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New law brings uncertainty in relation to OTC derivatives and certain other contracts concluded with public sector entities

A new law, partially in effect from 1 July 2016, requires contracts concluded with certain public sector entities (the Relevant Entities) to be concluded in writing and published in an online register maintained by the Ministry of Interior (the Register). The law explicitly states that it applies regardless of the governing law of the contract.

Relevant Entities include, for example:

  • the Czech Republic;
  • municipalities or regional governments;
  • state-owned enterprises;
  • health insurers; and
  • commercial companies directly or indirectly majority-owned by the state or by one or more municipalities or regional governments.

There are exemptions from the publication requirement, including:

  • contracts performed predominantly outside the Czech Republic;
  • contracts concluded on regulated markets; or
  • cases where the Relevant Entity is a joint-stock company that has securities admitted to trading on a regulated market.

From 1 July 2017, a contract that must be published in the Register (a Relevant Contract) will not become effective until it is published in the Register and will automatically be deemed void ab initio if not published within three months of being concluded. Note that the requirement for a Relevant Contract to be concluded in writing and published in the Register applies with effect from 1 July 2016.

The publication requirement potentially applies to certain OTC derivatives that are customarily concluded over the phone, if they are concluded with a Relevant Entity and qualify as a Relevant Contract. This raises issues such as what constitutes "written form", and whether the consequences of a failure to comply with the requirement of a written form should be governed by the governing law of the contract or by Czech law.

As far as Czech law is concerned, and setting aside the technical difficulties of publishing a recording of a phone conversation in the Register, there are arguments to support the view that a Relevant Contract concluded over the phone should be "in writing" if the parties to the call have sufficiently identified themselves (eg by a password) and the phone call has been recorded. There is also a good argument that the requirement of a written form is a regulatory requirement, the breach of which would not invalidate the contract.

However, the position is not clear and the risk that a Relevant Contract concluded by phone would be invalid for lack of form, cannot be entirely excluded.

We understand that efforts are underway to amend the new law in order to address these concerns. In the meantime, it is as a minimum advisable that both parties sign a written confirmation as soon as possible after concluding a Relevant Contract by phone (or by other means that might not qualify as "written form" and that such confirmation is published in the Register in accordance with the new law.

Footnotes

* Act No 340/2015 Coll., on the Register of Contracts. 

Legal and Regulatory Risk Note
Europe