Act No. 89/2012 Coll., the Civil Code (hereinafter “NCC”), which has been in effect since the beginning of the year, has completely changed the established Czech legal environment. One legal institute that the NCC has changed substantially is the institute of compensation for damage. It is therefore appropriate to familiarise you with some of the important changes brought by this legislation here in this article.
1. Prerequisites for establishing liability
First and foremost, it is clear that with the repeal of the old Civil and Commercial Codes, dual-track legislation on compensation for damage is a thing of the past, and the provisions of the NCC apply whether dealing with relations between entrepreneurs or non-entrepreneurs.
The primary prerequisite to establish liability for compensation (newly damage/s) is a breach of legal obligations.
The NCC now recognises 3 possible cases of a breach of legal obligations, namely:
- a breach of good morals (§ 2909 NCC)
- a breach of law (§ 2910 NCC)
- a breach of contract (§ 2913 NCC)
Although there are numerous differences, the basic difference lies in culpability.
While culpability is not a requirement for an obligation to pay compensation for damage resulting from a breach of contract, culpability is an essential prerequisite for an obligation to pay compensation caused by a breach of good morals or the law. According to Section 2911 of the NCC, culpable negligence is presumed in case of a breach of statutory obligations.
It is clear from the above that in case of damage to another party’s property during, for example, a traffic accident, it will be necessary to prove the damaging party caused the accident. If, however, in the same accident, a freight carrier is unable to meet its obligation to deliver goods, it will be liable to the creditor, even if it demonstrably didn’t cause the accident.
However, the above rules may not be absolute, as in some cases it is possible to be relieved of liability for compensation, for example by proving vital self-defence or necessity. Another liberating reason can be force majeure (e.g. natural disaster, war). Liability can also be contractually limited or excluded (see point 5 below).
An interesting new provision states that a claim for compensation may not only be exercised by a contracting counterparty, but also the party the execution of the contract was meant to serve.
So, if, for example, a father concludes a lease agreement for a house in which his entire family is to live, and his son consequently suffers damage to property (e.g. his notebook is destroyed by a faulty electric socket), the father can claim compensation for damage from the landlord himself.
2. Restoration to previous condition, not cash
Legislation on compensation for damage has changed significantly. Compensation for damage is newly achieved by restoration to original (good) condition. Cash (financial) compensation for damage can be awarded at the specific request of the injured party. Under the old legislation, compensation for damage were principally paid in cash. Restoration to original condition was only possible if requested by the injured party, where this was possible and practical.
There is no change in the area of non-property damage. Financial compensation is possible if there is no other way to ensure effective and adequate reparation for damage (§ 2651 (2) NCC).
3. What are the rules for non-property damage?
In case of non-property damage (e.g. damage to reputation), the damaging party is only obliged to pay compensation if so stipulated by law, or if the parties have expressly agreed to do so (§ 2894 (2) NCC).
A different approach to non-property damage can be found in Act No. 90/2012 Coll., on business corporations (hereinafter “ABC”), under which non-property damage is always paid if caused by a breach of obligations prescribed by community law (§ 3 (2) ABC).
4. Debt is also incurred damage
Another significant change from the old legislation is the moment damage occurs. Previously, a point of contention often arose on whether the creation of a debt could be considered as damage, for example, if the injured party was obliged to pay something to a 3rd party as a consequence of the damaging party’s actions (e.g. if the injured party was given a fine by the tax office). However, earlier case law clearly concluded that damage arose at the moment the fine, or respectively debt was paid (e.g. Supreme Court of the Czech Republic ruling of 29 May 2003 in case no. 25 Cdo 1836/2001). Damage was thus understood as an actual reduction of the injured party’s property (assets).
Damage is also newly defined as damage to equity capital (§ 2894 (1) NCC), which is understood to mean an actual reduction in the injured party’s property (assets) and the creation of debt (liabilities) on the side of the injured party. The injured party will thus be able to newly claim compensation at the moment a debt arises as a consequence of the damaging party’s actions (§ 2952 NCC, second sentence), which means not just before the actual payment of the debt and reduction of the injured party’s property, but also before the due date of the created debt. The decisive factor for entitlement to compensation is therefore just the creation of a debt.
5. Contractual limitation of liability
Because the NCC is primarily based on autonomy of will, and allows a greater degree of freedom in laying down relations between contracting parties, the option of contractually limiting liability for damage, or waiving the right to compensation for damage is also regulated.
Limitation of liability is not possible, however, in case of damage to natural rights, wilful damage or gross negligence. Similarly, the weaker party cannot validly waive or limit its right to compensation for damage (§ 2898 NCC).
6. Determination of compensation by the court
Another problematic aspect of the old legislation was quantifying damage. The plaintiff was previously forced to precisely quantify damage and could only successfully exercise its right to compensation based on specific damages. However, this was not possible in some cases.
The NCC now explicitly allows the court to determine the amount of damages in such cases by fair consideration of all the circumstances of the specific case (§ 2955 NCC).
This will have a practical impact on the procedural standing of the plaintiff, who will no longer be forced to quantify damages where this is practically impossible and can bring an action for compensation in the amount determined by the court. The court fee will then probably be paid as a flat fee.
7. Conclusion
Overall, it can be said that there are many changes in legislation on compensation for damage and some significantly change the regulation of compensation for damage from previous legislation.
Overall, the NCC improves the legal standing of injured parties, as it extends the circle of actively legitimate parties able to bring an action, simplifies the burden of proof and also sees the creation of debt on the side of the injured party as damage.
Hitherto any action for compensation for damage was very difficult from the position of the plaintiff, as the burden of proof was highly demanding. The new legislation will hopefully allow injured parties to effectively exercise their rights.
This article only examines some changes to the regulation of compensation for damage and is not a complete overview of all changes. Regulations governing special types of liability for damage such as damage caused by an animal, object, information or advice are beyond the scope of this article.
When preparing contracts, it is therefore always advisable to contact an expert, who will appropriately set forth entitlements to compensation for damage in the contract and take into account the potential risks arising from the new legislation.
For more information, please contact our office’s partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz ; tel.: +420604242241.