Compensation from the State

Regarding the possible issue of claiming damages from the state, we would like to advise you that the Czech Republic has not yet faced a similar situation. Thus, it is impossible to foresee how the courts shall face this issue.

Naturally, many entrepreneurs whose work has been limited by the Government under the current circumstances have been asking whether they will be compensated for damage (e.g. unsaleable goods) or lost profits. Generally speaking, the state is responsible for any damage caused by emergency measures that have been imposed. Therefore, for example, if the presence of the public in a business establishment is prohibited, the entrepreneur could claim lost profit. However, as the measures affected a large number of businesses and the potential amount of total damage that the state would have to pay could be astronomical, government officials have already declared that they fundamentally refuse to compensate for lost business profits and only direct damage will be compensated, such as the seizure of property (this has not really been the case at the moment, but think of the seizure of medical or protective materials for example).

However, the right to compensation is provided for by law and the final decision on (non-) compensation must be decided by the courts, not the Government. However, the Government has made some changes in the form of existing decisions, which may have a major impact on ​​compensation.

Whereas between 12 March 2020 and 22 March 2020, most of the restrictive measures were adopted as a “government resolution adopted as an emergency measure”, effective from 23 March 2020, all restrictive measures are being adopted as “extraordinary measures taken by the Ministry of Health”. However, they are identical in content, the only difference being the “document header”.

Although this can be seen as nothing more than a formal change and the factual impact on business activity is the same, from the legal perspective, the fundamental difference is that restrictions imposed as extraordinary measures by the Ministry of Health are compensated under much stricter conditions. The main difference will most likely be that under measures adopted by the Ministry – according to the law – only those restrictions that resulted from unlawfully adopted measures may compensated for, while under emergency measures, the state would have to pay compensation regardless of whether a measure was taken legally or not.

An important development has happened on April 23, 2020, when the Municipal Court in Prague has decided to revoke four decisions of the Ministry of Health. In particular, the measures in question had introduced restrictions on the free movement of persons, retail sales and the provision of services.

The court has reasoned that the restrictions are so severe that they may only be imposed by the government, not merely by the Ministry of Health. Therefore, the Ministry had not been duly authorized to issue such measures. Currently, the government has been given time until April 27th, 2020 to re-adopt them in the form of a crisis measure of the government.

This decision means a positive turning point in the issue of compensation for damage caused by state-ordered measures. Beginning on April 27th, 2020, the restrictions shall bear the form of a crisis measure, which makes the state liable for any damage caused due to them, regardless of the legality of such measures. However, most importantly, the measures of the Ministry, effective between March 22nd and April 26th, 2020, are now considered illegal. This might make the state liable for related damages. The court's decision might still be overturned by the Supreme Administrative Court.

Other differences of both compensation regimes include, for example DIFFERENT TIME LIMITS for making claims – for emergency measures, the time limit is relatively short, and within 6 months, claims must be filed with the relevant state authority.

Common rules for both compensation schemes:

Consideration will be given, for example, to the cost of storing or destroying perishable goods or severance pay paid out to employees in connection with the measures that have been taken.

It is also possible to seek compensation for lost profits if the injured party can prove that it would have achieved such profit, for example, based on its results of previous periods. There must be a direct link between an ordered measure and the damage suffered as not all economic losses associated with the COVID-19 pandemic will be compensated.

Compensation for damage is not provided, or its amount will be reduced, if the damage was partially caused by the injured party. In practice, this means taking all reasonable measures to avoid incurring damage as much as possible. It may also be questionable whether the injured party has done everything it could – this will be a problem, particularly with regard to compensation for lost profits.

It is advisable to gather as much evidence for possible litigation now, including but not limited to: