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Changes to public contracts and arbitration as of 1 April 2012

On 1 April 2012, everyone working with public contracts in a professional manner will be faced with substantial changes brought on by the new amendment to the Public Contracts Act, which is one of two amendments to come into force on 1 April. Changes are also set to take place in relation to arbitration, especially with regard to so-called consumer-related disputes. The brief summary below provides important information on the key impacts of the two upcoming amendments.

Act No. 55/2012 Coll. amends Act No. 137/2006 Coll., the Public Contracts Act, as amended

Key changes:

  • The “grand” amendment to the Public Contracts Act, also known as the “anti-corruption” amendment, will impose a number of new duties on contracting authorities, abolish certain qualification criteria, and enable the Act to be applied to additional areas of public investment.
  • The existing financial thresholds for public contracts have been reduced by half. Starting in 2014, the specific financial threshold for construction work will be abolished. Contracts for goods and services can be deemed “minor” public contracts if the anticipated value is under CZK 1 million (the current threshold is CZK 2 million). The threshold for construction contracts will be reduced from CZK 6 million to CZK 3 million and, also starting in 2014, contracting authorities will be subject to a CZK 1 million threshold for minor public contracts no matter what type of delivery is involved. The financial threshold for applying the simplified below-limit procedure has been reduced from CZK 20 million to CZK 10 million.
  • A new category of “major public contracts” worth CZK 300 million and more (or CZK 50 million and more for municipalities) was introduced and is subject to stricter rules. For state contracts, the government shall appoint an evaluation committee and government approval is required in terms of the contract itself (an opponent expert statement is required). These rules will not be applied fully until 2014. The major contracts to be concluded by a municipality require approval from the municipality’s local government.
  • The definition and purpose of a preliminary notice of a public contract that is to be made by the contracting authority has been redefined. The preliminary notice will be a mandatory requirement for all above-limit and below-limit public contracts tendered by public contracting authorities. The preliminary notice must include reasoning that justifies the purpose of the contract. There are, however, exemptions, such as for contracts tendered more than once due to a lack of interest in a prior procedure.
  • The Amendment has entirely abolished the practice of drawing lots as a means of reducing the number of candidates. With regard to restricted and negotiated procedures with publication, the possibility of limiting the number of candidates, but not by means of drawing lots, is permitted only for defence and safety contracts or contracts awarded by sector contracting authorities.
  • Contracting authorities may state in the tender documentation that the respective bid may be submitted only by electronic means.
  • Contracting authorities will no longer be permitted to request that contractors submit quality management system certificates and similar environment-related documents.
  • The Amendment abolishes the requirement that economic and financial qualification criteria must be documented. Instead, contractors are required to present an affidavit stating that they are economically and financially capable of delivering and completing the public contract.
  • To document past supplies and services, a contractor’s affidavit will no longer suffice. Instead, contractors are required to present a contract and a project completion document.
  • Bids are to be opened immediately upon the expiry of the bid submission deadline.
  • A new duty to disclose an executed contract, the price actually paid, and a list of subcontractors applies to public contracting authorities and all below-limit and above-limit contracts. There are, however, several exemptions (such as safety concerns where deliveries of military materials are involved, etc). The executed contract must be disclosed even where a minor contract with a value exceeding CZK 500,000 is involved.
  • Complaining bidders will not be able to file an official complaint with the Competition Authority before they have exercised their right to complain to the respective contracting authority. The penalties that the Competition Authority may impose on contracting authorities and contractors for any violation of the Public Contracts Act have been increased substantially – most of them have been doubled.
  • The Amendment finally approved by the Chamber of Deputies at the end of January 2012, however, fails to include the much-discussed duty placed on winning contractors to disclose their ownership structure, which was much sought after by senators.

Comments by KSB lawyer Martina Parusová Zímová:

“The Amendment has substantially expanded the range of public contracts that will have to be tendered and awarded subject to the rules imposed by the Public Contracts Acts since it substantially reduces the thresholds for minor public contracts and expands the group of subsidized contractors who are required by statute to tender and award public contracts. While some may appreciate this change, smaller contractors (such as municipalities with several thousand inhabitants) are likely to incur higher costs and exert greater effort to take part in tenders. Moreover, because the group of contractors is now larger, there will be much more on the Competition Authority’s plate and I personally am not sure whether the Authority is ready to handle the workload which is to arrive in the first half of 2012.”

“I do, however, greatly appreciate the fact that the disputed practice of eliminating candidates by drawing lots – everybody remembers the notorious “Carlsbad lot drawing” – has been abolished and that an electronic auction for deliveries of goods was introduced. Hands-on experience clearly shows that auctions can help increase savings. At the same time, it is very likely that the decree implementing the details of electronic auctions will not be adopted by the end of March, when the Amendment is due to take effect. That would mean that in certain circumstances the Amendment will not have to be followed and electronic auctions will continue to be voluntary, which is an apparent weakness in my opinion.”

“What I regret is that the Amendment fails to impose a duty on contractors to disclose their ownership structure. Nevertheless, I consider the Amendment a positive attempt to increase transparency and save public money. Time will tell how successful the attempt will be.”

Act No. 19/2012 Coll., amending Act No. 216/1994 Coll., the Arbitration Act, as amended, and other associated legislation

Key changes:

The Amendment will introduce important general changes to arbitration and specific changes to so-called consumer-related disputes.

  • General changes: The definition of a permanent arbitration court has been rendered stricter (the only courts that can serve as permanent arbitration courts are courts established or appointed by a special act). There will be an explicit ban on using any misleading designation which could provide a notion that a particular entity is a permanent arbitration court when in fact it is not. The requirement that arbitrators must have a clean criminal record will mean a record clean of any convictions for any crime. The parties to the arbitration will be free to agree on a third party to appoint the arbitrators. Property-related disputes will newly be able to be resolved by arbitrators subject to being permitted by a special act (such as in the communications industry where administrative authorities are in charge of resolving disputes rather than the court).
  • Consumer-dispute news: Parties in a dispute will not be able to enter into an arbitration agreement except by means of an independent document rather than through a clause within a loan or another contract. The arbitration agreement will be subject to prescribed requirements and parties to the agreement who are businesses will have to inform the given consumer about the consequences that may result from entering into the arbitration agreement (that arbitrators will be in charge of resolving the dispute instead of a general court). The only individuals who will have the authority to decide consumer-related disputes will be law graduates registered with the Ministry of Justice. Consumer-related arbitration awards will have to include reasoning and instructions for available remedies. If a consumer seeks to have the arbitration award cancelled by referring the matter to a general court, the court will be required to review certain aspects of the award on a mandatory basis, including the grounds for suspending the exercise of the award. Moreover, the courts will be able to cancel consumer-related arbitration awards if they are in conflict with consumer protection laws and any apparent conflict with good ethics or the public order. In addition, the grounds for suspending distraint proceedings will be expanded even in cases where the deadline for review has expired.

Comments by KSB lawyer Josef Bedeč:

“I do not expect the general changes to the Arbitration Act – such as the stricter definition of the permanent arbitration courts – to have any immediate practical impact. What are much more important for the general public are the changes specific for so-called consumer contracts and related disputes.”

“The reasoning report indicates that the Amendment was adopted due to the Czech law’s conflict with acquis communautaire and judgments by the European Court of Justice, which pays greater attention to adequately protecting consumers, who are traditionally the weaker party when compared to the businesses.”

“The consumer-specific changes can be summarized into three main categories. First, new requirements are imposed on businesses in entering into arbitration agreements, such as the requirement that the arbitration agreement must be made as a separate and independent document with prescribed contents or the requirement that consumers must be informed of the consequences of entering into an arbitration agreement. Second, the general courts will have broader grounds for cancelling consumer-related arbitration awards if they are in conflict with consumer protection laws and if there is any apparent conflict with good ethics or the public order. In addition, rather than having to follow what is pleaded for in the petition for cancelling an arbitration award, the court will have to review certain aspects of ex officio. And third, professional requirements have been rendered stricter on those who wish to resolve consumer-related disputes.”

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