Article

The most frequent legal questions about the COVID-19 pandemic

The coronavirus COVID-19 pandemic puts new demands on organizations. We have put together a set of questions and answers, which can help organziations with the most common legal questions.

EMPLOYEES

Is the employer obliged to excuse the absence of an employee at work if the employee needs to take care of a child attending a school institution that was closed under emergency precautions?

 

The employer must excuse the absence of an employee, if it is an employee who takes care of a child younger than 10 years. In such case, the employee is entitled to a childcare allowance as an allowance from the sickness insurance system. If he/she needs to take care of older children, it is appropriate to agree with the employer on absence from work, or consider the possibility of work from home (if the care of the child allows the employee to duly perform his/her work).

 

What is a quarantine? What amount of money will an employee under quarantine receive? And how much will the employer pay?

 

The quarantine imposed by legal means may be ordered only by a public health protection authority, i.e. regional public health department, or an attending physician (usually following a recommendation by the regional public health department). Pursuant to the resolution on the quarantine, a confirmation on sick leave will be issued to an employee – in such case, it is a temporary sick leave in terms of labour law and the employee is entitled to a salary compensation of 60% of the average salary in the first 14 calendar days, paid by the employer. If the sick leave continues, the employee is entitled to sick benefits paid from the sickness insurance system starting from the 15th day.

 

May the employer order employees to work from home?

 

For positions where it is technically possible (usually the employees who need only a computer and telephone for their work), it is appropriate to consider work from home. Home office can also be used by the employees who were ordered to stay under quarantine. The quarantine does not necessarily involve incapacity to work and the employee may work from home even if ordered to be under quarantine and receive standard salary instead of compensation for temporary sick leave. However, the employer cannot order the employee to do home office work, the employee must agree to it. 

 

May the employer order employees to take vacation to prevent the spread of disease?

 

The employer may order an employee to take vacation; however, it must notify the employee at least 14 days in advance. This cannot be used as a measure to prevent the spread of disease.

 

May the employer order the employee to refrain from coming to work premises?

 

The employer may order employees to stay at home and not to work even if they were not ordered to be in a quarantine. In that case, it is an obstacle on the part of the employer and the employee is entitled to salary compensation or salary in its average amount.

 

May the employees refuse to come to work, or may they refuse to do a certain type of work (meetings with clients)? May the employees refuse business trips?

 

The basic duty of an employee is to personally do the work stipulated by the employment contract and by instructions of the employer. An employee cannot refuse to come to work and cannot refuse a certain type of work (e.g. meetings with clients). However, the employee has the right for safety and protection of health at work and the right to refuse to do the work if he/she reasonably believes that it imminently and significantly presents hazard to his/her life or health. The risk relating to the contagion will, however, hardly reach such intensity, and even if it is so significant as to threaten the health of the employees, quarantine would surely be ordered. An employee who agreed with being sent on business trips in his/her employment contract cannot refuse a business trip. However, if it were a business trip to a region with a declared (including foreign) quarantine, the general consent in the employment contract would likely not be sufficient, and the employee would be entitled to refuse the business trip.

Coronavirus: 6 situations having an impact on employees’ work

CONTRACTS

I am a supplier with a contractual obligation to supply goods to customers. However, the supply of raw material from my own subcontractor is delayed because of logistics issues caused by border restrictions. Due to the delay caused by my supplier, I am unable to supply goods to customers on time. Do I still have the legal obligation to fulfil my contractual undertakings despite the epidemic?

 

An outbreak of an epidemic may be considered as a force majeure. Force majeure as such does not release any party from its contractual obligations. Nevertheless, under certain circumstances, it may release a party from the liability for damages caused by a failure to perform (a failure to supply goods or services within the agreed-upon deadline) as a consequence of an extraordinary, unexpected and insurmountable obstacle (i.e. force majeure).

 

I have entered into a contract but after the outbreak of an epidemic, my position has deteriorated significantly and the contract is highly disadvantageous for me as I am unable to deliver contracted supplies on time. How could I address the situation – is it possible to renegotiate the contractual terms?

 

If the outbreak of an epidemic caused a major change in circumstances resulting in a significant disproportion in rights and obligations of both contracting parties, the affected party may seek renegotiation of terms of already concluded contract. If the parties fail to agree on new terms and conditions, the contract may be revoked by a court at the request of either party, depending on the specific contractual relationship and its terms. We note that a number of robust contracts often include a disclaimer regarding the risk of a major change in circumstances for both contracting parties.

 

I have entered into a contract but due to the epidemic, I am unable to fulfil my obligations completely; for example, I can only supply a limited amount of goods. Will the contract continue to exist? What should I do when the contracted performance is not entirely impossible but very difficult?

 

If a permanent obstacle arises after entering into a contract due to which an obligation (e.g. supply of goods) is impossible to fulfil, the contract will cease to exist. However, the inability to fulfil an obligation is assessed objectively, i.e. in relation to all persons in such a position. In the event that the fulfilment of an obligation only became more difficult (e.g. supply of goods with increased costs), the obligation as such (e.g. supply of goods) remains unchanged.

However, an epidemic is usually just a temporary obstacle and, after it passes, the obligation will be possible to fulfil. In relation to an epidemic, an obligation which will likely cease to exist will principally relate to contracts with a limited time frame, under which the obligation has to be fulfilled within a specified period (e.g. in just-in-time systems).

 

I have entered into a contract with a foreign entity. Are the above rules any different?

 

Under certain circumstances, the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) may become applicable, signed by 89 countries worldwide, including the Czech Republic and China. If your contract is governed by CISG, meaning that if your business partner is an entity operating in a country that acceded to CISG and the application of CISG is not ruled out by the agreement, your agreement will be governed by specific rules. These rules stipulate in detail certain aspects, especially the duration of force majeure and notification duty or force majeure circumstances on the part of a sub-contractor. In particular, Clause 79 shall apply, providing, in particular, that a contracting party will not be responsible for a failure to perform any of its obligations if it proves that the failure was due to an impediment beyond party’s control.

 

Coronavirus: Effect of the epidemic on contractual obligations

LEASE

I am a lessor of business premises. How should I deal with requirements for a rent discount?

 

Under the Civil Code, a lessee is entitled to require a rent discount if defects of leased premises make their use difficult or if somebody prevents the lessee from the usage thereof. The premise does not have a defect if the usage thereof is restricted by the state of emergency announced by the government of the Czech Republic. In such a case, the lessee is not ipso facto entitled to the rent discount, the provision thereof is only a business decision that can facilitate to preserve good relationships between parties. In each case, conditions of a particular lease agreement are decisive for assessing the rights and obligations of the parties.

 

I am a lessor of business premises. How should I cope with an outage of delivered services?

 

From a legal perspective, the pandemic occurrence and a related state of emergency represent a so-called force majeure forming an obstacle in performing a contractual obligation. A force majeure does not relieve parties of the obligation to perform their duties (deliver services or goods) but under certain circumstances, it can relieve a party of a liability for damage caused by their nonperformance within a determined time limit. However, it cannot be applied if the non-delivery of services or goods was not a business decision of a supplier or if a delay existed already at the time of a force majeure occurrence.

 

Will the pandemic occurrence affect the validity of concluded lease agreements? May lessees enforce their changes or even termination?

 

As a result of a pandemic, a substantial change in circumstances could occur, causing a particularly gross disparity of rights and obligations of the parties (e.g. obligations of the lessee of a closed shop or an empty hotel towards the lessor). In such a case, the lessee as a disadvantaged party could seek negotiations on the new terms of an agreement. Upon proposal, a court may decide on the terms or cancellation of the relevant contract, if parties do not reach an agreement. This does not apply under assumption that the lessee assumed a danger of change in circumstances, i. e . in the case of standard lease agreements entered into between business persons.

An obligation of parties could expire if, after concluding an agreement, it becomes objectively and permanently non-performable (not performable with difficulties or greater costs). A debtor (i.e. the lessee unable to pay a rent in our case) has to demonstrate a subsequent impossibility to perform. In the case of a pandemic, the impossibility to perform is usually a temporary one therefore a subsequent impossibility could be successfully argued only in the case of a lease relationship that is to be terminated before the end of the pandemic under a lease agreement.

The terms of changes or termination of lease agreements always depend on the wording of particular lease agreements that may exclude certain described processes or, on the other hand, extend them in favour of a disadvantaged party as lease relationships are regulated by a dispositive provision of the Civil Code, i.e., parties may regulate mutual relationships differently from the letter of the law.

 

We are completing a shopping centre or office building development – what consequences can be expected in connection with the pandemic or commencement of operation?

 

From the perspective of an owner or future lessee of a shopping centre or office building, postponement of a building completion date can be expected due to suspension of construction work together with a potential non-adherence to the dates for a hand-over of the premises to the lessee for starting an operation or fit-out work of the lessee. This risk or failure to meet the date of operation commencement is factually pending where completion fit-out work is performed by the lessee itself. In the event of non-performance of the obligation to complete construction of the premises or fit-out work in agreed times due to the current crisis situation, a reason for a discharge of liability for damage will apply, i.e. a damage caused by such a non-performance of such an obligation due to a force majeure event.

If a lease agreement for newly built premises is to be entered into based on a previously concluded agreement on future agreement, it is advisable to consider that at the time between the conclusion of the agreement on future agreement and the date on which the lease agreement is to be entered into, such a substantial change in circumstances occurred that it cannot be reasonably required from the lessee that it conclude the lease agreement.

According to reference books, the above-mentioned rule can also be applied if commonly known circumstances change as e.g. an economic situation in a certain country. Therefore, one can imagine that with reference to the overall state of the economy impacted by the pandemic, the conclusion of a lease agreement can be rejected.

Coronavirus: How will it affect lease relationships?

GOVERNMENT’S RESPONSIBILITY

Does Czech legislation include any regulation concerning the compensation for damage arising due to implemented government measures?

 

In terms of Czech law, the situation is certainly unique, raising a great many questions that have not yet been addressed. However, attention is given to Act No. 240/2000 Coll., on Crisis Management (the Crisis Act) in this context. Section 36 et seq. of the Crisis Act stipulates the duty to provide compensation for damage caused by a crisis measure implemented to prevent or eliminate a crisis. Pursuant to the Crisis Act, a crisis also involves other danger due to which a state of emergency is announced. A crisis measure is defined as an organisational or technical regulation aimed at addressing the crisis or removing its aftermaths. The Crisis Act thus certainly provides an opportunity for claiming compensation for the damaged sustained. As was said at the beginning, the situation is new and unique in terms of the legal interpretation of responsibilities. To which extent the Crisis Act will affect the current situation is a question of further legal interpretations.

 

What are the conditions for utilising such claims?

 

Pursuant to the Crisis Act, compensation is given for damage caused by adopted or implemented crises measures. Therefore, conditions similar to those applicable to other damage claims apply; namely (i) existence of damage on the part of a business entity or an individual, whereby (ii) the damage has been caused in relation to an implemented crisis measure. Under the Crisis Act, the liability for damage is objective, i.e. regardless of fault. Pursuant to the available decision-making practice, a breach of law (that is demonstrating illegal actions by state authorities) is not necessary. The state may only release itself from its liability by showing that the injured party has inflicted the damage by itself or that the damage has arisen otherwise.

 

Towards which party is the claim directed and in which form is it possible to utilise it?

 

The state is liable for damage caused by a crisis measure. The claim for damages is utilised by the injured party at the relevant crisis management authority determined on an ad hoc basis under the Crisis Act. In the coronavirus pandemic, a number of bodies meet the characteristics of a crisis management authority, imposing appropriate measures within their power. The body liable for damage will be determined primarily based on the nature of the damage caused or, more precisely, the circumstances or adopted crisis measure causing the damage.

 

What is recommended to be enclosed in the application to ensure that it is sufficiently conclusive?

 

The filing must be in writing and justified but no further information is provided by the Crisis Act. Nevertheless, general principles relevant for other damage claims shall apply. Specifically, define the origination of damage (and its amount) and demonstrate the link between the damage sustained and the crisis measure implemented. In other words, describe and demonstrate general as well as specific assumptions of liability for damage under the Crisis Act. There are two-tier proceedings related to this claim, meaning the action for damages can only be filed on condition that a claim for compensation has been previously dismissed by a crisis management body within a lapse period. We therefore recommend that businesses maintain careful records of and duly document the damage sustained and consult a lawyer prior to utilising any claim.

 

What is the deadline for claiming such damage?

 

No deadline has been determined. The claim must be filed in writing, substantiated and supported by relevant documents, within six months from the date when the injured party identified the type and extent of damage but no later than within five years from the origination of damage. The deadline has the characteristics of a lapse period; a failure to meet the deadline results in a loss of one’s entitlement. However, it is not advisable to delay the application. The deadline of six months as specified above will be applicable to most claims because due to the extensive coverage of this matter in the media, most businesses will be informed of the impacts of the crisis measures adopted and the damage arisen.

 

Is utilisation of such claims subject to any fees?

 

Proceedings before the relevant crisis management body are free of charge. However, if the application is not complied with, the applicant will have to seek their entitlement in court. The fee for commencement of court proceedings related to compensation for damage is defined in the costs of litigation tariff (currently 5% of the claimed amount) unless the applicant is eligible for a relief.

 

This is certainly a unique situation. Are there any conditions known that may restrict or rule out utilisation of such claims?

 

Certainly. The situation is unique, which is why there are more questions than answers. I believe that demonstrating the causality between the damage sustained and the crisis matter implemented will be of key significance in the proceedings related to compensation of damage under the Crisis Act. It would be erroneous to believe that all damage arising or arisen is, without exception, attributable to crisis measures of the government. It is certainly not the case. Damage arises regardless of measures taken by the government on the grounds of the pandemic as such, which principally affects behaviour and business relations as well. Government crisis measures are in most cases the secondary cause of the damage, or alternatively have no effect on the damage at all. It will thus be crucial to distinguish whether the damage was caused by a government crisis measure or by the pandemic and the subsequent response of the business sector. Aside from that, attention should also be given to a loss of earnings that is not explicitly addressed in the Crisis Act even though the loss of earnings is a form of damage. Whether the loss of earnings will be regulated by the Crisis Act to the same extent will certainly be subject to further interpretations and formation of legal opinion. Ultimately, the proportionality of adopted crisis measures may also play a central role in the compensation of damage. This factor cannot be omitted either and will certainly be construed in relation to liberation from liability for damages or limitation of damages. Therefore, each case will have to be assessed individually with regard to the specific circumstances of each segment. It is thus impossible to develop any “calculator of damage“ universally applicable to all businesses.

 

How is it possible to prevent damage, ensuring that the entitlement of a business to damages is not subsequently reduced due to a failure to breach this duty?

 

This relates to the due fulfilment of one’s prevention duty, i.e. duty the prevent damage and eliminate its impact. This duty is individual for each business segment or enterprise. Nevertheless, each business action potentially giving rise to any damage should be carefully considered with respect to meeting this statutory duty. Therefore, business should already take appropriate measures to eliminate damage and document them, or gather evidence of why further measures cannot be taken.

 

Are there any other possibilities of claiming damages or seeking support than those disclosed above?

 

Proceedings in line with the Crisis Act are the only way of claiming damages or another entitlement. In particular, business entities should assess as to whether the damage sustained is not covered by any insurance policy (e.g. on the grounds of interrupted operation or another insured title). Furthermore, support for individual industrial segments will follow – from both the state and the EU. In this context, a pro-active approach is highly recommended, with each entity claiming its rights. Undoubtedly, private law also offers a range of possibilities for an entity to release itself from its obligations or not to fulfil its obligations without any sanction in the given circumstances. An active approach of a business to such measures and adherence to them will certainly be considered fulfilment of the above-specified prevention duty.

Coronavirus: Is the government responsible for the damage sustained by businesses due to anti-pandemic measures?

CASH FLOW

If economic prognoses get confirmed, we can expect liquidity failure on the Czech market in the following weeks, resulting in customers’ deteriorated payment discipline. Such a situation may lead to insolvency.

 

We recommend namely strengthening communication with your customers and intensively monitoring their current financial health. If a customer proves to be insolvent and is declared bankrupt by the court, such a situation requires a flexible response. Any possible receivable from the customer should be claimed in the insolvency proceedings within the statutory deadline. This is the only way to protect your statutory options to collect your receivable and keep your influence over the method in which your customer’s bankruptcy is solved.

 

If your customer’s situation is not that serious, temporary extension of receivable maturity is one of the possible solutions so that the customer is prevented from the risk of meeting conditions of insolvency testing (multiple past due receivables).

 

In this situation, it is understandable that a supplier will require a certain form of assurance from the customer for the extension, which may give rise to some issues. For example, if a customer collateralises its assets as consideration for the extension of maturity for the benefit of a supplier and, subsequently, the customer goes bankrupt, this act could be objectionable in the insolvency proceedings and the supplier might lose the collateral. It is more advisable to require collaterals from third parties if possible (e.g. parent company, bank guarantee, etc.) rather than from the customer.

 

The current situation may escalate the competitive environment and certain businessmen will strive to eliminate their competitors through unjustified or bullying insolvency petitions.

 

If you face such a petition, we recommend responding proactively and as fast as possible. The Insolvency Act offers a relatively wide range of tools to defend against this procedure or possibly disprove any insolvency presumption established on formalistic grounds. For example, the ability to meet obligations should be assessed taking into consideration a company’s future profit. In addition, the instrument of coverage gap may be applied, which is aimed at a short-term liquidity failure. In certain situations, the court may decide that an insolvency petition will not be published in the insolvency register for a certain period to eliminate any adverse impact on business credibility and uncontrolled customer outflow.

 

Making decisions in a crisis period places much greater demands on company managers who are obliged to make a number of decisions under pressure. It is obvious that the pressure on making the right decisions has increased significantly at present.

 

It is necessary for the management of companies impacted by the current crisis to thoroughly monitor the situation. It should be taken into consideration that if a company is on the verge of bankruptcy it is not possible to prefer only certain creditors (usually the most aggressive or the key ones) in receivable settlement. Such an approach may be classified as giving preferential treatment to those creditors and may have criminal consequences. If the insolvency test is positive, management is obliged to file an insolvency petition; otherwise, it is exposed to the risk of liability for damage. If company management files an insolvency petition, the possibility of imposing a moratorium should be taken into consideration. This may postpone bankruptcy declaration and provide the time needed to negotiate a recovery approach to solving bankruptcy with creditors in order to preserve business operations and jobs.

In general, management is recommended to start solving the situation as soon as its doubts on a business’s financial health arise and seek out professional assistance. Nearly any crisis has a solution if preventive measures are adopted in time and with professional care. Our team is ready to assist you in this respect.

The coronavirus COVID-19 pandemic puts new demands on organizations. We have put together a set questions and answers, which can help organziations with the most common legal questions.

Coronavirus: What to consider (in legal terms) when solving problems with liquidity?

TAX LITIGATION

Deadlines for filing ordinary tax statements are approaching. In connection with the current situation, do I have to file a statement within the statutory deadline?

 

If you file an income tax return and simultaneously pay the stated tax by 1 July 2020, your fine for late filing of your tax return and default interest will be remitted even without an official request. Please note that the decision of the Ministry of Finance of the Czech Republic does not extend the period for filing an ordinary tax return, but only remits the fine related to its late filing. Therefore, we recommend using other legal options to postpone filing of a tax return. In the case of VAT, your fine of CZK 1,000 for late filing of a local sales and purchases report (LSPR) may be remitted without making a request if it was filed before receiving the call. Upon receipt of the call, the fine may be remitted based on a request if the failure to file the LSPR demonstrably occurred as a result of extraordinary measures related to coronavirus. There are also other options for remission of sanctions upon request if a connection with coronavirus is established. However, a number of other conditions need to be fulfilled in respect of the remission.

 

I am obliged to participate in the 3rd or 4th phase of electronic records of sales. However, the current situation does not allow me to get prepared in order to fulfil all statutory requirements as of 1 May 2020.

 

Unfortunately, the Act on Registration of Sales does not allow any postponement of the following phases of electronic records of sales. However, the Financial and Customs Administration has promised the most tolerant approach during inspection activities. Therefore, it can be expected that, for a period of 3 months starting from 1 January 2020, no sanctions will be imposed in case of non-compliance with the obligations in connection with the introduction of the 3rd and 4th phases of electronic records of sales.

 

Due to the closure of premises, my current income has been significantly reduced. Is it possible, due to the lack of funds needed for my business, to set up regular payments of periodic income tax prepayments differently?

 

In legitimate cases, the Tax Code allows the Tax Administrator to establish a different amount of prepayments for taxable entities, or to cancel prepayments, even for the entire taxation period. In particular, taxable entities may apply for reduction in tax prepayments if their income does not reach the same level as in the previous periods on the basis of which the prepayments were set up.

 

What to do if I do not have enough funds to pay my tax obligations without compromising my business. What are my options?

 

The taxable entity may ask the Tax Administrator for a so-called tax deferral or repayment schedule. For example, in a situation where paying your tax could cause you serious detriment, you may ask the Tax Administrator for a tax deferral. In this case, you do not have to pay default interest of 14% + repo rate, but only interest on the deferred amount of 7% + repo rate. Moreover, this interest can also be remitted, partially or, in exceptional cases, completely. Simultaneously, until 31 July 2020, the administrative fee of the original amount of CZK 400 for a tax deferral request or distribution of tax into instalments will be remitted. Alternatively, please keep in mind that individual sanctions may be remitted if a connection with coronavirus is established. However, we recommend that you actively address any debt to the Tax Administrator so that there is no enforcement by the Tax Administrator.

 

How can a lack of funds be addressed to maintain operating activities?

 

For example, you can take advantage of the opportunities for self-employed persons and SMEs whose business has been affected by the current measures. From 16 March 2020, they will have an option to apply for interest-free loans of up to EUR 15 million under the governmentapproved programme of Českomoravská záruční a rozvojová banka (ČMZRB) – the COVID loan. EU funds can also offer some options.

 

Because of the strict restrictions imposed by the Government and the ban on public events, my investment has been thwarted. Is it possible to seek compensation for such detriment?

 

The Crisis Act stipulates an obligation of the State to compensate for detriment caused to legal and natural persons in connection with crisis measures. Therefore, the taxable entities may submit an application for compensation for detriment within 6 months from the time when the taxable entity learned about the detriment.

Coronavirus: Possibility of tax reliefs in times of emergency
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