On 14 December 2015, long-awaited Act No. 340/2015 Coll., on Special Conditions for the Effectiveness of Certain Contracts, the Disclosure of These Contracts and the Register of Contracts (Act on the Register of Contracts, hereinafter “ARC”) was published in the Collection of Laws. The Act governs conditions for the disclosure of contracts between public entities and private individuals in which the value of performance exceeds CZK 50,000, and imposes a tough penalty of invalidity in cases where these contracts are not published. The Act also addresses exemptions from the obligation to disclose these contracts and the contracting authority’s duty of disclosure pursuant to Act No. 137/2006 Coll., on Public Procurement.
I. Duty of disclosure
Under the Act, it will be mandatory to publish (disclose) all private-law contracts and contracts for the provision of subsidies or repayable financial assistance in which the Czech Republic, a regional or local authority, a government organisation, state fund or other legal entity in which a state or local government authority has a majority stake holding is a contracting party.
Under Section 3, the Act also provides exemptions from the duty of disclosure. Specifically, for example, there is no obligation to disclose contracts in which the value of performance is less than CZK 50,000, contracts entered into with a natural person acting outside the scope of their business activity, contracts relating to copyright work or contracts to be performed largely outside the Czech Republic and more.
Contracts subject to the Act will be published (disclosed) by the public bodies listed in Section 2 of the ARC, not their private contractual partners. The duty of disclosure applies to both the contract in open and machine readable format, as well as so-called metadata, identifying the contracting parties, subject of the contract, the price and date of the conclusion of the contract. However, metadata may be exempt from disclosure on the grounds of protecting trade secrecy.
II. Penalties for failure to disclose
To ensure the willingness of the entities listed under Section 2 to disclose concluded contracts, the ARC includes a relatively tough stipulation under Section 6, whereby such a contract only becomes effective on the day of its publication (disclosure). Performance on the basis of an unpublished contract will be considered unjust enrichment. Only a contract concluded in order to prevent or mitigate impending damage in direct connection to an emergency endangering life, health, property or the environment can come into effect without publication in the Register of Contracts. The question is what kind of situations will fall under this exemption and which will not, particularly with regard to this vague definition.
In this context, the ARC stipulates a harsh penalty in the event of a failure to publish (disclose) a contract under Section 7: “Where a contract, which takes effect no earlier than the date of its publication, is not published in the Register of Contracts within three months of the date on which it was concluded, it shall be considered void from inception.” Legislators have thus included strong motivation for obligated entities to publish such contracts.
While the ARC comes into effect on 1 July 2016, Section 6 and 7 shall only apply to contracts concluded on or after 1 July 2017 according to interim provisions. In the intervening period between these effective dates, entities will still be required to disclose contracts, but without penalty. However, if a contract concluded before the Act entered into force is amended or changed in any manner, this amendment will be published in the register, together with the original contract.
III. Relationship to the Public Procurement Act
Another Act, currently in force, that imposes an obligation to publish (disclose) contracts with public entities is Act No. 137/2006 Coll., on Public Procurement (hereinafter also “PPA”). In Section 147a, this Act imposes an obligation on the contracting authority (primarily the Czech Republic, budgetary organisations, regional authorities, etc.) to publish the entire public procurement contract, the contract price and a list of subcontractors on completion of the tender process, on the contracting authority’s profile, provided the value of the contract exceeds the threshold of CZK 500 thousand.
The relationship of these two Acts to the duty of disclosure is governed by Section 8 (4) of the ARC. If a contract that is to be published according to the PPA is published in the Register of Contracts, this satisfies the obligation to publish it according to the PPA; this applies analogously to data published as metadata according to the ARC. However, in order to meet the requirements of both the PPA and ARC, a list of subcontractors will also have to be published in the ARC, as required by the PPA.
In view of the fact that the duty of disclosure under the PPA applies to contracts for performance of over CZK 500,000, the provisions of the ARC are unduly stricter. It is also important to point out that although publication in the Register of Contracts replaces publication on the contracting authority’s profile under the PPA, the reverse does not apply and publication in the Register of Contracts cannot be replaced by publication of the contract on the contracting authority’s profile. A contract concluded after 1 July 2017, which is not published in the Register of Contracts, will therefore be ineffective and after three months from its conclusion considered void from inception.
IV. Conclusion
The Act on the Register of Contracts brings the long-awaited disclosure of contracts in which public entities are contracting parties, in order to increase the transparency of public administration. Legislators have appropriately set the minimum value from which it is necessary to publish contracts in the register, as well integrating the provisions of the new Act with the publication of public procurement contracts on the contracting authority’s profile under the PPA.
However, the appropriateness of the penalties stipulated under Section 6 and 7 is arguable, namely to postpone the effectiveness of contracts until their publication and their invalidity from inception in case of non-disclosure. The government has already stated in its opinion on the draft ARC that the postponement of the effectiveness of a contract is “excessive formalism that can complicate a whole range of relations.” In the government’s opinion the exemption of contracts entered into for emergencies will also cause problems, specifically due to the definition of contracts to which this exemption applies, which will not provide greater legal certainty.
It should also be noted that in the event the public administration portal is not operational due to downtime, the flexibility of public authorities to enter into contractual relationships will be significantly reduced. The effectiveness of contracts will be deferred until such time as the public administration portal is operational again. As a result of the inoperative portal, this could also give rise to unjust enrichment on the part of the other party.
However, there is no doubt that the imposition of an obligation to publish (disclose) contracts in the register is a further step towards the transparent operation of the state and its financial management.
For more information, please contact our office’s partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz ; tel.: +420604242241.