding a perfectly lawful decision but rather a mediator tries to achieve a
mutual consensus between parties. If a mediation is successful, both parties leave a mediator
satisfied with a result while litigation usually ends with one party unhappy. Thanks to the fact
that a mediator does not look for a perfect solution from the legal point of view, the whole
procedure may be way quicker than litigation where all the necessary evidences must be carried
out. Moreover, if a mediation leads to the satisfaction of both parties, such method is more
efficient than litigation since both parties actually accept the deal and there is no space for
appeals. The result of a mediation is a so called mediation agreement which is directly
enforceable if approved by a court*. The mediation is all about building trust between the parties
and a mediator, and finding the acceptable solution for all the disputed parties. A mediator does
not have to be a lawyer but he/she has to have a university degree and must pass a special
mediation exam and be registered in the list of mediators maintained by Ministry of Justice of
the Czech Republic.
9.4.2 Commercial arbitration
Arbitration is another alternative to litigation which means that both parties to the dispute must
agree to resolve their case before an arbitration court or before a single arbitrator.
Institutionalized arbitration
An institutionalized arbitration takes place before permanent arbitration bodies. There
are currently only three such bodies in the Czech Republic – Arbitration Court attached to the
Economic Chamber of the Czech Republic and Agricultural Chamber of the Czech Republic,
International Arbitration Court of the Czech Commodity Exchange and Exchange Court of
Arbitration. Such institution has its permanent arbitrators, administrative personnel, its own
building etc. These institution are usually highly representative and trustworthy. Again,
contrary to standard litigation before competent courts, arbitration is quicker, more efficient
and also has more specialized arbitrators for commercial legal disputes as opposed to judges
who have to deal with cases from different legal fields and thus they often lack specialization
(especially at district courts).
Ad hoc arbitration
Arbitration may be used by the parties to a dispute also on a case by case basis. It means
that parties agree in advance that in case of legal disputes between them, such disputes will be
resolved by a particular arbitrator (or three arbitrators). The parties thus themselves in advance
formulate the conditions of their future dispute resolution.
International arbitration
International arbitrations are more and more popular among international companies
because they provide for desired independency compared to local courts. These institutions are
again quick, efficient and highly specialized. Their verdict (called “award”) is final and binding
for both parties. One of the leading international arbitration courts is the International Court of
Arbitration of the International Chamber of Commerce in Paris.
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9.5 Summary
This chapter related to litigation and alternative dispute resolution. Procedural law was
distinguished from substantive law and the purpose of ligation which is the enforcement of
rights or duties stemming from substantive law was highlighted.
The subjects of any litigation are a court and the parties of a dispute. These parties are called
a plaintiff and a defendant.
The basic types of procedures in the Czech Republic are a civil, criminal and administrative
ones and a special constitutional procedure. The court system includes district courts, regional
courts, high courts, the Supreme Court and the Supreme Administrative Court. There is also the
Constitutional Court which is not a part of the ordinary court system, though.
The protection of rights of individuals by independent courts guaranteed by the state is called a
right to a fair trial and it belongs to fundamental human rights guaranteed by the Charter of
fundamental human rights and freedoms and many international treaties. Article 6 of the
European Charter of Human Rights which is binding for Czech Republic guarantees a right to
fair trial including the principle of presumption of innocence and another minimum rights of
the persons charged with a criminal offence.
Apart from litigation, the chapter dealt with Alternative Dispute Resolution, more particularly
mediation and arbitration.
9.6 Self-assessment questions
1. Could you describe the hierarchy of Czech courts?
2. What does “litigation“ mean?
3. Is it better to initiate standard litigation or arbitration?
4. What are the three fundamental types of procedure in Czech law?
5. What are the mandatory/necessary elements of an action?
6. What are the authorities involved in the criminal procedure?
7. In which cases is it better not to initiate a litigation?
8. What is the role of the Czech Constitutional Court?
9.7 Further reading/listening
Chapter 2.4 “The Judiciary“ of An Introduction to the Czech Legal System and Legal Resources
Online by Michal Bobek, available online at:
http://www.nyulawglobal.org/globalex/Czech_Republic.html
The very basics of mediation and arbitration can be listened to in the video called Alternative
Dispute Resolution – What is ADR? by David P. Hersh, available at:
https://www.youtube.com/watch?v=5IfPqPIPSmI
Study resources on mediation as well as short theoretical videos and longer videos with mock
mediation are available on the Online Study Mediation Platform at https://mediation.turiba.lv
93
Chapter 10. Czech Corporate Law
The following chapter is dedicated to the topic of Czech Corporate Law. It aims to cover
primarily the areas listed below (please note that these are – based on the authors' opinion and
necessary selection – seen as the most critical areas for introducing the Czech business and/or
corporate law to our international students, even though the topic itself is much broader and
detailed):
(a) Introduction to Czech business law (including the recent process of so called
“recodification of the Czech private law”);
(b) Czech commercial register;
(c) Czech business corporations: general provisions of the Czech corporate law (act No.
90/2012 Coll.);
(d) A limited liability company: specific provisions of the Czech corporate law (act No.
90/2012 Coll.); and
(e) A joint stock company: specific provisions of the Czech corporate law (act No. 90/2012
Coll.).
1. Introduction to Czech business law
The focus of this sub-chapter is primarily placed on major sources, history, principles, and key
legal terms & definitions from across the area of Czech business law. In addition, it also
introduces a high-level legal scheme for acting on behalf of Czech entrepreneurs.
1. Recodification of the Czech private law
Recodification of private law in the Czech Republic is represented by a set of three formally
and materially interconnected acts. These are as follows:
(1) Act No. 89/2012 Coll., Civil Code (the number “89” has not been chosen randomly – it
shall be seen as a symbol for the changes that took place back in 1989);
(2) Act No. 90/2012 Coll., Business Companies and Cooperatives Act, the so called
“Business Corporations Act”, which replaces the corporate part of the previously enacted
Commercial Code (i.e. Act No. 513/1991 Coll., Commercial Code); and
(3) Act No. 91/2012 Coll. International Private Law Act, which regulates the private-law
relations with a foreign (international) element.
All these acts came into force on 1 January 2014 and they represented an imaginary end of the
recodification works commenced already in the year 2000 – on an initiative of Czech exminister
of justice, JUDr. Otakar Motejl. This reform shall be seen as the largest change of
the Czech private law over the past 25 years.
94
The aim of this reform was to remove socialist relics from the Czech legal order and to follow
up on the traditional continental law culture. As a result of this, Czech experts from across
dozens of industries, business companies (corporations), judicial bodies, universities etc. and
also the general public have recently faced several extremely difficult tasks – all related to the
implementation of related legislative changes into the real life (including all of the
accompanying changes in areas such as tax and procedural law). Given the fact that the New
Civil Code includes 3,081 provisions, repealed about 238 existing legal regulations or their
parts (e.g. Family Act, Commercial Code, Securities Act etc.), wholly united the contractual
(obligations) law and introduced a huge number of new legal institutes, it is obvious that all
lawyers, notaries, corporate lawyers, Czech judiciary, but also the entrepreneurs as well as
“ordinary” Czech citizens had to familiarize themselves with plenty of new rules and contextual
changes.
95
As mentioned above, the Business Corporations Act replaced the corporate part of Act
No. 513/1991 Coll., Commercial Code, as amended, which has been repealed as at 1 January
2014. Whilst commercial obligations, which formed Part 3 of the original Commercial Code,
were fully transferred to the New Civil Code (which has led to a complete “unification of the
law of obligations”), the business companies and cooperatives (i.e. business corporations)
are now regulated by the Business Corporations Act. In addition to the above, the original
Commercial Code contained also a number of general provisions. Those were also passed to
the New Civil Code, whereby the Business Corporations Act becomes a special law (towards
the general civil-law regulations), which regulates exclusively business companies and
cooperatives.
In terms of its structure, the Business Corporations Act is divided into: (a) a general part on
business corporations, which regulates a number of general issues and legal matters on all
forms and types of business corporations, and (b) a specific regulation of individual legal
forms and types of business companies. Besides, we must not forget the general provisions
on legal entities in the New Civil Code – as each and every business corporation shall be seen
as an independent legal entity.
The Business Corporations Act applies to all business companies and cooperatives in the
Czech Republic regardless of their size or subject of business. The effect of the Business
Corporations Act impacts (among others) the corporate governance rules, the conduct of
members of the management and supervisory bodies, as well as normal daily activities of the
Czech business companies and cooperatives. The duty of due managerial care, introduction of
a business judgement rule, insolvency test and introduction of the rule of personal liability for
The Business Corporations Act, whose main author is JUDr. Bohumil Havel, Ph.D.,
forms an integral part of the private law recodification in the Czech Republic. This Act was
approved by the Chamber of Deputies on 16 December 2011, by the Senate on 25 January
2012, and signed by the President of the Czech Republic on 20 February 2012. The
Business Corporations Act then came into force on 1 January 2014. It is an essential legal
regulation for our corporate business world which, on one hand, changed the whole range
of already existing legal institutes and, on the other hand, introduced plenty of entirely new
corporate institutes and terms, such as the term “business corporation” itself – which
compiles business companies (the personal as well as the capital ones and also the
European companies and associations), and cooperatives. This liberal regulation offers
mainly non-mandatory rules, with the exception of those statutory provisions which must
be insisted on in the interest of public order, good morals or the protection of weaker and/or
third parties.
96
wrongful trading are primarily concerned in the corporate governance area. The authors of this
Act were inspired by modern legislative trends in the laws of many other countries in
Europe, the USA and elsewhere, e.g. legislation in Germany, the Netherlands, Austria,
Poland, Italy, Switzerland, Great Britain, Russia and, of course, the requirements of EU laws.
According to the ex-minister of justice, Mr Jiří Pospíšil, this is “the crucial act for Czech
entrepreneurs which brings in a modern commercial law and which is extremely positive for
the overall business community.”2 The increase of the competitiveness of the Czech corporate
law in the competition with other legal orders was one of the main objectives that the authors
of the Business Corporations Act wished to achieve from the very beginning. Any modern
corporate law would take into account that business companies and cooperatives are not limited
by borders or legal orders of individual states, but on the contrary, they should be able to utilize
those regulations that are attractive enough for them. Legislative stability and application legal
certainty along with sufficient variability of doing business, which provides effective protection
of rights and minimizes administrative and cost burden on individuals, are considered to be the
key attributes of business attractiveness.
2. Sources of the Czech business law
Considering the above, it can be summarised that he major sources of the new Czech business
law are therefore the following codes and/or acts:
− Act No. 89/2012 Coll., New Civil Code (available here3);
− Act No. 90/2012 Coll., “Business Corporations Act” (available here4);
− Act No. 91/2012 Coll., International Private Law Act (available here5);
− EU law (various European regulations and directives as listed in the individual
chapters and sub-chapters of this textbook);
− Other private-law and/or public-law acts (such as, for example, the “Trade
Licensing Act”6, “Registry Act”7, anti-trust regulation(s)8 etc.).
3. Principles of the Czech business law
The main principles of the Czech business law are as follows:
- The principle of freedom of contract, i.e. a judicial concept which holds that contracts
are based on mutual agreement and free choice;
- The principle of equal position of concerned parties, i.e. a key private-law attribute
which states (confirms) that the private-law parties shall always be seen in the equal
position (meaning on the same level – there is no subordinated party);
- The principle of good faith and protection of third parties, i.e. a confirmation that every
party has to act in good faith in exercising its rights and performing its obligations (which
2 Source: http://www.podnikatel.cz/clanky/zakon-o-obchodnich-korporacich-prosel-snemovnou/
3 http://obcanskyzakonik.justice.cz/images/pdf/Civil-Code.pdf
4 http://obcanskyzakonik.justice.cz/images/pdf/Business-Corporations-Act.pdf
5 http://obcanskyzakonik.justice.cz/images/pdf/Act-Governing-Private-International-Law.pdf
6 Act No. 455/1991 Coll. which defines the operation of a „licensed trade“ as an ongoing activity, performed
independently, in one's own name, at one's own responsibility, for the purpose of achieving profit and under the
conditions set forth by the trade licensing law.
7
Act No. 304/2013 Coll., on public registers of legal entities and individuals (available here:
http://obcanskyzakonik.justice.cz/images/pdf/Act_on_Public_Registers.pdf).
8 Please see the chapter dedicated to Competition Law.
shall be seen as the basis for performance-related obligations and obligations to protect and
maintain);
- The principle of fair business (fair business practices and trade), i.e. an attribute which
relates to equal opportunities, transparency and accountability, fair trading practices, fair
pricing strategies, ensuring no child and forced labour, ensuring good working conditions,
respect for the environment etc.; and
- The principle of professionalism, i.e. a standard of personal conduct by a professional (an
entrepreneur) in his/her business dealings. Whilst regulations and guidelines for acceptable
and expected entrepreneurial behaviour vary from industry to industry, personal principles
that typically focus on ethics, code of conduct, appropriate personal interactions and
workplace integrity shall always remain the same.
4. Key legal terms & definitions
The main objective of the Czech business law is to regulate the so called business relations.
Thanks to the above, business law must be seen as the law of professionals (entrepreneurs).
An entrepreneur shall be understood as a person (or legal entity), who (which) is
professionally engaged in a specific business activity.
Business activity shall then be understood as:
− A continuous activity;
− Carried out by an entrepreneur;
− Independently;
− In his/her/its own name and at his/her/its own account (responsibility);
− For the purpose of gaining profit.
Professionally engaged means that the business activity is carried out on the basis of an
authorization granted in accordance with respective public laws. The most common and
frequent type of this authorization is the above mentioned trade authorization, i.e. trade license.
Entrepreneurs can either be individuals or legal entities, i.e. business corporations (business
companies and cooperatives), foundations etc. The most frequent and also common forms of
Czech entrepreneurs are business companies, and sole entrepreneurs, i.e. individuals.
When speaking about distinguishing features of the Czech entrepreneurs, these relate to
(a) name / trade name; (b) seat (registered office) / place of doing business; and (c)
entrepreneurial registration number.
5. Acting on behalf of entrepreneurs
Entrepreneurs – individuals can mostly act:
- By their own acts (directly), or
- Through a legal representative acting on the basis of power of attorney (indirectly).
Entrepreneurs – legal entities can only act trough:
- A legal representative (agent);
- Statutory body (respectively member of a statutory body); member of a statutory body
may act on behalf of the legal entity concerned in all matters. Any internal restriction of
statutory body's authority is not effective towards third parties even if published;
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- Other persons on the basis of power of attorney;
- Other persons on the basis of procuration (a special general “power of attorney” related
to business relations and operating).
Employees and other persons entrusted with performance of certain activity within respective
legal entity always represent the legal entity to the extent appropriate to their position and
tasks as known to the public.
Anyone who is entrusted with performance of a certain activity within the specific legal entity
is authorized to undertake all legal acts (contracts) which usually occur in the course of this
activity; this includes also employees and other persons working for this legal entity.
10.2 Czech commercial register
Czech Commercial Register is a public register which maintains data concerning
entrepreneurs prescribed by the law (e.g. trade name, seat, registration number, details on
the statutory body and its members etc.).
The leading principle of the commercial register is a principle of publicity. We distinguish
between material and formal publicity. Material publicity confirms that any entry in the
commercial register can be claimed against third persons only after its publication (protection
of reliance in good faith on published data). Formal publicity says that commercial register is
available to anybody and that any entry must always be published.
The Czech commercial register is maintained by courts – it is available in an electronic form
and accessible through electronic means. Any entry is effective towards third persons
(parties) upon its publication. The entries into the Czech commercial register must be supplied
in an electronic form (see above).
Entities that must be entered into the Czech commercial register:
• Business companies and cooperatives (i.e. business corporations);
• Foreign entrepreneurs;
• Individuals upon request (please note that several exceptions apply); and
• Entities required by special laws.
Facts that must be registered in the Czech commercial register:
• Main identification data concerning an entrepreneur (trade name, seat, legal form,
statutory body etc.);
• Data relating to important events and changes in organizational structure and subject
of business (e.g. registered capital and its changes, termination of a business
corporation, changes in statutes and/or founding documents etc.).
The Czech commercial register is available on www.justice.cz.
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Task: Go to www.justice.cz, copy in the name of any chosen Czech business
corporation and review the records entered into the commercial register. Compare
those to the theoretical part above and make sure you also review the attached
documents.
3. Business corporations – general provisions of the Czech corporate
law
1. General introduction
Business corporations are considered as legal entities and include business (commercial)
companies (hereinafter also “companies”) and cooperatives.
Companies include an unlimited partnership and a limited partnership (“partnerships”), a
limited liability company and a joint stock company (“capital companies”), as well as a
European Company and a European Economic Interest Grouping.
Cooperatives include a cooperative and a European Cooperative Society.
The European corporations, i.e. a European Company, a European Economic Interest
Grouping and a European Cooperative Society shall be governed by the provisions of the
Business Corporations Act to the extent permitted by directly applicable legislation of the
European Union governing the European Company, the European Economic Interest
Grouping or the European Cooperative Society.
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A partnership can only be established for the purpose of doing business or for the purpose of
managing its own assets.
Activities that may only be carried out by a natural person pursuant to other legal regulations
may constitute the objects or activity of a business corporation, provided that such activities
are performed by persons authorised to this end pursuant to other legal regulations (e.g.
doctors).
Legal acts governing the establishment, incorporation, modification, dissolution or winding
up of a business corporation must be in written form with certified signatures, otherwise the
legal will be seen as invalid.
Where a capital company or a cooperative includes information about its registered capital
in its commercial documents, such information may only concern the part of the registered
capital that has been subscribed and paid-up.
A joint stock company shall release information, which it is obliged to include in commercial
documents, as well as other information prescribed by the Business Corporations Act, without
undue delay after its incorporation and thereafter on a continuous basis, in a manner
allowing remote access, which is free of charge for the public, so that the information is easily
accessible upon entering an e-mail address (the “website”).
Task: Based on the above information, draw a simple scheme of business corporations in
the Czech laws. Please do not forget do split them into business companies and cooperatives,
and subsequently also into partnerships and capital companies. Make sure your scheme
includes the European companies, as well.
2. Establishment
A Czech business corporation shall be established by a memorandum of association. A
memorandum of association on the establishment of a capital company shall have the form of
an authentic instrument. A memorandum of association on the establishment of a cooperative
under the Business Corporations Act shall be concluded upon its adoption at the foundation
meeting.
If permitted by law for a company to be established by a sole founder (please see the details
below), the company shall be established by a deed of foundation in the form of an authentic
instrument.
Not filing the application for registration of a company in the commercial register within 6
months after the date of its establishment shall be conclusively presumed to have the same
effect as a withdrawal from a contract.
The period referred to above may be modified in the memorandum of association.
3. Single member company
A capital company may be established by a single founder. A capital company may also have
a sole member as a result of all its business shares being held by that member. In a single
member company, the powers of the supreme body shall be exercised by its member.
4. Contribution
A contribution is the monetary value of the subject of the contribution into the registered
capital of a business corporation. In case of a joint stock company, the contribution shall be
expressed as nominal or book value of a share.
The subject of the contribution shall be an item which a member or a future member (the so
called “contributor”) undertakes to contribute to the business corporation in order to acquire or
increase a business share in the business corporation concerned (the “contribution obligation”).
The contribution obligation may be met by a cash payment (the “cash contribution”) or by
contributing another item whose value can be expressed in monetary terms (the “contribution
in kind”).
The contributor shall fulfil the contribution obligation within the period of time and in the
manner prescribed by the Business Corporations Act and by the memorandum of association.
The value of a contribution in kind shall be specified in the memorandum of association of
the business corporation concerned (and always assessed and evaluated by an expert).
A contribution in kind may not consist of work or services (please note that exceptions apply).
5. Contribution administrator
Before the incorporation of each business corporation, the subjects of the contribution or parts
thereof that have been paid up or contributed shall be received and administered by the
contribution administrator appointed in the memorandum of association. The founder or one
of the founders may also act as the contribution administrator.
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Where the contribution in kind consists of an immovable property, the subject of the
contribution shall be contributed by the contributor by handing over the immovable property to
the contribution administrator together with a written statement on the contribution of the
immovable property, with certified signature(s).
Where the contribution in kind consists of a movable property, the subject of the contribution
shall be contributed by handing the item over to the contribution administrator, unless provided
otherwise in the memorandum of association.
If, by nature, it is impossible to effectively hand over the movable property, it shall be
handed over through the delivery of the data carriers or other media capturing the item to be
handed over, and the documentation describing the nature, contents and other facts relevant for
the possibility to use the contribution in kind.
Where the contribution in kind consists of an enterprise or a part thereof, the subject of the
contribution shall be contributed on the effective date of the contribution agreement. The
relevant provisions of the Civil Code on purchases shall apply mutatis mutandis to a
contribution agreement of an enterprise or a part thereof.
Where the contribution in kind consists of a receivable, the subject of the contribution shall be
contributed on the effective date of the agreement on the contribution of the receivable. The
relevant provisions of the Civil Code on the assignment of receivables shall apply mutatis
mutandis to an agreement on the contribution of a receivable. The contributor shall be liable for
the collection of the receivable up to its valued amount.
In all other cases, the contribution in kind shall be contributed on the effective date of the
contribution agreement between the contributor and the contributor administrator.
A cash contribution into capital companies shall be paid into a designated account held with
a bank or a savings and loan cooperative (the “bank”) to be opened by the contribution
administrator. The bank shall not make these funds available for disposal before the
incorporation of the capital company unless necessary for the payment of incorporation
expenses or refund of issue prices to the founders.
A contribution in kind shall be fully contributed to the capital company prior to its
incorporation.
A written declaration on the fulfilment of the contribution obligation or a part thereof by
the individual contributors shall be issued by the contribution administrator to the person who
is entitled to file the application for registration in the commercial register. Such declaration
shall be attached to the application for registration in the commercial register, unless it is not
required by law to register the extent in which the contribution obligation is fulfilled in the
commercial register.
10.3.6 Registered capital
The registered capital of a business corporation shall be equal to the sum of all contributions.
The Business Corporations Act specifies the minimum required amount thereof within the
individual types of companies (please see the details below).
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7. Business share
A business share represents the member’s interest (participation) in a business corporation
concerned and the rights and duties attached thereto.
Each member may hold one business share only in the same business corporation. This shall
not apply to an interest in a capital company and to business shares of a limited partner.
Where a business share in a commercial company is in joint ownership, the joint owners shall
act as co-member and their interest shall only be administered by the administrator of joint
property vis-à-vis the commercial company.
8. Profit share
A profit share shall be determined on the basis of ordinary or extraordinary financial
statements approved by the supreme body of the business corporation concerned. It can only be
distributed among the members, unless provided otherwise in the memorandum of association.
A profit share of capital companies shall be due and payable within 3 months after the date
when the supreme body of the business corporation adopted the decision on profit distribution,
unless stipulated otherwise in the memorandum of association or by the supreme body. A profit
share of a partnership shall be due and payable within 6 months after the end of the accounting
period, unless stipulated otherwise in the memorandum of association.
Decisions to pay a profit share are made by the statutory body.
9. Share of liquidation balance
Upon a business corporation’s winding-up with liquidation, each member shall be entitled to a
share of the liquidation balance. Such share shall be paid out in cash, unless stipulated
otherwise in the memorandum of association or in a separate agreement between the members
and the corporation concerned.
The liquidation balance shall be first distributed among the members up to the level at which
they met their contribution obligation. Where the liquidation balance is insufficient for such
distribution, it shall be distributed among the members according to the proportion of their paidup
or contributed contributions.
Where none of the members was subject to a contribution obligation, the liquidation balance
shall be distributed equally among the members.
10. Business corporation bodies
The supreme body of a partnership is all of its members; the supreme body of a capital
company is the general meeting; and the supreme body of a cooperative is the members’
meeting.
For the purpose of the Czech Business Corporations Act, the supervisory body of a business
corporation shall be the supervisory board, the auditing committee or other similar body.
A collective body shall appoint its chairman, whose vote shall be decisive in the event of a tie,
unless stipulated otherwise for this case in the memorandum of association. This shall not apply
to partnerships.
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Each member of a partnership shall act as its statutory body. In a limited-liability company,
each executive shall act as the company’s statutory body, unless the memorandum of
association stipulates that multiple executives shall act as a collective body.
Any decision taken by a body of the business corporation shall be effective vis-à-vis the
business corporation upon its adoption. Any decision taken by the sole member acting as a
body of the business corporation shall be effective vis-à-vis the business corporation upon its
receipt by the business corporation. Any decision taken by a body of the business corporation
shall be effective vis-à-vis third parties as from the time when they became aware or could
have become aware thereof.
The representative of a legal entity which is a member of a body of a business corporation must
fulfil the requirements and preconditions for the execution of the function defined by law
for the members of the body themselves. Compensation for any damage caused by the
representative shall be provided to the business corporation by the representative and the legal
entity he or she represents, acting jointly and severally.
11. Rules of conduct of members of corporate bodies
A person shall be deemed to act with due care and the necessary knowledge where, in
business-related decisions, he or she could in good faith and reasonably assume to be acting
on an informed basis and in justifiable interest of the business corporation concerned (the so
called „Business Judgement Rule“). The foregoing shall not apply in cases where such
decision-making was carried out without the necessary loyalty.
A member of the statutory body of a capital company may request instructions from the
supreme body of the business corporation regarding the management of its business; however,
the same shall be without prejudice to his or her obligation to act with due care.
When assessing whether a member of a body acted with due care, the care that would be
exercised in a similar situation by another reasonably diligent person if they would be in the
position of a member of a similar body of the business corporation shall always be taken into
account.
A person who violated the duty of due care shall return to the business corporation any benefit
obtained in connection with such behaviour. Where such return of the benefit is impossible,
the obliged person shall pay an equivalent amount to the business corporation in cash.
12. Conflicts of interest rules
If a member of a body of a business corporation becomes aware of a conflict that may arise
between his or her interest and the interest of the business corporation during the exercise
of his or her office, he or she shall inform, without undue delay, other members of the body
of which he or she is a member as well as the supervisory body, if established, or, failing that,
the supreme body. The same shall apply mutatis mutandis to potential conflicts of interest of
persons who are closely related to the member of a body of the business corporation, and
persons influenced or controlled by that member.
Where a member of a body of a business corporation intends to sign a contract with the
corporation, he or she shall inform, without undue delay, the body of which he or she is a
member as well as the supervisory body, if established, or, failing that, the supreme body. At
the same time, the member shall indicate under which conditions the contract is to be concluded.
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The same shall apply mutatis mutandis to contracts between the business corporation and
any person who is closely related to the member of a body of the business corporation, and
persons influenced or controlled by that member.
10.3.13 Executive service agreement
The rights and duties between a business corporation and a member of its elected body shall be
governed, mutatis mutandis, by the provisions of the Civil Code governing an order, unless
implied otherwise from the executive service agreement, where concluded, or from the
Business Corporations Act.
An executive service agreement for a capital company and its subsequent modifications shall
be agreed in writing and approved by the company’s supreme body.
Unless remuneration is agreed in the executive service agreement in accordance with the
Czech Business Corporations Act, it shall be conclusively presumed that the exercise of the
office is free of charge.
An executive service agreement for a capital company shall also include the following
details on remuneration:
- Definition of all remuneration components which the member of the body is or may be
entitled to, including any benefits in kind, payment to the complementary pension
insurance scheme or other benefits;
- Specification of the amount of remuneration or the method of its calculation, and its
form;
- Definition of rules for the payment of special bonuses and profit share for the member
of the body, where these may be granted; and
- Information about the benefits or emoluments for the member of the body consisting in
the transfer of participating securities or in the possibility of the acquisition by the member
of the body or a person closely related to him or her, where the remuneration is to be
provided in such form.
10.3.14 Resignation
A member of a body of a business corporation may resign from his or her office. However,
he or she may not do so at a time which is inappropriate for the business corporation.
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Unless determined otherwise in the memorandum of association or the executive service
agreement, the resigning member shall notify his or her resignation to the appointing body,
and his or her office shall terminate one month after the delivery of such notification, unless
the competent body of the business corporation approves a different office termination date
at the request of the resigning member. Where the competent body is a sole member, the office
shall terminate one month after the delivery of the resignation notification to the sole member,
unless they agree on a different office termination date.
The above stated inappropriateness shall be explained as any situation which is very
important in the life of each business corporation concerned – e.g. financial problems,
entering new markets etc.
10.3.15 Expulsion from office of a member of the statutory body of a business
corporation
During insolvency proceedings, the insolvency court shall, even ex officio, decide that a
member of the statutory body of the bankrupt business corporation who was in office at the
time of the ruling on bankruptcy or afterwards may not hold the office as a member of the
statutory body of any business corporation or act as a person in a similar position (the
"expulsion") for a period of 3 years after the expulsion decision became legally effective.
A court may also, even ex officio, decide to expel a member if it turns out that, in the past 3
years, the member of the statutory board repeatedly and seriously breached the duty of due care
or, where applicable, any other duty of care associated with the exercise of his or her office
pursuant to another legal regulation.
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10.3.16 Nullity of a business corporation
After the incorporation of a business corporation, it shall be pronounced null by a court, even
ex officio, if:
• The memorandum of association was not drawn up in the prescribed form;
• The provisions concerning the minimum amount of registered capital to be paid up
were not complied with; or
• The court finds legal incapacity of all the founding members.
10.3.17 Dissolution and winding-up of a business corporation and liquidation provisions
A court, on the basis of a petition of a person who has a legal interest therein or a petition of
the prosecutor’s office, shall also dissolve a business corporation and order its liquidation,
where the court finds a substantial public interest to do so, in the event that:
• The business corporation lost all its business licences; this shall not apply in case
the business corporation was also established for the purpose of managing its own
assets or for a purpose other than doing business;
• The business corporation has not been able to perform its activities and,
consequently, serve its purpose for more than 1 year;
• The business corporation is not able to perform its activities because of
insurmountable differences between the members; and/or
• The business corporation, without making recourse to natural persons, carries out
an activity which may only be performed by natural persons pursuant to other
legal regulation.
Task: You were already explained about the Czech “duty of care (loyalty)”. Can you think
of any practical situations which would be seen as a breach of this duty? Can you think of
any similar situations in your domestic jurisdiction?
4. Specific provisions of the Czech corporate law – a limited liability
company
1. Introduction to specific provisions of the Czech Business Corporations Act
Both a limited liability company and a joint stock company must be established by a notarial
deed executed by a Czech notary. Before registering in the Commercial Register, the founders
must pay the monetary contributions into a special bank account opened specifically for this
purpose. The bank will not allow the company (or anybody else) to use the money deposited in
such bank account before the registration of the company in the Commercial Register, unless
the money is to be used for the payment of establishment-related costs. This bank account will
be opened on the basis of an agreement concluded between the bank and the contribution
administrator of the company. The contribution administrator is an individual (either a
founder or another person) responsible (before the registration in the Commercial Register) for
the payment of contributions (both monetary and also non-monetary). The contribution
administrator can also be a foreign person.
Before registering in the Commercial Register, both branches and business companies must
obtain a trade licence from a trade licensing office corresponding to the activities they intend
to undertake, or some other form of business authorisation. For this purpose, they must appoint
a responsible representative who is responsible for the company’s compliance with the
conditions of the trade licences. The appointment of a responsible representative is not required
for any of the 80 general business activities covered by the so-called free trade licence. One
responsible representative may be responsible for more than one trade licence of the company.
On the other hand, one responsible representative may not perform this function on behalf of
more than four entrepreneurs. The company has the option to submit a single application to the
trade licensing office; in such an application it will apply for both (i) trade licence(s), and (ii)
registration with the tax office – along with the application for a trade licence.
Shareholders of a joint stock company do not guarantee the company’s obligations. Partners
of a limited liability company jointly and severally guarantee such company’s obligations only
up to the sum of unpaid contributions to the company’s registered capital.
As mentioned above, executive directors, directors and board members of Czech business
companies are obliged to perform their respective offices with due care (and are liable for any
damage caused to such company by any breach on their part of this obligation).
In some cases, the so called shadow directors (i.e. persons who de facto control a Czech
business company, even if they do not have any official position in such a company) or other
companies from the same group of companies can be liable for damage caused to such Czech
company by exercising their influence over such Czech company to its detriment.
The Czech legal system recognises the concept of the criminal liability of legal entities; such
liability can be in some cases effective beyond the Czech Republic’s borders. This concept
allows for, in some cases, the prosecution of a legal entity where a crime has been committed
to the benefit of such legal entity by its director, employee or other associated person.
2. Establishment
A limited liability company is commonly used only for small and medium-sized businesses.
It may be established either by means of (i) a founder’s deed by one entity (whether an
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individual or a legal entity); or (ii) a memorandum of association concluded by several entities
or individuals. Such founder’s deed or memorandum of association must be executed in the
form of a notarial deed.
3. Registered capital
The registered capital of a limited liability company is composed of the contributions made
by the shareholders (partners). The minimum contribution of each shareholder to the
registered capital is CZK 1. However, in the event of such a low contribution, the risk of
insolvency (and related consequences for executive directors and shareholders) should be
considered.
Non-monetary contributions must be fully settled before the company’s registration in the
Commercial Register. The founder’s deed or memorandum of association must specify the nonmonetary
contribution, its value (which is determined by an expert) and the expert who
determined its value.
At least 30 per cent of subscribed monetary contributions must be paid up before the
registration of the company in the Commercial Register.
4. Ownership interest
A limited liability company does not issue shares. The ownership interest represents the
shareholder’s participation in the company and the rights and duties derived from such
participation.
The size of the ownership interest is basically determined by the ratio of a particular
shareholder’s investment contribution to the company’s registered capital.
A limited liability company may have more than one type of ownership interest, to which
different rights and obligations attach. For example, the obligation to work for the company can
attach to one ownership interest and the obligation to contribute a higher sum of capital to the
company can attach to another one. A shareholder may hold more than one ownership
interest (provided that the founder’s deed or the memorandum of association allows so). An
ownership interest in a limited liability company is not as easily transferable as the shares in
a joint stock company. It requires a written agreement (with notarised signatures).
A shareholder may transfer his/her ownership interest to another shareholder without the
approval of the general meeting (unless the memorandum of association stipulates otherwise).
A shareholder may also transfer his/her ownership interest to a third party with the approval
of the general meeting (unless the founder’s deed or the memorandum of association stipulates
that such approval is not required).
5. Corporate bodies
The corporate governance of a limited liability company is much simpler than that of a joint
stock company.
A limited liability company does not have a board of directors. Its executive body is made
up of one or more executive directors. The law does not restrict their number, but their
number must be stipulated in the founder’s deed or the memorandum of association. The
executive director is appointed by the general meeting (the supreme body of the limited
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liability company) or by the sole shareholder exercising the powers of the general meeting.
Each executive director represents the company independently, unless the founder’s deed or
the memorandum of association stipulate otherwise. The founder’s deed or the memorandum
of association may stipulate that the executive directors form a collective body, which will
make the legal position of executive directors closer to that of the board of directors in a jointstock
company.
The law does not require the limited liability company to establish a supervisory board;
however, a supervisory board can be established, provided that the founder’s deed or
memorandum of association stipulates so.
10.4.6 Advantages and disadvantages of a limited liability company
The main advantages of a Czech limited liability company are the following aspects:
• Relatively low registered capital;
• Relatively low administrative requirements;
• Protection of the members from the company´s creditors by a corporate veil;
• Optional supervisory board (please note that exceptions apply).
The main disadvantages of a Czech limited liability company are the following aspects:
• Shareholders are jointly and severally liable up to the amount of the unpaid
registered capital as recorded in the Commercial Register if the full payment of the
registered capital has not been registered in the Commercial Register yet;
• The procedure of the transfer of the ownership interest is more complicated than in
the joint stock company.
10.5 Specific provisions of the Czech corporate law – a joint stock
company
1. Establishment
A joint-stock company is usually used for large businesses. It is established by articles of
association by one or more shareholders (individuals or legal entities). The articles of
association must be executed in the form of a notarial deed.
2. Shares
A joint-stock company could have issued either bearer or registered shares in the form of
either certificated or book entered shares. However, please note that as of 1 January 2014, the
certificated bearer shares are no longer allowed and existing certificated bearer shares must be
either immobilised (physically deposited) in a bank or exchanged for book entered shares.
The transferability of registered shares may be restricted (e.g. by requiring that the general
meeting approves share transfers) but not excluded by articles of association. The transferability
of bearer shares may not be restricted. Registered certificated shares are transferred by means
of, an oral/written agreement, an endorsement and a hand-over of the shares. Book-entered
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shares are transferred by virtue of the registration of the new owner with the Central Securities
Depository.
3. Registered capital
The minimum registered capital is CZK 2,000,000 (or EUR 80,000 for companies which are
allowed by a special law to keep their accounts in EUR).
At least 30 per cent of the registered capital must be paid up before the application for the
registration of the joint stock company in the commercial register is filed (or earlier, if the
articles of association stipulate so).
4. Corporate bodies
The executive body of a joint-stock company is a board of directors. Members of the board of
directors are elected and recalled by the general meeting (or by the supervisory board if the
articles of association stipulate so). The board of directors decides on all matters that are not
reserved for the general meeting or the supervisory board.
A joint-stock company must establish a supervisory board, which monitors the activities of
the board of directors and the operations of the joint-stock company.
Alternatively, instead of a board of directors and a supervisory board, a joint stock company
can have an administrative board and a single director (monistic system). The choice of the
corporate bodies’ structure (i.e. either dualistic, or monistic) must be stipulated in the articles
of association. If the articles of association stipulate so, the administrative board can have only
one member who can, at the same time, perform the office of a director.
10.6 Summary
The Czech private law recodification provided citizens of the Czech Republic with a number
of changes and it significantly changed the legal environment for doing business and for
activities of business companies and cooperatives, the so called business (commercial)
corporations. The key codes of this reform include the New Civil Code, the Business
Corporations Act and the International Private Law Act (all of those came into force on 1
January 2014). In addition to these basic pillars, there were also many changes made in the
accompanying legislation. The aim of the recent recodification was to remove the remains of
the laws from the socialist era and to modernize and liberalize the Czech private law following
the example of many countries of the European Union, the USA etc.
The Czech joint stock company and the Czech limited liability company are legal persons,
whereas the so called branch office is not a separate legal entity. As far as the company’s
liability is concerned, both joint stock company and a limited liability company are liable by
its entire property for its breach of obligations. However, shareholders of a joint stock company
are not liable for breaches of company’s obligations at all. Members of a limited liability
company are jointly and severally liable for the company’s obligations up to the unpaid
contributions of all members to the registered capital. Branch office is not liable for breach of
its obligations (the parent company is liable therefor).
The Czech joint stock company’s minimum amount of the registered capital is CZK
2,000,000. Limited liability company’s minimum amount of the registered capital is CZK 1
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(per shareholder/partner). For the establishment of a Czech branch office, there is no registered
capital required.
Obligatory bodies of a Czech joint stock company are General Meeting, Board of Directors and
the Supervisory Board (please be aware of the monistic system, as well). Obligatory bodies of
a Czech limited liability company are General Meeting and Executive(s). The Czech branch
office must have a Head of Branch who is entitled to act on behalf of the parent company with
regards to the branch office concerned.
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10.7 Self-assessment questions and tasks
1. Explain the process of so called recodification of the Czech private law. Why is it so
important? What changes did this reform bring? What are the key – new – codes? Do we
still have the Czech Commercial Code?
2. What are some of the sources of Czech business/corporate law?
3. Define the term business corporation.
4. Define the principle of freedom of contract.
5. Define the principle of equal position of concerned parties.
6. Define the principle of good faith and protection of third parties.
7. What are the other principles of Czech business law?
8. Who is an entrepreneur?
9. What is a business activity?
10. What are the key distinguishing features of Czech entrepreneurs?
11. Who can act on behalf of Czech legal entities?
12. How would you write a power of attorney?
13. Where can the Czech commercial register be found?
14. Which entities MUST be registered in the Czech commercial register?
15. Explain the principle of publicity.
16. Name all the possible forms and types of business corporations in the Czech Republic.
17. Must a joint stock company have its own websites?
18. How is a Czech business corporation established? Is there any difference in this process –
with regards to partnerships and capital companies?
19. What is a difference between single member and single founder?
20. Make sure you are able to define the following: contribution, subject of contribution,
contribution obligation, contributor, monetary contribution, non-monetary contribution,
and contribution administrator.
21. Which types of Czech business corporations must have a registered capital?
22. What is a business share? How is this called in the joint stock company?
23. What are the conditions for paying the profit share?
24. Who is the recipient of the share of liquidation balance?
25. What is the difference between single and collective body?
26. Explain the business judgement rule. What does it stand for? Why is it important?
27. Name one situation where there is a conflict of interest between the member of a business
corporation and the corporation itself. How would you solve such situation – practically?
What do you need to do with regards to Business Corporations Act?
28. What is the executive service agreement? What are its mandatory parts and clauses?
29. Can a member of a statutory body be expelled from his/her function? Can he/she resign?
What are the legal conditions for the above?
30. Name at least 7 key features and characteristics of a limited liability company.
31. Name at least 7 key features and characteristics of a joint stock company.
32. What is a branch office?
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10.8 Further reading/listening
Legislation: selected provisions of the Czech Civil Code; selected provisions of the Business
Corporations Act; selected provisions of the International Private Law Act; selected provisions
of the Trade Licensing Act.
Printed books:
• HAVEL, B. et al. Business Corporations Act with updated explanatory report and index
(in Czech). Ostrava: Nakladatelství Sagit, a.s., 2012. ISBN 978-80-7208-923-9.
• MACGREGOR, R. Introduction to Law for Business. Ostrava: KEY Publishing s.r.o.,
2012. ISBN: 978-80-7418-137-5.
Online resources: www.justice.cz (Czech commercial register).
Documentary video(s): I Am Fishead: https://www.youtube.com/watch?v=bcRRZsag0Io.
Chapter 11.EU Competition Law
The following chapter is dedicated to the topic of EU Competition Law. It aims to cover
primarily the areas listed below (please note that these are – based on the authors' opinion and
necessary selection – seen as the most critical areas for introducing the EU competition law to
our international students, even though the topic itself is much broader and could be presented
in a more detailed way):
1. Introduction – the system of competition law (including unfair competition and sanctions for
competition law breaches);
2. EU antitrust law – cartels and monopolies;
3. Competition law authorities (including dawn raids); and
4. Mergers.
1. Introduction – the system of competition law
The focus of this sub-chapter is primarily placed on major sources, history, principles, and key
legal terms & definitions from across the area of EU completion law. In addition, it also
introduces a high-level legal scheme for so called unfair competition.
1. Competition law in general
Competition law governs how individual entrepreneurs and business corporations interact with
their competitors, partners, suppliers and customers. It requires them to compete fairly in
the markets that they operate in, ultimately to the benefit of their customers.
The idea is that fair competition leads to customers getting the best price, quality and
choice of products and services possible.
Complying with competition law brings the business world closer to its often proclaimed
objective to be a customer obsessed organisation that customers can trust. Nowadays
businesses need to stay on the right side of the law also because of their reputation.
2. Consequences of competition law breaches
Breaching competition law can be really easy to do. One does not need a formal contract to do
so – a throwaway comment to a friend might be illegal, too. And there can be serious
consequences:
• Huge fines – in some cases up to 10 % of global turnover;
• Years of expensive litigation as the victims may sue the entrepreneurs and/or business
corporations to recover (compensate) their damage(s);
• Imprisonment, disqualification and personal fines for directors (statutory bodies) in
certain territories;
• Serious brand and reputational damage, which often results in a drop in share price;
• Important contracts being void and unenforceable.
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The most serious infringements of competition law include:
• Price fixing;
• Bid rigging or market sharing;
• Collective boycotts;
• Exchanging highly sensitive information with competitors; and
• Resale price maintenance.
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3. Protection of commercial competition in general – across majority of legal
traditions and legal systems
1. Public law (i.e. antitrust) – quick scheme/overview
• Sources of law
o EU law
o National public law
• Target
o Monopolies (the so called „abuse of a dominant position“)
o Cartels (horizontal as well as vertical cartels)
o Mergers
• Enforcement
o State administrations (national competition authorities, i.e. NCAs, such as the
Office for the Protection of Competition in the Czech Republic or Office of Fair
Trading in the UK)
o Administrative and civil court proceedings
Examples: It is really easy to breach the competition law. This is a list of suggested
(potential) business conversations that can get the individual entrepreneurs and/or business
corporations into trouble:
• “It is your turn to win – we will sit this one out.”
• “We will distribute for you, but you must not undercut our resale price.”
• “You are our supplier – you cannot bid against us – that is a betrayal of our
relationship.”
• “We are going to hold our pricing next quarter – what are your plans?”
• “Let’s both stop supplying that company – they are undermining our business
models.”
• “We are going to reduce our agents’ commissions – you could do that too.”
114
11.1.3.2 Private law (i.e. unfair competition) – quick scheme/overview
• Sources of law
o Mostly national private law
o Within legal systems sharing the continental law tradition, the regulation of unfair
competition is included either in a code (e.g. the New Civil Code in the Czech
Republic) or in a special statute (e.g. the German Act against Unfair Competition)
• Target
o General prohibition (i.e. a general clause prohibiting certain types of behaviour with
a potential for being unfair competition), such as section 2976 of the Czech Civil Code
(Act No. 89/2012 Coll.)
o Specific prohibited behaviour named in a non-exhaustive list (often in a set of
provisions in the Commercial or Civil Code), such as misleading advertisement,
misleading description of goods and services etc.
• Enforcement
o Enforced by private parties (individuals and entities under the private law),
sometimes also by the involvement of various trade and consumer interest groups
o Civil (commercial) courts
o Remedies (injunctions, compensations, satisfaction)
2. EU antitrust law
1. Introduction – what is EU antitrust law for?
The EU antitrust law shall be seen as a political commitment to free and open market-based
economy. It is a system in which goods, labour and capital can all move freely. In the EU, this
is mostly enshrined in the EU Treaty (the “Treaty on the Functioning of the Europe Union”,
i.e. TFEU9). Apart from the EU, the most developed countries also have a domestic system
with similar aims to promote consumer welfare and efficient allocation of resources.
In the EU, firms (companies or corporations) must not distort the operation of the market
and the development of the single market through their behaviour, either individually or
collectively. EU competition law applies where there may be an effect on trade between
member states; national competition law applies where effects are confined to a single territory
or an area within a territory. The EU competition law generally applies to all businesses, large
and/or small.
In a nutshell, the EU competition law consists of the following:
• Article 101 TFEU → Anti-competitive agreements (cartels)
• Article 102 TFEU → Abuse of a dominant position (monopolies)
• Separate merger control regime (mergers)
9 Available here: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A12012E%2FTXT.
11.2.2 Why is competition law awareness so important these days?
In some countries, criminal sanctions apply to individuals for serious infringements of
competition law. First individuals were sentenced to 24-36 months in prison back in 2008
(marine hose cartel in the UK). Apart from that, the individuals also subject to fines. In addition,
in some countries the company directors’ disqualification orders as well (up to 10-15 years).
Last but not least, we should also highlight the significance of damages to companies’
reputation.
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11.2.3 Cartels (anti-competitive agreements)
The Article 101 of TFEU (Chapter 1) – Anti-competitive agreements reads as follows:
“The following shall be prohibited as incompatible with the internal market: all agreements
between undertakings, decisions by associations of undertakings and concerted practices which
may affect trade between Member States and which have as their object or effect the prevention,
restriction or distortion of competition within the internal market, and in particular those
which:
• Directly or indirectly fix purchase or selling prices or any other trading conditions;
• Limit or control production, markets, technical development, or investment;
• Share markets or sources of supply;
• Apply dissimilar conditions to equivalent transactions with other trading parties,
thereby placing them at a competitive disadvantage;
• Make the conclusion of contracts subject to acceptance by the other parties of
supplementary obligations which, by their nature or according to commercial usage,
have no connection with the subject of such contracts.”
We can thereby summarise that: this article applies to agreements between independent firms
(not intra-group agreements); covers formal agreements, but also verbal agreements or informal
understandings; applies to agreements between firms at different levels of the production chain;
some types of agreements are „anti-competitive by object” and are always illegal.
In other words, the EU competition law prohibits agreements between firms (written or
informal) at the same or different levels of the production chain and decisions of trade
associations whose object or effect is to restrict competition within the EU. The most obvious
types of restrictive practices are price fixing, market sharing, bid rigging and exchanging
sensitive information with competitors.
Agreements that infringe EU competition law are void and unenforceable and are also subject
to fines of up to 10 % of a company’s worldwide turnover.
Fines are increasing! These are some of the examples of the highest fines for individual
firms (companies/corporations) since the y. 2007
• Ideal Standard (y. 2011) – EUR 326 million
• E.ON (y. 2010) – EUR 553 million
• St. Gobain (y. 2009) – EUR 896 million
• Thysen Krupp (y. 2008) – EUR 479 million
• ENI SpA (y. 2007) – EUR 272 million
The national competition law generally mirrors provisions of EU competition law.
116
Task: Have a look at the following list of conduct that is likely to be unlawful (from the
competition law perspective). Think about the reasons and explain why. What are the
major risks?
• A phone call between competitors regarding the verification of their price to a
particular customer or business area.
• Listening to a lunch break discussion of a trade association meeting dealing with the
topic on „How competitors will adapt their commercial pricing strategies in the
future“.
• One competitor calls the other one to find out its reaction to their intended price
increase.
• An agreement between competitors in which they agree to focus on a different
market segment.
• Discussion between competitors on what they are paying or are willing to pay to a
particular supplier or on not agreeing to purchase goods or software from a particular
supplier.
• Discussion between competitors on how to eliminate a potential new entrant or
competitor (for example by collectively refusing to supply him or buy from him).
11.2.3.1 Information Exchanges as an example of anti-competitive agreements
Accessing information is fundamental for markets to function. It increases transparency,
enhances efficiency and also stimulates the competition. Therefore, competitors need
access to information to compete effectively. However, exchange of “competitively
sensitive” information between competitors will raise authorities’ concerns. It could lead
to collusion and reduce uncertainty on the market (to the detriment of end-consumers –
higher prices and slower innovation).
Exchanges of certain types of commercial information between competitors may be viewed as
facilitating co-ordination of conduct. Information exchanges may also be viewed as evidence
of some other anti-competitive practice. Forums and conferences (e.g. trade association
meetings) do not make it legitimate. Always remember that a “standard industry practice“ or
“everyone does it” does not serve as a defence.
To sum up, information that could be assessed as confidential or sensitive should not be
revealed to a competitor. Such information includes:
Generally speaking, there are 3 areas of prohibited cooperation:
1. Hard-core cartels (always illegal), i.e. price fixing, restriction on output, collusive
tendering, collective boycotts, information exchanges etc.
2. Other collaboration (might be illegal), i.e. trade associations, joint purchasing,
joint production, joint marketing, collective standards, sub-contracting etc.
3. Agreements “de minimis” (legal), i.e. those agreements where the combined
market share is lower than 10 % and no hard-core restrictions apply.
• Past/present/future price data (wholesale or retail);
• Details of customer base;
• Details about production and new investments;
• Details about capacity;
• Details relating to costs;
• Commercial strategy; and
• Details on market shares.
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Not all exchanges of information are considered as being anti-competitive. Information
exchanges can promote efficiency in the industry, encourage the spread of new
technologies, and also benefit the consumer (by promoting transparency). What information
can therefore be legitimately shared?
• Data that is historic;
• Data that is aggregated or anonymized;
• Information relating to industry studies;
• Issues of interest to the industry (e.g. technological developments);
• Exchanges of opinions or experiences;
• Information on lobbying activities.
11.2.3.2 Price fixing
Price fixing, as another example of anti-competitive agreements, is illegal under EU
competition law where:
• It involves competitors (i.e. horizontal price fixing);
• It involves firms (companies/corporations) at different levels of the
production chain – e.g. supplier and retailer (i.e. vertical price fixing).
Example: Can the information below be shared?
Do not share: unpublished information on prices, sales volume, customer data, costs;
price-setting factors, pricing trends; marketing strategy; bidding strategy; expansion
strategy; capacity; investment plans; information received from competitor or exemployee
of competitor.
“Grey area”: current public pricing information; future public – non-binding – pricing
information; aggregated data; benchmarking data on product standards.
OK to share: publicly available information; purely technical information; compliance
with legislation; fraud or security issues; safety issues; business aspects on which the
company/corporation does not compete; information received from a customer.
„People of the same trade seldom meet together, even for merriment and diversion, but the
conversation ends in a conspiracy against the public, or in some contrivance to raise prices.“
(Adam Smith: The Wealth of Nations, 1776)
Price fixing leads to significant financial penalties for the firms (companies/corporations)
involved. As mentioned above, in some countries even the criminal sanctions apply (i.e.
possibility of imprisonment). There is a high potential for discussions on price strategies with
competitors at the above mentioned industry meetings.
Firms cannot enter into discussion with competitors about current or future prices or pricing
strategies. In addition, when entering into vertical agreements, firms cannot consider:
• Fixing a minimum resale price;
• Fixing a set resale price;
• Fixing discounts from particular price level;
• Linking rebates or subsidies to observance of particular price levels;
• Use of threats (e.g. contract termination) to ensure compliance with price
levels.
What can, however, be permitted?
• A maximum price;
• Recommended resale prices;
• Fixed wholesale prices.
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What happened in the story above?
• 11 cargo airlines concluded a price fixing cartel in 1996-2006 colluding to inflate fuel
surcharges (British Airways, Air France – KLM, SAS, Air Canada, Qantas and others).
• Number of dawn raids took place in February 2006 around the world after Lufthansa, as
one of the cartelists, “blew the whistle”.
• Since the fuel surcharge also applied to flights departing from the U.S., the U.S. state
authorities investigated the case, as well.
• To prevent his extradition to criminal prosecution in the U.S., a 10 year sentence and USD
1 million penalty, Keith Packer decided to cooperate with the investigators and accepted
a plea offer of 8 months in jail and a fine of USD 20,000.
And what are the consequences?
• In the US, the Department of Justice charged 18 airlines and several executives over USD
1.6 billion.
Information exchanges and price fixing in the real life
“During my eight-month sentence – 241 days and nights, and believe me, I counted every
single one of them – I had a lot of time to reflect on how a typical British executive,
balancing the demands of a challenging business life and a full and happy personal life,
ended up in prison. To go to prison in the US and pay a $20,000 fine was something I never
imagined in my worst nightmares. The closest I ever thought I would get to breaking the
law would be the odd speeding ticket or parking fine.”
Keith Packer, former Commercial General Manager at British Airways World
Cargo (source: http://www.legalweek.com/legal-week/analysis/2110631/cautionary-tale-
exec-consequences-competition-law-infringement)
• The European Commission fined 11 airlines almost EUR 800 million (highest fine of
EUR 340 million to Air France – KLM, EUR 104 million to BA).
• Keith Packer accepted a plea offer of 8 months in prison in Pensacola and a fine of USD
20,000.
• Several customers who paid the fuel surcharges claimed their damages under the private
law procedures.
11.2.4 Abuse of a dominant position (monopolies)
The Article 102 of TFEU – Abuse of dominant position reads as follows:
“Any abuse by one or more undertakings of a dominant position within the internal market or
in a substantial part of it shall be prohibited as incompatible with the internal market in so far
as it may affect trade between Member States. Such abuse may, in particular, consist in:
• Directly or indirectly imposing unfair purchase or selling prices or other unfair trading
conditions;
• Limiting production, markets or technical development to the prejudice of consumers;
• Applying dissimilar conditions to equivalent transactions with other trading parties,
thereby placing them at a competitive disadvantage;
• Making the conclusion of contracts subject to acceptance by the other parties of
supplementary obligations which, by their nature or according to commercial usage,
have no connection with the subject of such contracts.”
We can thereby summarise that this article makes any abuse by one or more undertakings of a
dominant position within the internal market/substantial part thereof prohibited so far as it may
effect trade between Member States.
Dominance (dominant position) shall be seen as a high degree of market power which causes
significant independence of competitors, customers, consumers etc. The dominance/dominant
position is possible but unlikely in cases where the market share is 40 % and below. The
dominance/dominant position is presumed where the market share is 50 % and above
(rebuttable rule).
1. Dominance: a quick overview
The EU competition law prohibits individual firms from engaging in abusive practices that
ultimately harm consumers. Such prohibition applies to firms that have certain market power.
Market power is an economic concept and is measured with reference to a particular market
(usually presumed where a firm has a market share of 50 % or more).
The abusive practices include (examples only):
• Discriminatory pricing;
• Refusing to supply products;
• Tying or bundling products together;
• Pricing below cost or excessively.
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11.2.4.2 Predatory Pricing as an example of abusive conduct
A nice example of abusive conduct is so called predatory pricing.
Predatory pricing is when a dominant undertaking deliberately reduces its prices to below-costs
levels (which it can afford to do because of its size and market strength) in the short-term in
order to prevent a rival from being able to compete. In order for predation to be abusive, the
exclusion should be instrumental in protecting or strengthening the predator’s dominant
position. Once that rival has exited the market or increased its prices, the dominant
undertaking is then expected also to raise its prices.
As a rule of thumb, there is a rebuttable assumption of dominance where an undertaking
holds a market share of 50 % or more and there may be a position of dominance under that
market share benchmark.
3. Competition Law Authorities and their Powers
1. Investigatory powers of competition law authorities
The main enforcer of EU competition law is the European Commission (sometimes assisted
by the National Competition Authorities – NCAs). The NCAs enforce national competition law
(e.g. the OFT in the UK, ÚOHS in the Czech Republic10 etc.). European Commission and NCAs
have wide ranging powers to investigate potential infringements of competition law. These
can take the form of:
• A requests for information; or
• A “dawn raid”.
11.3.2 Dawn raids
Dawn raid is a surprise inspection conducted by the European Commission or an NCA. It
usually follows a tip-off to the European Commission or the NCA by a whistle-blower
(typically a competitor or a customer). The purpose of dawn raids is to review and take copies
of documents and to conduct an investigation into suspected breach of competition law. Firms
are required to co-operate with the authorities and must not do anything to compromise the
investigation; failure to do so can have serious consequences.
What can inspectors do during a raid?
• Enter any business premises, examine and take copies of any business records (including
e-mails, diaries, handwritten notes etc.) relating to the investigation;
• Off-site locations can now also be searched (homes and cars);
• Ask any employee factual questions (typically explanations of technical language or
handwriting on documents);
• Take oral statements (with consent);
• Seal premises for up to 72 hours;
• There is, however, no right to view legally privileged documents and also business secrets
must be kept confidential.
10 Please note that ÚOHS is a Czech abbreviation only.
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11.3.3 Office for the Protection of Competition in the Czech Republic
Office for the Protection of Competition is the Czech central authority of state
administration responsible for creating conditions that favour and protect competition,
supervision over public procurement and consultation and monitoring in relation to the
provision of state aid. It was established by the Czech National Council by the Act No.
173/1991 Coll. on 26 April 1991. The Czech NCA started its activity on 1 July 1991. In order
to declare independence of the decision-making process, Brno has become its headquarters,
although Prague is usual seat of all administrative bodies.
121
What shall the concerned firms/corporations do during the raid (inspection)?
• Check inspectors ID and authorization
• Check the scope of the inspection
• Prepare meetings rooms, copiers and shredders
• Shadow the inspectors at all times
• Prepare the internal and also external communications
• Record everything: what was seen, what was asked, what was answered, which
documents were taken etc. (copies, documents, oral statements and others)
• Protect legally privileged documents
• Protect seals and customer facing IT systems
• Fully engage with the competition law authority
• Review the case post the inspection (assess the possibility of leniency) etc.
• Consolidate all materials and notes
Task: Watch the movie below and answer the following questions (“Basics of
Competition Law”, the Czech Office for the Protection of Competition:
https://www.youtube.com/watch?v=uZO2So-wrXQ):
1. Why should all competitors follow the rules?
2. What are the consequences of a healthy competition?
3. What happened to the Czech telecommunications market several years ago?
4. Can only the producers and sellers influence the competition? Where is the role
of consumers?
5. What kind of prohibited practices were mentioned in the video?
6. What is a cartel agreement about?
7. What is a dominant position?
8. Is it possible that a merger will be considered as a breach of competition law?
9. What does competition advocacy mean?
4. Mergers
1. Mergers in the European Union – a quick overview
There is a mandatory notification if:
• Combined worldwide turnover („t/o“) of undertakings concerned > €5bn; AND
• Community-wide t/o of each of at least 2 undertakings concerned > €250m; UNLESS
• All undertakings concerned each have > 2/3 of community-wide t/o in one and same
Member State
OR
• Combined worldwide t/o of undertakings concerned > €2.5bn; AND
• In each of at least 3 Member States, combined domestic t/o of all undertakings concerned
> €100m; AND
• In each of those 3 Member States, at least 2 undertakings concerned each has domestic
t/o > €25m; AND
• Community-wide t/o of each of at least 2 undertakings concerned > €100m; UNLESS
• All undertakings concerned each have > 2/3 of community-wide t/o in one and same
Member State.
Timing: Phase I – 25-35 working days / Phase II – 90-125 working days.
11.4.2 Mergers in the Czech Republic – a quick overview
There is a mandatory notification if:
• Combined domestic t/o > CZK1.5bn (approx. €57.9 m) AND at least 2 undertakings
concerned each has domestic t/o > CZK250m (approx. €9.6 m)
OR
• Domestic t/o of at least 1 undertaking concerned (if merger or joint venture) or acquired
business/target (if business sale/acquisition of assets) > CZK1.5bn (approx. €57.9 m)
AND worldwide t/o of another undertaking concerned > CZK1.5bn (approx. €57.9 m).
Timing: Phase I – 30-45 calendar days / Phase II – 5 months + 15 calendar days.
11.5 Summary
Competition law governs how individual entrepreneurs and business corporations interact with
their competitors, partners, suppliers and customers. It requires them to compete fairly in
the markets that they operate in, ultimately to the benefit of their customers.
Fair competition leads to customers getting the best price, quality and choice of products
and services possible.
Breaching competition law can be really easy to do. One does not need a formal contract to do
so – a throwaway comment to a friend might be illegal, too. And there can be serious
consequences.
122
The most serious infringements of competition law include:
• Price fixing;
• Bid rigging or market sharing;
• Collective boycotts;
• Exchanging highly sensitive information with competitors; and
• Resale price maintenance.
The EU antitrust law shall be seen as a political commitment to free and open market-based
economy. It is a system in which goods, labour and capital can all move freely. In the EU, this
is mostly enshrined in the EU Treaty (the “Treaty on the Functioning of the Europe Union”,
i.e. TFEU). Apart from the EU, the most developed countries also have a domestic system with
similar aims to promote consumer welfare and efficient allocation of resources.
In the EU, firms (companies or corporations) must not distort the operation of the market
and the development of the single market through their behaviour, either individually or
collectively. EU competition law applies where there may be an effect on trade between
member states; national competition law applies where effects are confined to a single territory
or an area within a territory. The EU competition law generally applies to all businesses, large
and/or small.
To sum up, the EU competition law consists of the following:
• Article 101 TFEU → Anti-competitive agreements (cartels);
• Article 102 TFEU → Abuse of a dominant position (monopolies);
• Separate merger control regime (mergers).
The main enforcer of EU competition law is the European Commission (sometimes assisted
by the National Competition Authorities – NCAs). The NCAs enforce national competition law
(e.g. the OFT in the UK, ÚOHS in the Czech Republic11 etc.). European Commission and NCAs
have wide ranging powers to investigate potential infringements of competition law.
11.6 Self-assessment questions and tasks
Answer the following self-assessment questions. If unsure, go back to the theory explained
above.
1. What is competition law about?
2. What is a dawn raid?
3. What are the inspectors’ powers during a raid?
4. What are possible sanctions for breaking competition law?
5. What is a cartel?
6. Why is price fixing considered to be illegal?
7. What is bid rigging?
8. What might be wrong about the trade association meetings (or other events and
conferences)?
9. What are other examples of agreements that might cause competition law concerns?
11 Please note that ÚOHS is a Czech abbreviation only.
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10. What does abuse of dominant position mean?
11. What are examples of abusive dominant position?
12. Can you remember the criteria for a dominant position?
Think about the following case and answer the question on market sharing.
Imagine that you are a Senior Commercial Manager in the Asia Pacific region. You are
negotiating a contract with an independent third party supplier. This supplier is particularly
strong in cloud and hosting and your telecoms company wants to enter this market next year.
In the contract, the supplier requests that when your company enters the market, it will not offer
cloud and hosting to large corporates in Singapore. In return, the supplier will not target small
and medium-sized enterprises.
Can you agree to this clause?
a) Yes – we haven’t even launched yet, so there cannot be any impact on competition.
b) No – competition law bites on agreements between actual and potential competitors and
this could amount to market sharing.
c) Yes – the supplier is more established, so it makes sense for them to focus on bigger
players.
Help you teammate Sue!
Imagine that your team member, Sue, calls you with the following question: “I heard that you
can go to jail in some countries for competition law breaches. Is that true?”
What do you think? Select an option below:
a) True
b) False
Think about the following case and answer the question on online issues.
Imagine that you are working in an EU-based telecoms company and that you receive a phone
call from one of your new independent resellers. “Hi, just to say that we are setting up a website
to advertise a range of products and services online, including yours. Is this OK?
What should you do? Select an option below:
a) You already have a website for retails customer in your country. A second website
would only duplicate – so tell them this is not really viable.
b) Agree in principle, but ask that the reseller only accepts payments from cards registered
in your country.
c) Agree to the request but flag that your company will need to work with the reseller to
protect its brand integrity.
Help you teammate Sue!
Imagine that your team member, Sue, calls you with the following question: “I have heard that
only e-mails and formal project documents can be seized by competition law authorities if they
suspect a company/corporation has breached he competition law rules. Is that true?”
What do you think? Select an option below:
a) Yes.
b) No.
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Help your teammate Sue!
Imagine that your team member, Sue, calls you with the following question: “I know you are
not meant to receive competitively sensitive information directly from a competitor. But what
about if we receive it from a supplier or a distributor? Could this still be a breach of competition
law rules?”
What do you think? Select an option below:
a) Yes.
b) No.
11.7 Further reading/listening
Legislation: selected provisions of the Czech Civil Code (for the area of unfair competition).
Printed books: MACGREGOR, R. Introduction to Law for Business. Ostrava: KEY Publishing
s.r.o., 2012. ISBN: 978-80-7418-137-5.
Online resources: Treaty on the Functioning of the European Union (available here:
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A12012E%2FTXT).
Documentary videos:
• OFT competition law film from June 2011; available here:
https://www.youtube.com/watch?v=ACA9vdlNqek&t=35s.
• Basics of competition law, the Czech Office for the Protection of Competition;
available here: https://www.youtube.com/watch?v=uZO2So-wrXQ.
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12 Act No. 89/2012 Coll., Civil Code, as amended.
13 Act No. 90/2012 Coll., on Business Companies and Cooperatives (Business Corporations Act), as amended.
14 Act No. 262/2006 Coll., Labour Code, as amended.
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Chapter 12. Corporate Governance, Ethics and Compliance in Doing
Business
The following chapter is dedicated to the topic of corporate governance, ethics and
compliance in doing business. It aims to cover primarily the areas listed below (please note
that these are – based on the authors' opinion and necessary selection – seen as the most critical
areas for introducing corporate governance, compliance and ethics to our international students,
even though the topic itself certainly is much broader and could be presented in a more detailed
way):
1. Management liability under Czech laws – introduction and basic legal overview;
2. Duty to act with due managerial care and business judgement rule (including majority of
related legal aspects such as, for example, managers' remuneration and concern law);
3. Compliance and compliance programs (introduction and a brief history of compliance,
effective implementation of internal compliance programs etc.); and
4. Criminal liability of Czech legal entities (details on the new “compliance amendment” and
its link to corporate governance and business ethics).
1. Introduction – management liability under Czech laws
The new legal regulation of Czech private law (mainly the New Civil Code12 (hereinafter also
the “NCC”) and the Business Corporations Act13 (hereinafter also the “BCA”)) has brought in
plenty of changes, many of which also impacted on the status of company managers, i.e.
business corporations’ statutory management. It was the ambition of this new regulation to
create rules that are (a) fairer (towards the Czech entrepreneurs), and (b) making the general
concept of carrying on business easily available. As a result, we encounter new terminology,
systematics and also several new corporate governance institutions. In the field of business
corporations’ management, the previously existing rules are now specified in more details and
are more clearly arranged. On one hand, there is certain loosening in the decision making by
managerial bodies of Czech business corporations, on the other hand, there is a strong
tightening of sanctions for certain cases of their failure.
However, we certainly cannot ignore other forms of “management liability” in Czech laws,
such as “interference” within groups of companies (concerns) under the BCA (see below), or
respective provisions of the Czech Labour Code14 dealing with responsibilities and obligations
of individual employees and employed (delegated) managers towards their employer.
1. Management liability under Czech laws – a quick overview
The picture below summarises the potential legal liability of various types of corporate
managers, i.e. members of supervisory and statutory bodies (who are performing their office
in compliance with respective provisions of the New Civil Code and Business Corporations
Act), as well as so called “employed or delegated” managers – either individuals or members
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of different internal executive bodies and committees (who are performing their obligations in
compliance with respective provisions of the Czech Labour Code15).
Picture 1: A brief overview of various types of management liability under Czech laws
Picture 2: A brief overview of various practical tools that may either fully eliminate
and/or somewhat limit the management liability
15 Available at: https://www.mpsv.cz/files/clanky/3221/Labour_Code_2012.pdf.
2. Duty to act with due managerial care
Section 159 (1) of the New Civil Code stipulates the following: “Who accepts an office as a
member of an elected body, he/she undertakes to execute the office with necessary loyalty and
required knowledge and care. It is understood that a person who is not able to act with due
managerial care, although he/she must have known it when accepting the office or when
executing it, and does not draw consequences for himself/herself, acts carelessly.” To sum up,
this is how the Czech Republic legally defines the so called „standard of quality of care“. A
conflict with due managerial care may occur, however, a member of an elected body must react
to the situation without undue delay, i.e. to inform the concerned company (corporation)
about the conflict, to propose appropriate solution, to ensure an external consultant or other
professional, to delegate the activity to a third party etc. Therefore the law does not
automatically assume that such a situation is defective, however, it emphasizes the fact that a
member of an elected body must properly solve it. Thus the due managerial care is observed
also by such a member of an elected body of the company who evaluates his/her own
inadequacy and simultaneously finds a solution how to remedy the situation.
The law imposes a duty of loyalty upon the members of elected bodies of Czech business
corporations (supervisory, statutory and potentially also other corporate bodies). This means
such conduct that is in the interest of the corporation concerned. It is therefore expected that a
member of an elected body never pursues his/her own interest (or interest of another person) if
he/she would endanger the interests of the corporation concerned thereby.
1. Legal assessment of the duty to act with due managerial care
Section 52 (1) of the Business Corporations Act (BCA) stipulates the following: “When
assessing whether a member of the body acted with due managerial care, always the care that
would be taken in a similar situation by another reasonably careful person if he/she was a
member of a similar body of a business corporation will be considered.” The question on
whether a particular member of an elected body of a specific business corporation acted in a
particular case with due managerial care or not is being assessed with regards to what kind
of care in a similar situation would be taken by another reasonably careful person (not
with regards to what level of care is typical for a particular member of the body of the company),
i.e. an objective approach always applies.
12.2.2 Business judgement rule
In addition to the above, the section 51 (1) of the Business Corporations Act further introduces
the so called Business Judgement Rule: “A person acts carefully and with necessary
knowledge if, when making a business decision, this person presumes in good faith that he/she
acts on an informed basis and in the defendable interest of a business corporation; this will not
apply if such a decision is not made with the necessary loyalty.”
What is, however, the purpose of such institute? The duty to act carefully and loyally may,
at least at the first glance, look so rigidly that some members of elected bodies could be afraid
to make any risky business decisions. Therefore, the BCA introduces a business judgment
rule which offers those members of elected bodies, who act within the limits and under the
conditions laid down by the law, some form of a protection shield. A member of the elected
body is not responsible for a bad decision if he/she comes to such decision in a proper
manner, therefore, as stated above, loyally, in justifiable interests of the business
corporation and being well-informed. According to the Czech legislation, the burden of
proof is borne by the member concerned (i.e. he/she must prove that he/she had the necessary
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information which he/she properly evaluated, and subsequent decision was made in the interests
of the corporation, thus he/she has to prove that the loyalty was not breached).
This rule shall be seen as a practical reaction of the Czech legislation to the fact that the
members of elected bodies often have to act so as not to cause damage, but at the same time
so that to maximize profit of the corporation, whereby they expose themselves to certain
commercial and business risks.
However, it is also necessary to think about the practice of the Czech justice in this context.
In connection with the business judgment rule, the courts should decide not only on the basis
of the law, but they should also take into account certain economic aspects of individual cases.
To simplify their decision-making process, the law stipulates that the business judgment rule
test has three elements; the courts should therefore examine whether a member of an elected
body:
(1) Acted in good faith;
(2) Could reasonably assume that he/she acted on informed basis; and
(3) Could reasonably believe that he/she acted in the honest belief that the action taken was in
the best interest of the company.
The aim of the business judgment rule is therefore to review how the member has acted, not
what the result of the act was.
Picture 3: A summary of key legal elements of the due managerial care – both from
the NCC and also from the BCA perspective
12.2.3 Consequences of a breach of the duty to act with due managerial care
Remember that breaking the duty to act with due managerial care may have severe legal
consequences:
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• Surrender of benefit – i.e. an obligation of a person who acts in contradiction with the rules
of due managerial care to surrender to the company the benefit, which he/she obtained in
connection with his/her acting. If such surrender is not possible, the obliged person must
compensate the benefit in cash.
• Liability for damage – according to former legislation, no fault of a member of the elected
body of a business corporation was required to claim responsibility of such member for
caused damage, thus the so-called objective responsibility was concerned. However, the
NCC turns over this philosophy and stipulates the duty of a member of an elected body to
compensate damage caused by a breach of his/her statutory duty as follows: a wrongdoer is
responsible for violation of the legal obligation only if it is caused by his/her fault, i.e.
subjective liability applies. The burden of proof concerning the absence of fault is borne
by the member himself/herself, not by the company.
• Disqualification from the exercise of the office as per the court’s decision – a member
of the elected body may be disqualified from the exercise of his/her office, both for serious
and repeated breach of the duty to act with due managerial care and for such conduct and
performance of the office which brought the corporation concerned into bankruptcy.
Besides, if the business corporation is not fully satisfied with the performance of the office
by respective member, it may recall him. In addition, it is also possible for the members to
resign from their function, however, the BCA states that this can only be done when the time
is appropriate.
12.2.4 Remuneration of managers and agreement on office performance
It is solely an internal matter of a business corporation concerned how and when it will
remunerate its members. The Czech laws stipulate only the rules for related monitoring. The
rules for remunerating members of elected bodies are viewed as one of the most important
elements of monitoring the performance of their duties. Therefore, the law does not care at
all about what, how and when members of elected bodies receive the remuneration, it is in the
interest of the law that the remuneration is made in a fully transparent manner. In case of
capital Czech business companies (corporations), it is therefore necessary that any remuneration
is always approved by the general meeting, otherwise it cannot be provided.
The position of a member of an elected body may be created in different manners, however,
both the codification and the previous legislation clearly prefer contractual arrangements, i.e.
the situation where the relationship between a member of an elected body and the business
corporation is regulated by an agreement on the office performance. If the agreement on the
office performance is not entered into it does not mean that the position of a member of an
elected body is not created; in such a case, the new legislation offers alternative solution (a
supporting provision in the BCA referring to adequate application of the provisions of the NCC
on the mandate agreement would apply).
The new legislation treats the remuneration of members of elected bodies as a tool used to
increase their motivation for proper conduct when it introduces the possibility of refunding
the remuneration paid in the past as a penalty for failure in the performance of their
duties. An example may be an obligation of a director, who did not carry out all necessary and
reasonably foreseeable things to prevent impending bankruptcy of a joint stock company of
which he/she knew or should have or could have known (a breach of duty to act with due
managerial care), to return the benefits derived from the agreement on the office performance
for the period up to two years before the decision on the company's bankruptcy becomes final.
This sanction does not – logically – apply to crisis management.
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12.2.5 A brief excursion into concern law
A new legal regulation of concern law (section 71 and following of the BCA) added a new level
of influence, so called “interference” (apart from “controls” and “concerns”):
1. Anyone who influences (directly or indirectly) business conduct of a corporation to its harm
shall compensate such harm, unless he/she proofs that he/she could have assumed in good
faith and reasonably that he/she is acting informed and in defendable interest of influenced
person.
2. Such harm must be compensated before the end of fiscal year in which the harm arose
otherwise such harm needs to be compensated to shareholders.
12.3 Compliance programs
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12.3.1 Keith Packer: “You may be held liable for what your people do.”
Task: Re-read the story about Keith Pecker below and think about other than competition law
related consequences.
Do you still remember the story about Keith Packer?
“During my eight-month sentence – 241 days and nights, and believe me, I counted every single one
of them – I had a lot of time to reflect on how a typical British executive, balancing the demands of a
challenging business life and a full and happy personal life, ended up in prison. To go to prison in
the US and pay a $20,000 fine was something I never imagined in my worst nightmares. The closest
I ever thought I would get to breaking the law would be the odd speeding ticket or parking fine.”
Keith Packer, Former Commercial General Manager at British Airways World Cargo
(source: http://www.legalweek.com/legal-week/analysis/2110631/cautionary-tale-exec-
consequences-competition-law-infringement)
What happened?
• 11 cargo airlines concluded a price fixing cartel between 1996-2006 colluding to inflate fuel
surcharges (British Airways, Air France – KLM, SAS, Air Canada, Qantas and others).
• Number of dawn raids took place in February 2006 around the world after Lufthansa, as one
of the cartelists, “blew the whistle”.
• Since the fuel surcharge also applied to flights departing from the U.S., the U.S. state
authorities investigated the case as well.
• To prevent his extradition to criminal prosecution in the U.S., a 10 year sentence and USD 1
million penalty, Keith Packer decided to cooperate with the investigators and accepted a plea
offer of 8 months in jail and a fine of USD 20,000.
“If ethics are poor at the top, that behaviour is copied down through the organization.”
Robert Noyce
What were the consequences?
• In the US, the Department of Justice charged 18 airlines and several executives over USD
1.6 billion.
• The EC fined 11 airlines almost EUR 800 million (highest fine of EUR 340 million to Air
France – KLM, EUR 104 million to BA).
• Keith Packer accepted a plea offer of 8 months in prison in Pensacola and a fine of USD
20,000.
• Several customers who paid the fuel surcharges claimed their damages under the private law
procedures.
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What would you say that this story means for us – from the compliance and business ethics
perspective? Not sure? Then have a look at the summary below.
A. There really is a personal liability for a business infringement
The concept of personal liability of employees and managers derives directly from the Czech
Labour Code, the New Civil Code and the Business Corporations Act. Personal liability is,
however, stipulated in other legislations, as well, such as the Czech Act on Personal Data
Protection (fines up to CZK 100.000 for an individual, meaning also an employee), or the Czech
Act on Protection of Commercial Competition (the offence of infringement of competition law
rules with imprisonment up to 8 years).
B. The punishment does not avoid the top managers
Even a high managerial position does not protect the concerned individual from his/her
punishment, quite the contrary. Managers’ liability is not derived from their acting only, i.e.
from the specific violation, but also from the fact how he/she fought for the infringement not to
occur, i.e. typically what preventive measures have been considered in order to prevent a
breach of binding rules. The greater the role, the higher the responsibility.
C. The punishment may follow even for misconduct of someone else
As in case of Keith Packer, the punishment may follow for the manager who did not committed
the infringement by himself/herself directly. Such manager is, from the legal perspective,
responsible for activities of his/her subordinates, i.e. for cases when he/she did not timely
intervene, did not involve the lawyers and therefore did not prevent from the violation of
respective laws.
2. So how does compliance help and why business ethics matter?
1. What is compliance?
Compliance means knowing and following the relevant laws, rules, principles, standards
and procedures. It is making sure that the organizations adhere to all applicable legal and
other requirements. Compliance must be seen and understood as a detailed and complex
process. For any particular situation one must be aware of all potentially applicable laws and
regulations (such as international and local laws and also internal company-instituted rules). As
this is not a possibility (i.e. something we would call “nice-to-have”) but a strict obligation, a
strong compliance program is absolutely necessary to protect the organizations both internally
and externally. Ignorance of the law is no excuse. A legal and/or natural person cannot escape
a criminal charge or civil liability by claiming that he or she did not realize that the law was
broken. The role of compliance is therefore (1) making sure that people know the rules
beforehand; as well as (2) helping to ensure that they continuously follow them.
However, knowing the law and following it is only one side of compliance. It is obvious that
businesses also have to know where and to what it applies. Once they have this information,
they must implement it into an effective compliance program. To get the word “effective”
out of its theoretical meaning, it is highly recommended that the organizations hire experienced
compliance professionals, issue detailed policies and guidance, institute and roll out respective
training and promote all other aspects of the compliance program. The aim of these
compliance activities is to spread the knowledge to all who need it. It should be highlighted that
the above described process must be continuous. The compliance program is the heart of
compliance putting all of the elements above into effect. To sum up, true compliance should go
beyond the borders of knowing and following the law, i.e. beyond the minimum requirements.
In other words, simply following the law so that one does not get into trouble is not full
compliance. Effective compliance develops and sustains a culture based on values, integrity
and accountability; it ensures consistency of actions to lessen or eliminate the opportunities for
harm from criminal conduct or other compliance failures. It is therefore very important that true
compliance involves the ongoing commitment from senior executives in the organization to
promote ethical conduct and compliance with the law. “Leading by example and establishing
the tone at the top set the stage for every other element of compliance” (Biegelman, 2008, p. 3
– see below). Simply said, human beings mirror their leaders.
There are two significant obstacles that might occur in terms of compliance program’s
implementation. The first one can be described as “using compliance as an excuse”. Some
executives might tend to use compliance program to mask their own negligence or even
wrongdoing. It must be highlighted that this attitude is even more dangerous than having no
compliance program at all. That is because it gives shareholders, employees, vendors and also
the public a false belief that the organization cares about following the legal and other
requirements when, in fact, all it wants is just to misguide others into believing it. Plenty of
organizations that faced corporate scandals had, for example, implemented the code of conduct.
But, in the end, these codes showed up to be nothing more than empty words. The second
obstacle which might go in hand with compliance program’s implementation is when the
program itself is not sufficiently supported by skilled personnel, meaningful awareness,
management engagement etc. This is not only risky from the perspective of all stakeholders
concerned, but also counterproductive. True compliance means that one believes in what one
is doing day in and day out. The organizations cannot have effective compliance programs
without that. If their management believes in compliance and reinforces it by its actions, people
will follow its lead. An under-funded and unsupported program is predestined to fail. Without
sufficient support from the organization and its management, a compliance program cannot
fulfil its objectives of changing and influencing employees’ behaviour. To sum up, true
compliance requires direct input by company leadership and the key support of a qualified
compliance officer running a reliable compliance department providing the organization
with an appropriate direction.
12.3.2.2 A brief history of compliance
What is today known as corporate compliance is the result of many years of growth and
evolution. Various laws and rules covering businesses have been developed over the years into
a more formal and complex structure. Such regulation started slowly in the 19th century as a
response to several individual scandals. By the 1960s, with increasing complexity in both the
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business and regulatory areas, the foundations of modern compliance began to emerge. This
trend continued in 1970s and 1980s, until it reached a tipping point with the release of the USSC
Organizational Guidelines16. Although many compliance programs existed well before these
Guidelines came into force, they gave them a major push into the mainstream of business. The
compliance framework has further been developed with the passage of other well-known laws
and regulations, such as the U.S. Sarbanes-Oxley Act from 2002 or UK Bribery Act from
2010. The above described evolution resulted into increased importance and role of compliance
officers in the 21st century.
In many ways, the history and development of business parallels the history of scandal.
This idea could be described as an ongoing tug of war between regulators who seek to reign in
corporate excess and business that resists regulation in order to achieve greater flexibility and
innovation. Particularly, regulators have stepped in during the wake of massive corporate
scandals. As these scandals have been extremely devastating, they have forced lawmakers to
step in. This pattern lies at the heart of majority of related corporate governance regulations.
Let’s consider the American corporate regulation as an example. Skeel (2005) concludes that it
has consisted of periodic, dramatic regulatory interventions by federal lawmakers after a major
scandal, together with more nuanced ongoing regulation by the states. In the aftermath of these
scandals, the public outrage and calls for justice transform into broad support for tangible
reform that would otherwise be impossible had the scandals not occurred.
Compliance has always been around, in some form or another, since the establishment of
organized business activities and commerce. Walsh and Pyrich (1995) propose that selfregulation
of business stretches back to Middle Age merchant and craft guilds setting business
standards for themselves. Businesses have adopted their own codes of conduct, often in the
wake of other companies´ scandals. However, these types of self-imposed regulations were
voluntary, informal, and relatively simple. As regulation grew in the middle of the 20th century,
some companies had to find new ways to make sure they followed the law. They needed a more
formal and structured way to deal with the complexity of modern regulation. Most authors
agree on the fact that modern compliance programs were first created after the electricity
industry’s antitrust scandal in the early 1960s. “A widespread bid-rigging and price-fixing
conspiracy involving electrical equipment manufacturers such as General Electric and
Westinghouse resulted in dozens of individuals and corporations convicted of antitrust
violation. The enormity of the case and related publicity of the first prison sentences handed
down in the 70-year history of the Sherman Antitrust Act spurred the development of antitrust
compliance codes of conduct and programs. In this period, companies in the most heavily and
complexly regulated industries began internal compliance efforts, particularly involving the
above-mentioned antitrust issues. With further scandal, these compliance efforts would start to
reach other industries” (Biegelman, 2008, pp. 49-50 – see below). It is therefore obvious that
the public outrage combined with governmental pressure encouraged businesses to adopt
much-needed reforms. Last but not least example underlining the above introduced idea is the
enactment of U.S. Foreign Corrupt Practices Act (“FCPA”). The FCPA has been enacted
shortly after the Watergate investigation (conducted in 1977) which discovered that companies
were paying bribes to foreign and domestic officials using funds maintained “off the accounting
books”. Therefore, the Foreign Corrupt Practices Act makes it crime for American companies,
as well as individuals and organizations acting on their behalf, to bribe any foreign government
official in return for assistance in obtaining, retaining or directing business.
16 Available at: https://www.ussc.gov/guidelines/organizational-guidelines.
As mentioned in the introduction, the United States Sentencing Commission issued several
organizational guidelines recommending minimum requirements for an effective
compliance program. As the Sentencing Guidelines for Organizations focus (among other
measures) on prevention and deterrence of law violations that include self-reporting and
acceptance of responsibility, they gave companies a strong incentive to establish and maintain
truly effective compliance programs, either to receive a lessened sentence or mandated as part
of probation. The original seven steps to achieve effective compliance introduced by USSC in
1991 have been significantly enhanced by 2004 FSGO Amendments (more details below).
12.3.2.3 Compliance challenges and objectives
Ideally, a compliance program should be both industry-specific and unique. It should be
tailored to fit the requirements of the organization concerned, its needs and the overall
compliance requirements of its particular industry, as well as to reflect the compliance
requirements imposed on all organizations and the laws they must follow. Each organization
must therefore ensure that its compliance program is getting the individualized attention it
needs to enhance the corporate compliance culture. The focus on individuality rather than on
image of the compliance program itself produces great benefits. A strong compliance program
can create better employee productivity and morale, higher profits and a stronger
reputation among customers and investors. It can also help to catch problems before they
reach the level where they can hurt the company and its stock price. Least but not last, with a
strong and effective compliance program, an organization can have a more beneficial position
when dealing with state prosecutors should any problems arise.
Running an ethical organization that places its values on compliance is not simply a good idea;
it also makes a good business sense. Over the past years, a lot has been written about the
importance of business ethics, the damage that can be caused by compliance scandals and
about related legal requirements and benefits. However, less has been published about how an
ethical business with strong corporate governance outperforms organizations that do not focus
on ethics. Senior executives can damage their business and its future if they do not properly
value ethics. Copeland (2007) points out that too many corporate executives regard an ethics
program as an expense that adds nothing to a company’s bottom line. Even more disturbing,
some executives fear that an emphasis on business ethics could put their company at a
competitive disadvantage. They are unconvinced that ethics and profits are reconcilable.
Enlightened business leaders, however, know that building an ethical business culture is a
powerful means of maximizing shareholder value and increasing business profits. In the end,
ethics increases the bottom line. The strong link between corporate management’s public
commitment to ethics and the corporation’s financial performance has been borne out by
numerous studies. According to Verschoor (2004) well managed companies that take their
ethical, social, and environmental responsibilities seriously have stronger long-term financial
performance than the remaining companies in the S&P 500 Index.
The challenges to developing an ethical culture are therefore more than great. In the first place,
cultural change takes time. Culture cannot happen overnight. The compliance and ethical
values might be possibly written very quickly, but culture is not imbedded until everyone acts
on those values. In order to achieve a successful and lasting compliance culture, the program
has to be more than simply using a check-the-box and it-is-done approach. It is the
management´s responsibility to drive a culture of true compliance and build it element by
element until all employees understand every single component of the compliance program.
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12.3.2.4 Warning signs of compliance and ethics failures
An excellent overview of several major indicators of ethical collapse has been identified by
Jennings (2006). These seven signs are as follows: (1) the pressure to maintain the business
numbers; (2) a culture of fear and silence; (3) a “bigger than life” CEO and awe-struck direct
reports that will not go against their leader; (4) a weak board of directors; (5) a practice of
conflicts of interest; (6) a belief that the organization is above the law; and (7) that “goodness
in some areas” such as corporate giving “stones for evil in others”. Although these seven signs
are not a guarantee of an ethical collapse, they can definitely be used as potential announcers
of ethical challenges.
12.3.2.5 Ethical culture, integrity and proper business conduct
The major compliance failures of recent years resulted in significant changes to corporate lives
and cultures. Suddenly, integrity and accountability are considered as key elements for every
single organization. Senior executives and other leaders are constantly confronted with the dayto-day
realities of business compliance. They must ensure compliance with the organizations
internal rules and policies. In addition, all organizations must follow respective local and
sometimes also international laws, and, moreover, in most of the legal orders there is usually a
stricter regulation being applied to publicly held businesses. Some of these regulations even
mandate the creation of compliance programs, other constitute stern restrictions from antibribery
rules to free trade provisions. A flagship among these requirements is the idea of ethics.
Ethics should lie at the heart of every corporate governance requirement.
Ethics include integrity and proper business conduct. It refers to standards and values by
which an individual or an organization behaves and interacts with others. Aristotle (1962)
argued that moral behaviour is acquired by habituation and that without question moral
behaviour is good. This principle has not changed despite years. Ethics and compliance are
clearly on the minds of senior executives and leaders, as well as investors, public and
government. Thanks to many corporate scandals of the past decades, business ethics has
become a hot topic. However, despite the increased awareness given to ethics and compliance,
the problem has not been solved. Ethics and ethical behaviour are not the things that could be
created and attained merely through corporate expenditure. They require a far deeper
commitment that can only be achieved through time, effort and yes, also expenditure. Quality
matters here far more than quantity. A commitment to ethical conduct cannot be accomplished
by simply initiating a compliance program and then just checking the box that the process is
complete. Building an ethical culture takes time. Integrity and character bring out the best in
people and are therefore critical components of ethics and compliance. “Yet, human beings are
not perfect creatures and tend to falter from time to time. The importance of ethical conduct
needs to be nurtured, reinforced, and repeated over and over again lest people forget and stray
from the course” (Biegelman, 2008, p. 6 – see below). Therefore, building and maintaining an
effective compliance program requires smart decisions that are necessary to achieve true
compliance over the long term.
Ethics can also bring benefits in other areas, such as hiring and retaining top quality
employees. Unethical behaviour, as indicated in the previous chapter, not only impacts a
company´s bottom line, but it also impacts its workforce. Such a behaviour and attitude affect
current employees as well as the company´s ability to attract qualified staff. A study conducted
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by the consulting company LRN17 provides evidence that links a company´s ability to foster an
ethical corporate culture with an increased ability to attract, retain and ensure productivity
among U.S. employees. Some of the study´s findings conclude that: (1) 94 % of employees say
it is critical that they work for an ethical company; (2) more than one third of respondents
reported leaving their job for ethical reasons; (3) 56 % of respondents say their employer
embraces ethics and corporate values in everything it does; (4) 30 % of employees say their
company merely toes the line by following the law and company policies; and finally (5) 5 %
say they work at a company where they do what they are told, are not encouraged to ask
questions about what is right or wrong, or they often see management and peers acting in
questionable ways. To sum up, employees are very sensitive to business ethics. They are
intensely aware of their organization´s culture and pay attention to the tone set from the top and
around them. Unethical behaviour has a strong effect on employee morale and distracts
employees from the company´s business. One in four employees reported seeing unethical or
even illegal behaviour in the organization they work with; of those who saw unethical
behaviour, 89 % said it affected them.
12.3.2.6 Establishing an effective compliance program
Previously, a documented and reasonably functional compliance program was adequate. Today,
this is not enough. The compliance program must also be effective. An effective program
should, at a minimum, include a compliance officer, an employee training program, internal
policies, procedures and controls, and an independent audit function to test it. Such a
program should be understood as living efforts that need to continually evolve with time and
circumstances. To be effective, however, one needs to combine compliance with ethics.
Employees need to know more than the “dos” and “do not’s” of compliance; they should believe
in the organization´s values and judge their conduct and decisions according to them. Ethical
conduct goes beyond the perception and definition of compliance and deciding between right
or wrong. Ethical conduct means choosing the best and most ethical course of conduct by
applying the organization´s values. Fortunately, such a conduct can be taught to most
employees regardless of a lack of prior ethics training.
A commonly recommended best practice for public and private companies to establish a
meaningful compliance program is to design it according to the seven requirements outlined in
the FSGO. Following the FSGO recommendations, however, does not ensure an effective
ethics and compliance program. It only means that the organization have met the minimum
required components and, as already mentioned, effective compliance requires more than a
“bare bones” program. The “seven steps plan” for establishing a compliance and ethics program
as described in the FSGO therefore serves as a pure backbone which should further be
developed. The plan requires the organizations to take the following actions: (1) establish
standards of conduct reasonably capable of reducing the likelihood of criminal conduct; (2)
assign overall responsibility for compliance to a specific high-level officer; (3) do not delegate
discretionary authority to individuals with a history of illegal conduct or other conduct
inconsistent with a compliance program; (4) communicate standards and procedures to
employees and agents; (5) establish monitoring, auditing and reporting systems; (6) enforce
17 New Research Indicates Ethical Corporate Cultures Impact the Ability to Attract, Retain, and Ensure
Productivity among U.S. Workers, LRN, 3 August 2006, retrieved from
www.lrn.com/about_lrn/media_room/press_releases/263. LRN specializes in legal, compliance, ethics and
governance solutions.
standards with discipline and incentives; and finally (7) take reasonable steps to respond to
discovered criminal conduct.
• Compliance standards and procedures
Each organization shall establish relevant standards and procedures to prevent and detect
criminal conduct and ensure compliance with the law. The cornerstone of those standards
and procedures is usually an ethics code called code of conduct. This code is an integral
component of the compliance program pointing out on organizations values. Following
criteria should be taken into account when assessing the codes effectiveness: public
availability; tone at the top; readability and tone; non-retaliation; commitment to
stakeholders; risk topics; learning aids; presentation and style etc. The corporate ethics code
should always fit the organization. Therefore, it might be very advantageous to involve the
organizations employees into assessing it. The biggest mistake is to simply “copy-paste”
another organization´s code and substitute its heading with the name of the organization.
• Organizational leadership and a culture of compliance
The organizations governing authority (usually represented by the CEO, CFO and the board
of directors) should be knowledgeable about the content and operations of the compliance
and ethics program. In addition, the governing authority should exercise reasonable
oversight with respect to the implementation and also effectiveness of the program. Specific
individual(s) within the highest levels of the organization shall be assigned overall
responsibility for the compliance program. Other individual(s) within the organization shall
be delegated day-to-day operational responsibility for the program. The individual(s) with
operational responsibility shall report periodically to high-level personnel and to the
governing authority. To carry out such responsibility, the individual(s) shall be given
adequate resources, appropriate authority and also direct access to the governing body.
• Reasonable efforts to exclude prohibited persons
“The organization shall use reasonable efforts not to include within the substantial authority
personnel who the organization knew, or should have known through the exercise of due
diligence, have engaged in illegal activities or other conduct inconsistent with an effective
compliance and ethics program” (Biegelman, 2008, p. 169 – see below).
• Training and communication
The organization should take reasonable steps to communicate regularly and in a practical
manner its standards and procedures and other important elements of the compliance
program by conducting an effective training (preferably the face-to-face one) and otherwise
disseminating information appropriate to such individuals respective roles and
responsibilities. Training shall be provided to members of the governing authority, other
high-level leaders, employees and also the organization’s agents.
• Monitoring, auditing and evaluating program´s effectiveness
The organization shall take reasonable steps to evaluate the program’s effectiveness. It shall
also take reasonable steps to have and publicize a system, which may include mechanisms
that allow for anonymity or confidentiality, where the organization’s employees and agents
may report or seek guidance regarding potential or actual criminal conduct without fear of
retaliation, such as ombudspersons or hotlines. As Biegelman (2008) highlights, compliance
will always begin and end with people. That includes everyone from the CEO to the newest
intern. His words emphasis that people who are willing to speak up and be heard, even when
it is culturally not popular to do so, are extremely valuable and necessary in terms of an
effective compliance and ethics program. Senior executives must therefore ensure a
corporate culture where employees are not afraid to “blow the whistle” and report
wrongdoing and other potential violations of business conduct they are aware of.
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A common mistake that a compliance program can make is to focus too much on the “easy”
things and too little on the “hard” ones. It might be easy to do the training, prepare and roll
out a code of conduct, institute an external hotline, talk up the culture and tone from the top;
however, it is much harder to beat areas such as discipline, audits, monitoring, incentives
and the fact that the organization needs so called corporate cops.
• Performance incentives and disciplinary actions
The organization’s compliance program shall be promoted and enforced consistently within
the organization. This can be done through appropriate incentives to perform in accordance
with the program, and also through disciplinary measures for engaging in criminal conduct
and for failing to take reasonable steps to prevent or detect such a conduct.
• Response to criminal conduct and remedial action plan
After a criminal conduct has been revealed, the organization shall take reasonable steps to
respond appropriately to the criminal conduct and to prevent further similar conduct,
including making any necessary modifications to the organization’s compliance program.
The organization shall periodically assess the risk of criminal conduct and shall take
appropriate steps to design, implement or modify each compliance requirement to reduce the
risk of criminal conduct identified through the above mentioned risk assessment.
12.3.2.7 International compliance
It should be highlighted that in today’s corporate world compliance goes beyond the
geographical borders. This must be understood as a side effect of globalization of business.
International compliance is therefore a necessity. The global nature of organizations with
subsidiaries, affiliates and vendors all over the world provide great opportunity but also great
risk. Both U.S. and UK laws reach all around the world and cover the actions of “their”
corporations and employees no matter where they are. Illegal actions relating to the FCPA or
the UK Bribery Act can have major implications. There are severe penalties for those who
violate the anti-bribery provisions of those acts. Third party liability is another major concern
as organizations are liable for the actions of people they hire, by their direct employees or
agents. The solution is a strong global compliance program that ensures everyone knows what
the rules are, what is going on and to keep track of who is doing what (particularly on the local
level).
4. Criminal liability of Czech legal entities
1. Introduction
Criminal liability of legal entities became a reality here in the Czech Republic already on
1 January 2012. Generally, a criminal act can be committed only by an individual (natural
person). Legal entity, a sort of theoretical legal structure, never acts by itself, i.e. it can always
act only through individuals predicted by the law. However, over time it has been demonstrated
in the corporate (business) practice that it is not always fair and adequate to “punish” only
natural persons for committed criminal acts and therefore in 2012 a concept of criminal liability
of legal entities was newly introduced into the Czech legal order.
Thus the basic principle of the criminal liability of legal entities is the possibility to hold liable
the legal entity concerned, under certain circumstances, for the conduct committed by a
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particular individual. However, this is generally possible only if the individual acted on
behalf, for or in the interest the legal entity concerned or in the framework of its activities. In
this context, the updated Act on Criminal Liability of Legal Entities (hereinafter also
“ACLLE”) contains two key changes. They fundamentally complete the original concept of the
criminal liability of legal entities in the Czech Republic. Firstly, the list of criminal acts for
which a legal entity may be held liable is substantially extended; secondly, the entire possibility
of a legal entity to exculpate itself from the criminal liability has been included in the ACLLE.
Section 7 of the ACLLE previously included the so called positive list of criminal acts for which
a legal entity may hold criminal liability. However, the discussed Amendment has changed the
positive list to a negative one. Thus from 1 December 2016 a legal entity may commit any
criminal act except for those explicitly listed in the amended wording of section 7 of the
ACLLE. From the point of view of effects of the Amendment of the ACLLE on the activity of
individual entrepreneurs, however, the introduction of a mechanism allowing legal entities to
entirely exculpate themselves from the criminal liability is more significant. The Amendment
of the ACLLE introduces new section 8 subsection 5 of the ACLLE stipulating that: “The legal
entity will be relieved of criminal liability (...) if it made every effort that could be reasonably
required to protect committing a wrongful act (...).” The used wording may be seemed a bit
vague at first sight. Its content will become fully clear only after practice of next few years.
Nevertheless, in terms of the possibility of interpreting the ACLLE, this statement is quite clear
– namely the investigative, prosecuting and adjudicating bodies must consider what is the
standpoint of the particular entrepreneur concerning possible criminal activity, i.e. what specific
mechanisms have been introduced by them in their internal environment. A properly
functioning internal compliance program of the particular entrepreneur may constitute
such mechanism.
Following the above analysed changes it can thus be recommended to Czech entrepreneurs
to take every appropriate preventive measures – as a reaction to the effectiveness of the
ACLLE, especially to introduce or review their internal compliance programs corresponding
to the applicable market standards. It may include, for example, the following measures:
• Necessity to identify and assess appropriate risk areas of the entrepreneur concerned
Firstly, all risk areas and relationships which the entrepreneur usually enters into should be
thoroughly assessed, and in this context all criminal acts that could even potentially concern
the entrepreneur in this regard in theory, taking into account the specific business or other
activities, should be analysed and appropriately evaluated.
• Updating the existing internal compliance program of the entrepreneur concerned
In the light of individual specifics of the entrepreneur concerned, the system of internal
regulations should be revised and customized to the presented legislative changes;
subsequently, a system of other internal compliance mechanisms should be set up so as to
ensure not only the effective running of the business establishments but also adequate
protection against the risks of potential criminal liability (it usually involves a combination
of preventive, detective and sanctioning compliance mechanisms); and last but not least, to
introduce regular, professional and above all practical compliance training courses for all
persons acting in the interest and/or for the entrepreneur concerned (not only its internal
employees, but also selected third parties).
It can therefore be expected that greater emphasis will be placed on internal regulations,
control procedures and other compliance mechanisms of Czech entrepreneurs (business
corporations or legal entities in general). This is also confirmed by the Explanatory
Memorandum which states at the point of “Impact on Businesses Entities” that: “Higher costs
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can be expected with the extension of compliance programs.” Since the amended wording of
the ACLLE places great emphasis on prevention, it can be recommended in this regard to the
Czech business practice that entrepreneurs concerned conduct thorough audit of their internal
regulations and related compliance and control mechanisms, i.e. an audit of their internal
compliance programs in general. They should meet the recommended wording of the
ACLLE, especially in the sense that individual legal entities will be able to demonstrate that in
the framework of the discussed criminal prevention or repression they have implemented
everything what can be “fairly required”. Specific contents, or individual elements and areas of
interest, of the particular internal compliance program will be assessed in accordance with the
above specified, primarily depending on the particular entrepreneur, its market position, area of
business, and many other factors.
12.4.2 A more detailed analysis of the ACLLE from the compliance perspective
A Czech legal entity may exculpate itself from the criminal liability if it proves that it acted
with due care and iligence. The minimum for the foregoing is the implementation of the
relevant statutory provisions and the measures that may be reasonably required, i.e. especially
preventive measures and reactive measures.
In the context of presented (amended) institute of the criminal liability of legal entities
individual entrepreneurs may be asking the following questions: “How to prevent the
situation when an excess of an individual may have criminal impact on an innocent legal
entity?” “Is implementation and administration of internal compliance programs
sufficient to prevent it?” “What areas of interest and specific elements the internal
compliance programs should consist of?” Here it is appropriate to emphasize again that
preventing or eliminating the risks associated with the criminal liability of legal entities cannot
be interpreted as a “mere” acceptance of the recommended tools, regulations and rules. So as
to effectively protect the legal entity it is necessary to build a comprehensive and interlinked
(robust) system of compliance with the rules, regulations and specific procedures or processes
of a legal entity concerned. Such compliance program must be fully adapted to specific needs
and requirements of the particular legal entity, including the procedure for its initial
implementation. It is therefore impossible to present the only one generally binding internal
compliance program that would reflect very specific needs of a wide range of Czech
entrepreneurs. However, during its implementation and subsequent (interim) administration the
following recommendations and expected features can serve as guidance:
a) Full support from the legal entity´s management (so called “tone at the top”)
An important element of any internal compliance program is the full support of mid, senior or
statutory management of the respective entrepreneur, i.e. consistent honouring of the “leading
by example principle”. It applies that such support should be fully transparent and, above all,
permanent. The above described objective can be achieved by several practical methods, e.g. a
personal letter of the chairman or another member of the statutory body of the entrepreneur
addressed to all its employees and emphasizing the importance and sense of observance of rules,
regulations and specific procedures or processes of the internal compliance program as a whole
and its individual components and areas of interest, and incorporation of fundamental principles
and rules of the internal compliance program directly into the foundational legal actions,
whereby public declaration is made about interest of the legal entity to observe, when
performing the relevant business or other activities, all applicable legal, ethical and other rules
or specific requirements. In addition, the top management of legal entities should actively
promote not only the principles and rules or specific elements and areas of interest of the
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compliance program, but also support the employee or employees (departments) who are in
charge of the implementation and ongoing management thereof. It should also be added that
the established compliance rules, regulations, procedures and specific processes are always
observed by all interested employees and third parties, without exception and without regards
to their specific position within the hierarchy of the legal entity concerned. Observance of legal,
internal and other regulations of the particular entrepreneur should be a common and regular
issue at all levels of management of the activities of the entity concerned. Internal compliance
program of the entrepreneur should therefore not tolerate other than anticipated and approved
exceptions specified in internal rules and procedures; this applies to all its areas of interest or
specific elements.
b) Analysis and rigorous evaluation of the applicable compliance and other business risks,
and adoption of appropriate rules and measures for their elimination or reduction
(treatment)
This element of the internal compliance programs of various entrepreneurs can be determined
as a key element. Only on the basis of a properly performed analysis of applicable compliance
and other business risks and their subsequent evaluation, the top management of a legal entity
concerned is able to decide on individual (specific) areas of interest and other elements of the
management and controlling (compliance) program in such form that this program will be fully
adapted to corresponding internal and external legal and other influences. In relation to their
subject of business (activity) entrepreneurs should regularly analyse relevant legal and other
regulations and ethical standards and thereby identify their key areas of risk, relationships and
acting. On this basis they adopt specific measures, and the given measures would always be
„tailor-made” in maximum possible form. The primary objective of these measures is to clearly
identify and organize the structure and competence of selected employees, and the associated
responsibilities of teams or individuals. Minimum response of the respective entrepreneur to
most applicable compliance and other business risks should consist in creation of a
comprehensive system of internal procedures, processes, regulations and other rules, settings
of related roles and responsibilities, and especially regular trainings of and communications to
all employees and selected third parties of the legal entity concerned, including its top
executives (statutory management).
c) A clear, transparent, internally coherent and periodically reviewed system of internal
rules, procedures and processes of the legal entity concerned
In the light of the obligations resulting from the ACLLE and related measures, every
entrepreneur should not only devote appropriate efforts to the creation and subsequent
(ongoing) updating and maintaining of a comprehensive and coherent system of its internal
regulations, procedures and specific processes. The primary objective of such a system is to
inform employees, selected third parties and the top management of the legal entity about all
(internal) rules and thus to ensure legal and ethical business or other activity, i.e. such activity
that is in full compliance with applicable legal and other regulations and ethical standards. The
heart of the said system of internal regulations, procedures and processes is often the ethical
code (code of conduct). From the point of view of not only corporate (business) practice, the
ethical code is seen as a central element of internal compliance programs of entrepreneurs as it
should fully reflect the central rules, values and principles. Therefore it can be recommended
that the legal entities adopt and regularly review their own system of internal regulations
containing primarily the ethical code, working rules and organizational rules, rules for dealing
with clients (including the gift and hospitality rules), anti-bribery rules, rules preventing the
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legalization of proceeds from crimes, rules for handling of documents, including archiving,
filing and retention rules, rules for electronic data treatment, rules for disposal of assets
(including intellectual property rights), public procurement rules etc.
d) Training of the legal entity’s management, employees and selected third parties about
risks and related responsibilities
Every entrepreneur should acquaint its employees and selected third parties with the above
specified (proposed) rules of the internal compliance program and remind them thereabout on
a regular basis. One of the tools that constitute a prerequisite for the functioning of the overall
system of internal rules, regulations and specific procedures or processes can be systematic
training and communication plans and other related activities of the legal entity. They should
be sufficiently effective, i.e. they should have an adequate form, scope, content, style, length
and evaluation, and they should aim only at those employees whom the area concerned relates
to. Communication and training of some areas of the specific compliance program will thus
cover all employees (or third parties) of the entrepreneur concerned, other, usually more
specific areas, will cover narrower audience, such as managers or other narrowly focused
experts and specialists. Regular internal trainings and communications should also cover the
top (statutory) management of the legal entity in question. The top management should be an
example that there are no doubts that it is the top management that must know in details and
observe the applicable internal rules, procedures and processes. Some training or
communication activities should obviously aim at selected suppliers or business partners, or
rather representatives of the entrepreneur concerned (e.g. anti-bribery rules).
e) Providing internal legal support
Providing internal legal support and consultation to all stakeholders substantially reduces all
applicable criminal risks. The legal entity should therefore identify and consistently
communicate when and whom you can turn to with your legal enquires.
f) Implementation of controlling (whistleblowing) mechanism that is able to receive
information on potential infringement in time
Effective compliance and enforcement of the rules, regulations and specific procedures or
processes of internal compliance program of the entrepreneur concerned also includes the
development of a mechanism for the timely receipt of the information by means of which the
entrepreneur is notified about violation of relevant legal, internal and other regulations. For this
purpose an anonymous whistleblowing line (a kind of internal hotline) may be established, or
the notification of actual or potential violation of legal, internal or other relevant regulations of
the compliance program is addressed directly to top managers or specially designated persons,
departments or teams, usually in a particular regime. The aim of such notifying (controlling)
mechanism is to establish a functional process for dealing with complaints and suggestions
from employees and selected third parties of the legal entity leading to more effective
performance of the business or other activity, and the timely detection of all kinds of compliance
failures or breaches and other negative phenomena. In accordance with the above described it
also applies that all notifications should be thoroughly investigated, i.e. in this respect a fully
functional process of initiating and conducting internal investigations of the legal entity is
required. It is followed by the consequence management, or results of the internal investigation
are evaluated in other appropriate manner and communicated.
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g) Thorough due diligence (audit) of third parties
In order to properly identify applicable criminal risks of the legal entity concerned, it is suitable
to conduct regular internal audits of third parties, for example, suppliers or sales representatives
of the entrepreneur concerned.
12.5 Summary
The corporate compliance and ethics functions have grown rapidly in the last few years in
response to several high profile governance failures and subsequent regulatory reforms.
Companies throughout the whole world are making huge investments in compliance and ethics,
launching their compliance programs, building risk management systems, rolling out
comprehensive mandatory trainings and communication plans, designing and distributing
compliance standards and procedures and engaging their employees through so called tone from
the top. This phenomenon has struck companies across a diverse set of industries, even those
that have traditionally received less regulatory attention. Nowadays, when most of the
companies have already established some basic level of compliance and ethics infrastructure,
many of them begin to evaluate whether these are effective enough.
Ethics, integrity, accountability and strong leadership are key elements of a culture of
compliance. They can even be seen as constant for any successful organization. When a
business talks about increasing shareholder value, return on investment and driving revenue,
one of the best investments is to establish and maintain an effective compliance program. Best
in class compliance program is a real competitive advantage. Compliance then is a solution.
A culture of ethics and compliance takes time to develop. It can be a long journey to reach the
highest level of ethical standards as well as compliance requirements. All the positive changes
in legislation, regulation, initiatives, policies and procedures have taken years to clarify the
purpose of improving corporate governance. The legal and compliance requirements have
significantly changed the way businesses operate. Today’s senior (statutory) executives and
leaders, employees and other stakeholders must be aware of these requirements and their impact
on a culture of compliance.
In terms of building and maintaining an effective compliance program, the organizations meet
a wide variety of different laws, regulations and standards. Some of them provide the
organizations with guidance on how to best construct a truly working program or establish the
minimum requirements demanded by the law; others include industry standards or
organizational certification requirements. As the topic of compliance is so broad, this chapter
cannot possibly cover every aspect of every law. For example, the areas of health & safety,
environmental impact and privacy regulations have specific compliance requirements. This
chapter has tried to cover most of the key points but the world of compliance is so vast that
even a book could not hope to be fully comprehensive in anything less than several volumes.
However, understanding compliance from the concepts introduced in this chapter provides the
readers with the basics for effective implementation and maintenance of compliance programs
no matter what particular law or regulation applies.
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To underline the compliance principles presented in this chapter, more impressive words than
the ones said by W. C. Stone could hardly be found: “Have the courage to say no. Have the
courage to face the truth. Do the right things because they are right. These are the magic
keys to living your life with integrity.”
Considering the biggest (recent) Czech legal development in the compliance area, please do not
forget that on 1 January 2012, the Act No. 418/2011 Coll., on Criminal Liability of Legal
Entities came into force. This Act has introduced the institute of criminal liability of legal
entities into the Czech legal order. Adoption of such legislation was in conformity with national
and foreign development trends in recent years. In the middle of the year 2016, the ACLLE was
significantly amended. Section 7 of the ACLLE is of cardinal importance from the point of
view of the criminal liability of legal entities. It specifies in details the range of crimes for which
legal entities can hold criminal liability. In this context it should be pointed out that the range
of criminal acts represented by the list contained in the aforementioned section 7 is very wide
especially after the adoption of the ACLLE amendment. Conditions of occurrence of the
criminal liability of Czech legal entities are specified primarily in section 8 of the ACLLE. In
connection with the wording of this section it applies that under certain circumstances a legal
entity may exculpate itself from the criminal liability. However, to do so it must be proved in
the criminal proceedings that the criminal conduct of the particular employee (or the above and
below specified persons in equivalent positions, or a third person) occurred despite the fact that
the legal entity concerned, or its elected bodies (members of these bodies), implemented the
measures that are required by applicable laws or that can be reasonably required. So as to limit
the criminal liability, it can be strongly recommended to legal entities that they create and
continuously manage internal compliance programs within the scope of their internal
environment.
12.6 Self-assessment questions and tasks
Please make sure that you are able to fully answer the self-assessment questions below. If not,
please go back to the chapters above and re-read all related texts.
1. How has the recodification of the Czech private law touched the corporate governance
rules in NCC and BCA?
2. What are the standard types of managerial liability under Czech laws? How do these
differ?
3. Define the duty to act with due managerial care. What are its key elements?
4. Define the business judgement rule. What is the purpose of this rule?
5. What is the link between the two legal institutes above?
6. Is the duty to act with due managerial care being assessed subjectively or objectively?
7. What are the three elements of business judgement rule (the ones that should always be
tested by Czech justice)?
8. Name and describe two consequences of a breach of the duty to act with due managerial
care.
9. What are the mandatory parts of an agreement on the office performance? Where is this
agreement regulated?
10. Explain the legal term “interference”.
11. What does the term compliance mean?
12. What are the most critical aspects of an effective compliance program?
13. Think about the history of compliance. How, why, when and where was this concept
created?
14. What does it mean if we say that an effective compliance program must always be
“industry-specific and unique”?
15. What are the benefits of having and effective (internal) compliance program?
16. What is the difference between compliance and ethics?
17. How is compliance linked to the Czech concept of criminal liability of legal entities?
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18. What are the major indicators of a corporate ethical collapse?
19. How would you explain “integrity”?
12.7 Further reading/listening
Legislation:
• Selected provisions of Act No. 418/2011 Coll., on Criminal Liability of Legal Entities, as
amended.
• Selected provisions of Act No. 89/2012 Coll., Civil Code, as amended.
• Selected provisions of Act No. 90/2012 Coll., on Business Companies and Cooperatives
(Business Corporations Act), as amended.
• Selected provisions of Act No. 262/2006 Coll., Labour Code, as amended.
Printed books and articles:
• Andreisová, L. Building and Maintaining an Effective Compliance Program. International
Journal of Organizational Leadership, (5, 2016).
• Andreisová, L. Compliance program from the perspective of corporate criminal liability.
Scientia et societas, 2017 (XIII / 2).
• Biegelman, M. T. Building a world-class compliance program: Best practices and strategies
for success. New Jersey: John Wiley & Sons, Inc., 2008.
• Fox, T. Lessons Learned on Compliance and Ethics: The Best from the FCPA Compliance
and Ethics Blog. Middletown: Ethics 360 Media, 2012.
• Lam, J. Enterprise Risk Management: From Incentives to Controls. New Jersey: John Wiley
& Sons, Inc., 2014.
Online resources:
• The Financial Reporting Council Limited. Corporate Culture and the Role of Boards. Report
of Observations. London, 2016. Available online:
<https://www.frc.org.uk/getattachment/3851b9c5-92d3-4695-aeb2-
87c9052dc8c1/Corporate-Culture-and-the-Role-of-Boards-Report-of-Observations.pdf>.
• The Financial Reporting Council Limited. The UK Corporate Governance Code. London,
2016. Available online: <https://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-
governance/UK-Corporate-Governance-Code.aspx>.
Documentaries:
• ICA webinar on integrating Governance, Risk Management and Compliance:
https://www.youtube.com/watch?v=rwJk9cNnGvU
• The Great Dictator speech by Charlie Chaplin (with English subtitles):
https://www.youtube.com/watch?v=GU_rn1xzItk
146
Annex 1: Selected provisions of the Czech Constitution in English
Constitution of the Czech Republic
of December 16, 1992, amended by Act No. 347/1997 Coll., amended by Act No. 300/2000
Coll., amended by Act No. 448/2001 Coll., amended by Act No. 395/2001 Coll., amended by
Act No. 515/2002 Coll.
CHAPTER ONE - Fundamental Provisions
Art. 1
(2) The Czech Republic shall observe its obligations under international law.
Art. 2
(4) Every citizen may do what is not prohibited by law and nobody may be forced to do what
the law does not instruct them to do.
Art. 3
An integral component of the constitutional system of the Czech Republic is the Charter of
Fundamental Rights and Freedoms.
Art. 4
The fundamental rights and freedoms shall be protected by the judiciary power.
Art. 8
Self-government of territorial self-governing units is guaranteed.
Art. 9
(1) Constitution may be supplemented or amended only by Constitutional Acts.
Art. 10
Promulgated international agreements, the ratification of which has been approved by the
Parliament and which are binding on the Czech Republic, shall constitute a part of the legal
order; should an international agreement make provision contrary to a law, the international
agreement shall be applied.
Art. 10a
(1) An international agreement may provide for a transfer of certain powers of bodies of the
Czech Republic to an international organization or institution.
(2) An approval of the Parliament is required to ratify an international agreement stipulated in
Subsection 1 unless a constitutional law requires an approval from a referendum.
Art. 10b
(1) The Government shall inform the Parliament regularly and in advance on issues related to
obligations arising for the Czech Republic from its membership in an international organization
or institution stipulated in Section 10a.
(2) The Chambers of Parliament express their opinions on the decisions of such an international
organization or institution in a form provided for by their rules of procedure.
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Art. 12
(1) Acquisition and loss of citizenship of the Czech Republic shall be governed by law.
(2) Nobody may be deprived of his or her citizenship against his or her will.
CHAPTER TWO - Legislative Power
Art. 15
(1) Legislative power in the Czech Republic shall be vested in the Parliament.
(2) The Parliament shall have two chambers which shall be the Chamber of Deputies and the
Senate.
Art. 16
(1) The Chamber of Deputies shall have 200 Deputies who shall be elected for a term of four
years.
(2) The Senate shall have 81 Senators who shall be elected for a term of six years. One third of
the Senators shall be elected every two years.
Art. 18
(3) Every citizen of the Czech Republic who has attained the age of eighteen years shall have
the right to vote.
Art. 19
(1) Every citizen of the Czech Republic who has the right to vote and who has attained the age
of twenty-one years may be elected to the Chamber of Deputies.
(2) Every citizen of the Czech Republic who has the right to vote and who has attained the age
of forty years may be elected to the Senate.
Art. 27
(4) No Deputy or Senator may be criminally prosecuted without the consent of the chamber of
which he or she is member. If the respective chamber denies its consent, criminal prosecution
shall be excluded forever.
(5) A Deputy or a Senator may be detained only if he or she has been apprehended when
committing a criminal offence or immediately thereafter. The competent agency shall
immediately report the detention to the chairman of the chamber of which the detainee is
member; if the chairman of the respective chamber does not consent within twenty-four hours
of the detention to the surrender of the detainee to a court, the competent agency shall release
him or her. At its first subsequent meeting the respective chamber shall decide with final
validity on the admissibility of the prosecution.
Art. 33
(1) If the Chamber of Deputies is dissolved, the Senate shall adopt legal measures regarding
matters which cannot be delayed and which would otherwise require the enactment of a law.
(2) However, the Senate may not adopt legal measures regarding the Constitution, the State
Budget, the final state budgetary account, the electoral law and international treaties under
Article 10.
(3) A legal measure may be proposed to the Senate for adoption only by the Government.
(4) A legal measure adopted by the Senate shall be signed by the Chairman of the Senate, the
President of the Republic and the Prime Minister; it shall be promulgated in the same manner
as laws.
(5) A legal measure of the Senate shall have to be approved by the Chamber of Deputies at its
first meeting. If the Chamber of Deputies does not approve it, its continued validity shall cease.
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Art. 39
(1) Both chambers shall have a quorum if at least one third of their members are present.
(2) The decision of a chamber shall be adopted if approved by absolute majority of the Deputies
or Senators present, unless the Constitution stipulates otherwise.
Art. 41
(1) Bills shall be introduced in the Chamber of Deputies.
(2) Bills may be introduced by a Deputy, a group of Deputies, the Senate, the Government, or
the representative body of a superior self-governing territorial unit.
Art. 50
(1) The President of the Republic may return an enacted law, with the exception of
Constitutional Acts, together with the grounds for the return, within fifteen days of the day the
law was referred to him.
(2) The Chamber of Deputies shall take a new vote on the returned law. No amendments may
be introduced. If the Chamber of Deputies upholds the returned law by absolute majority of
vote of all Deputies, the law shall be promulgated. If not, the law shall be considered defeated.
Art. 51
Laws which have been enacted shall be signed by the Chairman of the Chamber of Deputies,
the President of the Republic and the Prime Minister.
Art. 52
(1) For a law to be valid, it must be promulgated.
(2) The law shall stipulate the way a law or an international agreement is promulgated.
CHAPTER THREE - Executive Power
President of the Republic
Art. 54
(1) President of the Republic is the Head of State.
Art. 57
(1) Any citizen eligible for election to the Senate may be elected President of the Republic.
(2) Nobody may be elected President of the Republic more than twice in succession.
Art. 62
President of the Republic shall
a) appoint and recall the Prime Minister and other members of the Government and accept their
resignation, recall the Government and accept its resignation;
b) convene sessions of the Chamber of Deputies;
c) dissolve the Chamber of Deputies;
d) authorize the Government the resignation of which the President has accepted or which he
has recalled to execute their office temporarily until a new Government is appointed;
e) appoint Justices of the Constitutional Court, its Chief Justice and Assistant Chief Justices;
f) appoint from among the Justices of the Supreme Court the Chief Justice and Assistant Chief
Justices of the Supreme Court;
g) pardon and mitigate penalties imposed by the court, order not to initiate criminal proceedings
and suspend them if they are already initiated, and expunge sentences;
h) have the right to return to the Parliament an enacted law with the exception of Constitutional
Acts;
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i) sign enacted laws;
j) appoint the President and the Vice-President of the Supreme Control Office;
k) appoint members of the Bank Board of the Czech National Bank;
l) announces a referendum concerning the accession of the Czech Republic to the European
Union and its result.
Art. 63
(1) President of the Republic shall furthermore
a) represent the State with respect to other countries;
b) negotiate and ratify international treaties; he may delegate the negotiation of international
treaties to the Government or, subject to the Government consent, to its individual members;
c) be the Commander in Chief of the Armed Forces;
d) receive heads of diplomatic missions;
e) appoint and recalls heads of diplomatic missions;
f) call elections to the Chamber of Deputies and the Senate;
g) appoint and promote generals;
h) confer and award state decorations, unless he authorizes other body to do so;
i) appoint judges; and
j) have the right to grant amnesty.
Art. 65
(1) President of the Republic may not be detained, subjected to criminal prosecution or
prosecuted for offence or other administrative torts.
(2) President of the Republic may be prosecuted for high treason at the Constitutional Court
based on the Senate's suit. The punishment may be the loss of his presidential office and of his
eligibility to regain it.
(3) Criminal prosecution for criminal offences committed by the President of the Republic
while executing his office shall be ruled out forever.
The Government
Art. 67
(1) The Government is the supreme body of executive power.
(2) The Government shall consist of the Prime Minister, Deputy Prime Ministers and Ministers.
Art. 68
(1) The Government shall be accountable to the Chamber of Deputies.
Art. 71
The Government may ask the Chamber of Deputies for a vote of confidence.
Art. 74
The President of the Republic shall recall a Member of Government if the Prime Minister
proposes so.
Art. 78
The Government may issue decrees for the implementation and within the scope of laws.
Decrees shall be signed by the Prime Minister and the pertinent Member of Government.
150
CHAPTER FOUR - Judicial Power
Art. 81
Judicial power shall be exercised in the name of the Republic by independent courts.
Art. 82
(1) Judges shall be independent in the performance of their office. Nobody may jeopardize their
impartiality.
(2) A judge may not be recalled or transferred to another court against his will; exceptions,
ensuing in particular from disciplinary liability, shall be specified by law.
The Constitutional Court
Art. 83
The Constitutional Court is a judicial body charged with protection of constitutional rule.
Art. 84
(1) The Constitutional Court shall consist of fifteen Justices appointed for a term of ten years.
(2) Justices of the Constitutional Court shall be appointed by the President of the Republic and
shall be confirmed by the Senate.
(3) Any citizen of full integrity who is eligible for election to the Senate is the graduate of a
university law school and has been active in the legal profession for at least ten years may be
appointed Justice of the Constitutional Court.
Art. 87
(1) The Constitutional Court shall rule on
a) repeal of laws or individual provisions thereof should they contravene the constitutional
order,
b) repeal of other legal regulations or individual provisions thereof should they contravene the
constitutional order or the law,
g) impeachment by the Senate of the President of the Republic under Article 65, par. 2,
h) the Presidential proposal to repeal a decision of the Chamber of Deputies and the Senate
according to Article 66 […]
Art. 89
(1) A ruling issued by the Constitutional Court shall be enforceable upon its promulgation in a
manner set by law, unless the Constitutional Court rules differently on its enforcement.
(2) Enforceable rulings of the Constitutional Court shall be binding for all agencies and
individuals.
(3) A decision of the Constitutional Court, whereby, in accordance with Section 87, Subsection
2, unconformity of an international agreement with the constitutional order is pronounced,
prevents ratification of the agreement until such unconformity is eliminated.
The Courts
Art. 90
The courts shall first and foremost provide in a manner defined by law protection of rights. A
court alone shall decide about guilt and penalty for criminal offences.
Art. 91
(1) The system of courts shall be made up of the Supreme Court, the Supreme Administrative
Court, and superior, regional and district courts. Their designation may be changed by law.
(2) Jurisdiction and the organization of courts shall be defined by law.
151
Art. 93
(1) Judge shall be appointed for life by the President of the Republic. A judge shall assume his
office by taking the oath of office.
(2) Any citizen with full integrity, who is the graduate of a university law school, may be
appointed judge. Additional requisites and the appointment procedure shall be defined by law.
152
Primary sources, bibliography, and documentary videos
Treaties and legislation:
The Treaty on the Functioning of the European Union
The Treaty on European Union
The EU Charter on Fundamental Rights
The European Convention on Human Rights
Act no. 1/1993 Coll., the Czech Constitution
Act no. 2/1993 Coll., the (Czech) Charter of Fundamental Rights and Freedoms
Act no. 89/2014 Coll., Civil Code, as amended
Act no. 90/2012 Coll., the Business Corporations Act
Act no. 91/2012 Coll., the International Private Law Act
Act no. 262/2006 Coll., Labour Code, as amended
Act no. 141/1961 Coll., Criminal Procedure Code, as amended
Act no. 150/2002 Coll., Code of Administrative Justice, as amended
Act no. 99/1963 Coll., Civil Procedure Code, as amended
Act no. 198/2009 Coll., on Equal Treatment and on the Legal Means of Protection against
Discrimination, as amended
Act no. 418/2011 Coll, as amended, Act on Criminal Liability of Legal Entities
Regulation (EU) No 1215/2012 on jurisdiction and the recognition and enforcement of
judgments in civil and commercial matters (“Brussels I Regulation recast“)
Regulation (EC) No 593/2008 on the law applicable to contractual obligations (“Rome I
Regulation“)
Books and printed papers:
ANDREISOVÁ, Lucie, Building and Maintaining an Effective Compliance Program.
International Journal of Organizational Leadership, (5, 2016).
ANDREISOVÁ, Lucie, Compliance program from the perspective of corporate criminal
liability. Scientia et societas, 2017 (XIII / 2).
BIEGELMAN, Martin T., Building a world-class compliance program: Best practices and
strategies for success. New Jersey: John Wiley & Sons, Inc., 2008.
CRAIG, Paul; de BÚRCA, Gráinne, Text, Cases and Materials, 5th ed., Oxford: OUP, 2011.
FOX, Thomas, Lessons Learned on Compliance and Ethics: The Best from the FCPA
Compliance and Ethics Blog. Middletown: Ethics 360 Media, 2012.
GERLOCH, Aleš, Teorie práva. 7th updated edition. Plzeň: Aleš Čeněk, 2017.
153
GRMELOVÁ, Nicole, Vybrané kapitoly z evropského obchodního práva. 1. vyd. Praha:
Oeconomica, 2015.
HAVEL, Bohumil, Zákon o obchodních korporacích s aktualizovanou důvodovou zprávou a
rejstříkem, Ostrava: Sagit, 2012.
KACZOROWSKA, Alina, Public International Law, 5th ed., Routledge.
MACGREGOR, Radka, Introduction to Law for Business. Ostrava: KEY Publishing s.r.o.,
2012.
PICHRT, Jan, Martin Š TEFKO, Labour law in The Czech Republic. Second edition. Alphen
aan den Rijn, The Netherlands: Kluwer Law International, [2015].
SPIRIT, Michal, et al., Základy práva pro neprávníky po rekodifikaci soukromého práva. 4.
aktual. vyd. Plzeň: Aleš Čeněk, 2015.
ŠVARC, Zbyněk, et al., Základy obchodního práva po rekodifikaci soukromého práva. 4.
upr. vyd. Plzeň: Vydavatelství a nakladatelství Aleš Čeněk, 2014.
LAM, James, Enterprise Risk Management: From Incentives to Controls. New Jersey: John
Wiley & Sons, Inc., 2014.
Electronic sources:
BAUBÖCK, Rainer; PERCHINIG, Bernhard; SIEVERS, Wiebke (eds.), Citizenship Policies
in the New Europe, Amsterdam University Press, 2009 (full view available at
books.google.com)
BOBEK, M., An Introduction to the Czech Legal System and Legal Resources, available at:
http://www.nyulawglobal.org/globalex/Czech_Republic.html
BORCHARDT, Klaus-Dieter, The ABC of EU Law, European Commission, DG
Communication, available at: https://publications.europa.eu/en/home
GRMELOVÁ, Nicole. Nepoložení předběžné otázky Soudnímu dvoru Evropské unie jako
porušení práva na spravedlivý proces. Mezinárodní vztahy [online]. 2014, Vol. 49, No. 4,
pp. 102–120. Available at: http://mv.iir.cz/article/view/1299.
For electronic resources on MEDIATION please refer to: https://mediation.turiba.lv
The Financial Reporting Council Limited. Corporate Culture and the Role of Boards. Report
of Observations. London, 2016. Available online at:
<https://www.frc.org.uk/getattachment/3851b9c5-92d3-4695-aeb2-87c9052dc8c1/Corporate-
Culture-and-the-Role-of-Boards-Report-of-Observations.pdf>.
The Financial Reporting Council Limited. The UK Corporate Governance Code. London,
2016. Available online at: <https://www.frc.org.uk/Our-Work/Codes-Standards/Corporate-
governance/UK-Corporate-Governance-Code.aspx>.
154
Documentary videos:
A brief video on the concept of law recorded by an American professor of law:
https://www.youtube.com/watch?v=2ds-NIFhU9s
A link to a video on how the office of the European Ombudsman works:
https://www.youtube.com/watch?v=tY_4YEyFxyM
A link to a video on how the SOLVIT network may assist EU citizens:
https://www.youtube.com/watch?v=Mc8D8KDq6iA
A link to a video on how the SOLVIT network may assist EU businesses
https://www.youtube.com/watch?v=7BeEqT6oy-g
A link to an institutional video on the functioning of the European Court of Human Rights:
https://www.youtube.com/watch?v=EPWGdhgQlgk
Basics of competition law, the Czech Office for the Protection of Competition; available at:
https://www.youtube.com/watch?v=uZO2So-wrXQ.
I Am Fishead: https://www.youtube.com/watch?v=bcRRZsag0Io
ICA webinar on integrating Governance, Risk Management and Compliance:
https://www.youtube.com/watch?v=rwJk9cNnGvU
“ICC Institutional Video, 2018” available at:
https://www.youtube.com/watch?v=gwhufH4vNzY
Institutional video explaining the Council configurations:
http://www.consilium.europa.eu/en/council-eu/configurations/
“Lecture 2B: Enforcement and Interpretation in International Law” by prof. Givens
https://www.youtube.com/watch?v=2pr9ziZjpeI
OFT competition law film from June 2011; available at:
https://www.youtube.com/watch?v=ACA9vdlNqek&t=35s.
Study resources on mediation as well as short theoretical videos and longer videos with mock
mediation are available on the Online Study Mediation Platform at https://mediation.turiba.lv
The Great Dictator speech by Charlie Chaplin (with English subtitles):
https://www.youtube.com/watch?v=GU_rn1xzItk
The very basics of mediation and arbitration can be listened to in the video called Alternative
Dispute Resolution – What is ADR? by David P. Hersh, available at:
https://www.youtube.com/watch?v=5IfPqPIPSmI
Video on the activities of lobbyists within the EU institutions, called “The Brussels Business“:
https://www.youtube.com/watch?v=h4C5SgeVK-Q
155
About the authors
156
Nicole Grmelová
Nicole Grmelová graduated from Charles University Law School and University of Sevilla Law
School. She obtained her Ph.D. degree at the University of Economics, Prague, where she
started teaching at the Business and EU Law Department in 2002. Between 2004 and 2008 she
worked as a Lawyer-Linguist for the European Parliament in Brussels. Between 2009 and 2012
she cooperated with the Court of Justice of the European Union in Luxembourg as a freelance
Lawyer-Linguist. In 2018 she was appointed Associate Professor at the University of
Economics, Prague. She publishes widely on topics related to EU Institutions, EU Law and
International Public Law. Nicole Grmelová is the Czech Republic´s Country Correspondent to
the European Food and Feed Law Review.
Lucie Andreisová
Lucie Andreisová graduated from the Master degree program ‘Business and Law’ at the Faculty
of International Relations, University of Economics in Prague. In 2017, she completed her
Ph.D. studies in ‘International Business Law’ at this University. The author was responsible for
Governance, Risk and Compliance (GRC) in Vodafone Czech. Between 2017 and 2018, the
author held a position of Compliance Manager in Vodafone Group, London. Currently, she is
having a role of CE Information Security Manager for Tesco Stores Czech. Since 2017, the
author also acts as an Assistant Professor at the Department of Business and European Law and
is a member of Czech and International Compliance Associations (CCA, ICA), where she has
accomplished the ICA Advanced Diploma in GRC (2018).
Tereza Vaňkátová
Tereza Vaňkátová graduated from Charles University Law School and the Faculty of
International Relations of the University of Economics in Prague. She also spent one year at
the Cardiff University studying the EU Competition Law. During her studies, she gained
experience in the field of commercial law in several Czech and the international law firms.
After finishing her law degree she started to work as a judicial clerk in the District Court of
Prague 6 where she works until now. In 2018 she passed the judicial exam. Since 2016 she has
been an internal Ph.D. student at the Business and EU Law Department of the University of
Economics focusing on Competition Law and Economics.