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New Czech Civil Code and Act on Business Corporations – old risks replaced by new ones

Czech private law has undergone a complete overhaul as of 1 January 2014.

The existing Civil Code and Commercial Code have been replaced by a new Civil Code and Act on Business Corporations. A number of other related laws have been replaced or substantially amended, including the regulation of private international law and the Land Register. The new legislation brings numerous changes relevant to financial institutions.

It eliminates some of the old risks; it also inevitably gives rise to new risks that will go away only when clarified by case law. Set out below are some selected examples.

Liability for harmful advice provided by professionals for a reward

Under a new explicit rule, professionals will be liable for damage caused by incomplete or incorrect information or harmful advice given for a reward in a matter of their knowledge or skill. It is quite possible that the phrase "for a reward" will be interpreted widely to include information or advice given technically for free but with a view to making profit later (for example, if a bank induces a prospective client to enter into a trade on which the bank expects to make a profit). What is completely unclear is whether negligence is required to establish liability. Indeed, views have been expressed that the liability is strict. This could potentially mean that investment advice or any other advice typically provided by financial institutions would be judged with the benefit of hindsight. Whilst arguments in favour of the opposite conclusion (that the liability is for negligent advice only) appear stronger, financial institutions should be prepared for the possibility that clients, who have suffered a loss from a transaction on which they received advice, may try to make claims on the basis that the liability is strict.

Powers of attorney

It used to be an established practice in relation to the signing of contracts or making of other legal acts in the form of a notarial deed under a power of attorney that it would be sufficient to have the signatures on the power of attorney notarised. Legal acts for which the form of a notarial deed remains mandatory include, for example, certain commonly used security agreements. A new rule, however, states that a power of attorney must be in the same form as the legal act for which it is granted. Many read this so that the power of attorney itself will also need to be in the form of a notarial deed. A practical solution would be to leave it up to the law of the jurisdiction in which the power of attorney is signed to determine the required form. There is support for this approach in the new Act on Private International Law. However, whether or not this approach prevails will ultimately depend on the notaries. In the interim, the convenience of using powers of attorney in connection with financing transactions could be greatly reduced.

Corporate approvals

The rules relevant to the need to obtain corporate approvals in connection with financing transactions have been completely rewritten.

The new rules are not entirely clear but, in most cases, the absence of a required corporate approval should not invalidate the relevant transaction. One exception is the pledge of an enterprise or its significant part, which must be approved by the general meeting of the pledgor or it will be invalid. It is unclear whether a "part" of an enterprise is only a part that comprises both assets and liabilities, for example a branch, or whether an individual asset could constitute a "part" of an enterprise for this purpose. A prudent approach will be to require that any pledge of assets which could be significant to the pledgor's enterprise is approved by its general meeting.

Transitional provisions

The transitional provisions of the New Civil Code state that contracts concluded before 1 January 2014, other than account agreements and lease agreements, will continue to be governed by the old laws unless the parties opt into the new legal regime. However, the provisions are not clear on which legal regime applies to transactions entered into on or after 1 January 2014 under framework agreements (such as Treasury Master Agreements) concluded before 1 January 2014. Various interpretations are conceivable. A similar issue arises in connection with the assignment, on or after 1 January 2014, of receivables arising under contracts governed by the old laws. It is advisable in such cases to ensure that all parties opt into the new legal regime so that there is no risk of discrepancies.

Legal and Regulatory Risk Note