The issue of validity of “forced” settlement with the State

From the beginning of April, employers may apply for a contribution towards wage compensations from the Antivirus programme guaranteed by the Ministry of Labour and Social Affairs. The Ministry of Labour and Social Affairs grants the contribution on the basis of an agreement on the provision of a contribution from the Antivirus programme concluded between the applicant-employer and the State. The terms of the agreement also include provisions on settlement. But is such a general provision on settlement automatically valid?

The contribution should compensate employers for 60% or 80% (as the case may be) of the compensations for wages paid to employees unable to work due to the COVID 19 pandemic, but no more than CZK 29,000 and CZK 39,000, respectively, per month and employee. Employers wishing to receive the contribution must conclude an agreement with the Czech Republic, whereby they represent that all their claims against the Czech Republic arising from the compensation for damage caused by emergency and extraordinary measures and Governmental resolutions adopted under the Crisis Management Act are settled by payment of the contribution, to the extent to which the damage follows from the employer’s obligation to pay compensation for wages or pay in case of impediments to work. Accordingly, even those employers who would otherwise be able to prove that they have incurred damage as a result of the aforementioned measures or resolutions in fact waive their right to claim actual damages when they accept this agreement.

In the light of all the circumstances, the State might in fact be abusing the distress of employers when concluding these agreements. The term distress is interpreted to mean not only a threat to physical or economic existence, but also a case where a party is in serious troubles and therefore accepts a disadvantageous contract as a “lesser evil”. If the counterparty abuses this situation, the party acting in distress may plead that the relevant provision are invalid.

The recent decision of the Municipal Court in Prague shed a new light on the situation. In the second half of March, the State began adopting extraordinary measures through the Ministry of Health based on the Public Health Act, which – unlike the Crisis Management Act – lacks explicit provisions on compensation for damage, thus making it even more difficult for employers to claim compensation. The measures forced employers to close down or limit their operations or created impediments to work on their part. The State offered them possible compensation under the Antivirus programme. But the Municipal Court in Prague ruled that only the Government had the necessary competence to restrict rights and freedoms of citizens at the time of a pandemic, and that the Government could do so only through emergency measures adopted under the Crisis Management Act, which expressly makes it possible to claim damages. The court cancelled the measures adopted by the Ministry of Health and enabled the Government to issue the same measures using a legitimate procedure by 27 April at the latest. Apart from being unlawful, the steps taken by the State could also be considered chaotic.

In the light of the court decision and the aforesaid circumstances, and also taking into account that most employers concluded the agreements at a time when they believed they had only a negligible chance to claim damages against the State as the Public Health Act contains no such option, we believe that it is open to debate whether the settlement provision comprised in the agreements is valid without further ado and whether it automatically deprives the employer of the right to claim full compensation for damage incurred as a result of the extraordinary and emergency measures. We believe that the situation has to be approached not indiscriminately, but rather on a case-by-case basis, depending  on the specific circumstances. In this respect, the execution of this agreement as such should not prejudice the right to claim damages because where the grounds for invalidity pertain solely to a provision that can be severed, only this provision is invalid, while the remaining provisions of the agreement remain in force.

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