Liability for harmful advice under the new Czech civil code

The New Civil Code that was applied in the Czech Republic from 1 January 2014 expressly regulates liability in connection with the provision of information and advice by professionals, such as investment advice provided by financial institutions.

While, at first sight, the new rules seem to provide for strict liability, a more in-depth analysis reveals that this is not necessarily the case. Nevertheless, claimants can be expected, at least initially, to try to exploit the new rules to the maximum extent possible.

Background

According to Section 2950 of the New Civil Code, "anyone who, as a member of a profession or vocation, declares that he makes professional performances or otherwise acts as a professional, will be liable for damage caused by him by incomplete or incorrect information or harmful advice given for a reward in a matter of his knowledge or skill". The old Civil Code, applicable until 31 December 2013, contains no such explicit rule. Liability for advice and information provided is assessed under general rules on damages.

There is no doubt that banks and other financial institutions will be considered professionals for the purpose of Section 2950 and that it will apply where they provide investment advice or act in any other advisory role for a reward. Section 2950 further states that anyone (not only professionals) is liable for damages caused by information or advice knowingly given incorrectly, but this is not the subject of this article.

One striking feature of the new rule is the absence of any explicit requirement of negligence on the part of the information or advice provider in order to establish liability, as well as the absence of any other grounds for exoneration. This at first sight suggests that liability under the new rule is absolute. Indeed the new rule is placed among other rules which undoubtedly provide for strict liability.

Views that liability under Section 2950 is strict have been already expressed. If these views prevail, the consequences will be harsh. Liability for advice under the general rule will be stricter than liability of specific groups of advisers regulated by special laws, such as lawyers and tax accountants, who are exempted from liability if they show that they took all steps that could be reasonably required. Investment and other advice not regulated by specific laws could be judged with the benefit of hindsight.

There are, however, strong arguments to the contrary. The general rule under the New Civil Code, set out in Section 2895, is that liability is strict only in cases where this is set out specifically. However this general rule does not appear to be implemented consistently throughout the New Civil Code. Some rules explicitly mention negligence as a requirement even though this should not be necessary in light of Section 2895. Other rules say nothing about liability being strict even though it is clear from the context that this is the case. Section 2895 therefore cannot be relied on alone. The explanatory report to the New Civil Code states that Section 2950 is a standard and traditional rule in civil jurisdictions. The New Civil Code is strongly inspired by two traditional Central European Civil Codes, the Austrian Algemeines Bürgerliches Gesetzbuch and the German Bürgerliches Gesetzbuch. Neither treats liability for harmful advice as strict. Both require that the advice provider acted negligently.

A separate but no less important question arises when a piece of information or advice is given for a reward. This will clearly be the case where the piece of information or advice is actually paid for. But it is quite possible that courts will give the term "for a reward" a wider meaning and will extend the scope of Section 2950 to include information and advice given technically for free but with a view to making profit later. This could include, for example, a bank inducing a prospective client to enter into a trade on which the bank expects to make a profit.

Mitigating the risk

It is possible to contractually limit liability under Section 2950, subject to significant restrictions. It is not possible to limit liability for damages caused wilfully or by gross negligence. It is also not possible to limit liability for damages caused to a "weaker party", which is a new and vague concept. The New Civil Code only sets out a rebuttable presumption that any party acting outside the scope of its business activities is a weaker party if dealing with a party acting in the course of its business. Whether intentionally or not, this rebuttable presumption favours, for example, the State and all municipalities, no matter how big or sophisticated they are.

Conclusion

Claimants who have suffered a loss as a result of a trade in relation to which they received advice or information can be expected, at least initially, to try to recover their loss from the information or advice provider on the basis that the provider has strict liability. Given the lack of clarity in the new rule, mounting a robust defence might, at least initially, involve more legal arguments than would usually be the case. Relying on iura novit curia may not be enough.

Further information

The European Finance Litigation Review is a quarterly publication on recent developments in the finance litigation and regulatory sector in key European jurisdictions. For more information please contact Amy Edwards amy.edwards@alleovery.com.