Common Law Review Description of rss feed of common law review. cs Thu, 30 Mar 2017 04:44:16 +0200 Thu, 30 Mar 2017 04:44:16 +0200 PUBLIC INVESTMENT VS. STATE AID IN THE CONTEXT OF EU LAW: A Comparison of the EU and WTO Regimes of State Aid Control <p class="editor-page-number">43</p> <h1>1. Introduction</h1> <p style="text-align: justify;">This article will attempt to grasp the concept of State aid as understood by European law, by contrasting it with the alternative approach adopted towards subsidies within the framework of the WTO. As a general rule of the EC Treaty public enterprises are not subject to different or stricter rules vis-à-vis private enterprises.<span class="editor-footnote">Note that Article 86 (2) of the Treaty provides that the application of competition rules cannot obstruct the performance of the particular tasks assigned to the undertakings entrusted with the operation of services of general economic interest.</span> This implies the possibility of the State creating public enterprises or even participating in the capital of a private enterprise<span class="editor-footnote">Biondi, Eeckhout, Flynn, <em>The Law of State Aid in the European Union</em>, Introduction by F.G. Jacobs, p. 10.</span> The State, from its privileged position, can intervene with the aim of promoting economic development in the event that a project cannot be financed by private investors. On the other hand, subsidies provided by the State <em>“most obviously hinder economic integration and distort competition as they provide an immediate artificial competitive advantage.”</em><span class="editor-footnote">Quidley and Collins, <em>EC State aid Law and Policy</em>, 2003, 4, citing Eight report on competition policy (1988), p. 41.</span></p> <p style="text-align: justify;">The main focus of our interest is how can it be verified whether State participation constitutes State aid or not? This is clearly a complex issue with very important practical consequences. The extent of the State’s role in the economy requires to be clearly identified. The</p> <p class="editor-page-number" style="text-align: right;">44</p> <p style="text-align: justify;">operators and Member States have to know what kind of conduct qualifies as illicit State aid according to EU law, in view of the serious procedural consequences of a failure to notify a proposed new aid. In fact only when this definition is made clear can effective control of State aid be undertaken.</p> <h1 style="text-align: justify;">2. What Qualifies As Being State aid?</h1> <h2>2.1 State Aid under EC Law</h2> <p style="text-align: justify;">Article 87 (1) defines State aid incompatible with the common market as being <em>“any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, in so far at it aff ects trade between Member States.”</em> In practice this ban is of a more limited nature.<span class="editor-footnote">Crocioni,<em> Can State Aid Policy Become more Economic Friendly?</em>, World Competition 29(1): 89–108, 2006, Kluwer Law International.</span></p> <p style="text-align: justify;">For a measure to be defined as being State aid a number of criteria have to be satisfied. First of all it must confer a benefit or an advantage on one or more undertakings. There need not always be a physical depletion of existing State funds. The measure must comply with the requirement of selectivity, which draws a distinction between an act of general economic policy pursued by a Member State such as the easing of credit controls or a specific tax regime for the self-employed and more targeted State interventions which are subject to competition policy scrutiny.<span class="editor-footnote">Ahlborn, Berg, <em>State Aid and Antitrust</em>, in Biondi supra, p. 51.</span> The distorting effects on competition as well as the effect on trade between Member States form the constitutive elements of State aid. In compliance with the effects-based approach merely a potential distortive effect would suffice to breach article 87 (1). The ECJ defined the concept of aid as being a <em>“direct or indirect economic advantage to the beneficiary which it would not have obtained in the ordinary course of business.”</em><span class="editor-footnote"><em>Amministrazione Italiana delle Finanze dello Stato v Denkavit Italiana Spa</em>, C-61/79, [1980] E.C.R. 1205.</span> In the end the conditions for State aid were clarified by the ECJ in its Altmark decision<span class="editor-footnote"><em>Altmark Trans GmbH v Nahverkehrsgesellschaft Altmark GmbH</em>, C-280/00, [2003] E.C.R. I-7747.</span> which has become settled case law.</p> <p style="text-align: justify;">In order to ascertain whether aid has been granted by the State through public resources, the ECJ has proposed the two step <em>“State imputability test”</em> in the Stardust Marine case.<span class="editor-footnote"><em>France v Commission (Stardust Marine)</em>, C-482/99, [2002] E.C.R. I-2481.</span> The mere fact that a bank and its subsidiaries were controlled by the State would not in itself be sufficient to turn their funds into State resources. In order to determine whether the aid is of State origin or not, the ECJ imposed an additional condition according to which the specific measure conferring funds on a beneficiary must be attributable to the State. There is, however, no presumption of imputability to the State where the resources are under the control of the public undertaking. Imputability to the State has to be deduced from the facts and circumstances of the particular case and from the context within which such a measure has been applied.<span class="editor-footnote">Opinion AJ Jacobs, <em>Stardust Marine,</em> C-482/99, [2002], E.C.R. I-4397.</span></p> <p style="text-align: justify;">Despite this clarification of the imputability criteria, so far they do not seem to have been clearly followed in practice. For instance, the ECJ seems not to have taken the opportunity of appling the Stardust Marine test in its later judgement, Pearle.<span class="editor-footnote"><em>Pearle BV v Hoofdbedrijfschap Ambachten</em>, C-345/02, [2004], E.C.R. I-7139.</span> The issue here was whether an advertising campaign would constitute a measure that would amount to being State aid. The ECJ followed the <em>Preussen Elektra</em> model where the transfer of public resources was not at stake and simply stated that the measure could not be attributed to the State. Besides the fact that <em>“the costs incurred by the public body for the purposes of that campaign were offset in full by the levies imposed on the undertakings benefi ting therefrom, the Board’s action did not tend to create an advantage which would constitute an additional burden for the State or that body.”</em><span class="editor-footnote">Ibid, para. 36.</span></p> <h2 style="text-align: justify;">2.2. What Qualifies As Being a Subsidy in the WTO Regime?</h2> <p style="text-align: justify;">The EC State aid policy differs from the concept of subsidies within the WTO framework. The WTO rules provide a less strict obligation for subsidies control. It must be borne in mind that the WTO regulation does not have a direct effect on domestic legal systems. A remedy against illicit subsidized imports from a WTO Member can be provided by the dispute settlement mechanism or the countervailing duty procedure.<span class="editor-footnote">Rubini L., <em>The International Context of EC State Aid Law and Policy: The Regulation of Subsidies in the WTO</em>, in Biondi supra, p. 152.</span></p> <p style="text-align: justify;">Contrary to the EC Treaty, the WTO Agreement on Subsidies and Countervailing Measures (“SCM Agreement”)<span class="editor-footnote">Available at</span> provides a definition of subsidy. Laying down the definition has obviously not been without controversy as<em> “that whole area involves value judgements. Ultimately, what is involved is the confrontation between different philosophical,</em> <em>political and societal conceptions of the role of state intervention in the economy.”</em><span class="editor-footnote">Rubini L., supra, p. 158.</span></p> <p style="text-align: justify;">According to the SCM Agreement a subsidy shall be deemed to exist if there is either a financial contribution by a government or any public body or any form of income or price support which would increase exports or decrease imports of the product receiving the subsidy. The financial contribution requirement is further specified as being the direct transfer of funds, the potential direct transfer of funds or liabilities, due revenue that has not been foregone or collected by the government, the provision of special goods or services by the government apart from of general infrastructure, the purchase of goods by the government, contributions to the funding mechanism by the government or entrusting the private body to carry out some of the above-mentioned functions. The question of whether this list of categories is exhaustive or rather illustrative remains open.</p> <p style="text-align: justify;">As opposed to the EC ban on any State aid with an actual or hypothetical distorting effect on competition the WTO law <em>“does not necessarily embrace a full competition analysis as it may also be construed as a relief mechanism providing protection to the domestic industry from the competition of foreign products.”</em><span class="editor-footnote">Rubini L., supra, p. 187.</span> Subsidies are divided into several categories depending on the adverse effects they produce on international trade. The prohibited subsidies such as <em>“export subsidies”</em> or <em>“local-content subsidies”</em> have to be withdrawn without delay. This is often the case with favourable tax treatment, in the form of tax deferrals or exemptions, for income generated by export transactions.<span class="editor-footnote">WTO Appelate Body Report, <em>US-Tax treatment for Foreign Sales Corporations</em>, WT/DS108/AB/R, 20. 3. 2000.</span> On the other hand, a broad category of</p> <p class="editor-page-number" style="text-align: right;">45</p> <p style="text-align: justify;">actionable subsidies exists. Less urgently appropriate steps should be taken in order to avoid the adverse effects of such subsidies which promote domestic industries. The former provision on nonactionable subsidies, corresponding to the EC concept of justifi cation of State aid by the economic or social objectives, lapsed after unsuccessful negotiations on extending their application.</p> <h1 style="text-align: justify;">3. An Effect Based Approach</h1> <h2>3.1 Is the ECJ on Track towards an Effect Based Concept of State Aid?</h2> <p style="text-align: justify;">The ECJ in its rulings in <em>Commission v Italy</em><span class="editor-footnote"><em>Commission v Italy</em>, C-173/73, [1974] E.C.R. 709.</span> and <em>Commission v France</em><span class="editor-footnote"><em>France v Commission</em> (Kimberley Clark), C-241/94 [1996], E.C.R. I-4551.</span> pointed out that Article 87 does not distinguish aid according to its motivesor aims but defines them according to its effect. Whilst this principle would be in line with a market approach analysis of competition law, it has not been maintained with a sufficient degree of consistency.<span class="editor-footnote">Nicolaides, <em>Compensation for public service obligations: the floodgates of state aid</em>, 2003, E.C.L.R. 561, p. 561–562.</span></p> <p style="text-align: justify;">State aid has to be granted by the State through State resources, however inconsistent this requirement is, and raises a question concerning the scope of article 87(1). The wording of this provision might be taken to imply that aid can be granted by the State even though it is not granted through State resources,<span class="editor-footnote">Plender, <em>Definition of Aid</em>, in Biondi supra, p. 17.</span> that is to say without either a grant of money from the State or the foregoing of revenue. Such a broad interpretation would substantially diminish the significance of a transfer of resources from the State to the beneficiary. It would compromise legal certainty since more legislation would fall within the scope of the State aid rules and would then have to be assessed in light of the notoriously difficult selectivity criterion<span class="editor-footnote">Opinion of Advocate General Jacobs, <em>PreussenElektra</em>, C-379/98, [2001] E.C.R. I-2099.</span>. However, the broader concept might fit better with the effects-based approach to State aid.<span class="editor-footnote">Slotboom, <em>Subsidies in WTO law and in EC law: A Broad or Narrow Definitions?</em>, [2002] Journal of World Trade, 36(3): 517–542, 2002.</span> <em>“A State measure which confers a specific advantage on certain undertakings does not become less anti-competitive when it is fi nanced through private rather then public resources.”</em><span class="editor-footnote">Ahlborn, Berg, <em>State Aid and Antitrust,</em> in Biondi supra, p. 58.</span></p> <p style="text-align: justify;">In <em>Sloman Neptun</em><span class="editor-footnote"><em>Sloman Neptun Schiffahrts AG v Seebetriebsrat Bodo Ziesemer</em>, C-72/91, C-73/91, [1993] E.C.R. I-887.</span> the ECJ adopted a narrow approach, stating that even though the exemption of certain small businesses from the system of protection against unfair dismissal was capable of constituting <em>“aid”</em> it was not to be viewed as being granted through State resources. The effects-based argument that such partial nonapplication of employment law puts certain categories of enterprises at an unfair competitive advantage was not accepted.</p> <p style="text-align: justify;">This approach was reiterated in subsequent judgements such as <em>PreussenElektra</em>.<span class="editor-footnote"><em>Preussen Elektra SG and Schleswag</em>, C-379/98, [2001] E.C.R. I-2099.</span> Th e ECJ dealt in this case with the problem of whether and to what extent the concept of State resources should cover measures which are financed through private funds under State control. In order to promote the use of electricity from renewable energy sources Germany adopted legislation according to which the power supply companies had to purchase a percentage of their electricity from environmentally friendly producers. Irrespective of the question of private or public funding, PreussenElektra claimed that the benefit conferred upon the producers constituted State aid due to the fact that it resulted from action by a Member State. Nevertheless the ECJ confirmed the narrow reading suggested by AG Jacobs and concluded that the allocation of the financial burden arising from the obligation to purchase electricity at fixed minimum prices did not involve any direct or indirect transfer of State resources to undertakings which produce electricity from renewable resources. Due to the absence of any transfer of State resources in that case the measure could not be classified as being illicit State aid.</p> <p style="text-align: justify;">A strict market-based approach can be seen in the manner in which the ECJ applies the ‘private investor test’ as a benchmark to determine the existence of the <em>“benefit.”</em> Under this test financial assistance granted by the State amounts to State aid whenever the operator receives an economic advantage which it would not have obtained under normal market-economy conditions. This principle limits the scope of the definition of State aid as it hinders its disruptive effects. It means that even if the investment perfectly fulfils the conditions of article 87(1), it cannot constitute State aid given that it is provided under normal market conditions.</p> <p style="text-align: justify;">The test can be applied both to recipients who are alleged to have paid less than what the products were worth and to overpaid providers of goods or services as it enables the recipient to avoid costs which would normally have had to be met out of its own financial resources. Under the test, it must be apparent from the size of the capital injection and the circumstances in which the investment was made that a private investor would not have acted as the public authority did. This scrutiny is in fact the pronouncement of the principle of equal treatment of the public and private sectors. Therefore <em>“capital placed directly or indirectly at the disposal of an undertaking by the State in circumstances which correspond to normal market conditions cannot be regarded as aid.”</em><span class="editor-footnote"><em>Alitalia v Commission</em>, T-296/97, [2000] E.C.R. II-3871.</span></p> <p style="text-align: justify;">The application of the market investor test can sometimes be problematic. There are a number of questions arising such as over what timescale should the profit be recuperated. For the sake of legal certainty the ECJ has provided guidance by declaring that a private investor is one who runs <em>“the structural, global or sectoral policy guided by the perspective of rentability in the long term.”</em><span class="editor-footnote"><em>Spain v. Commission</em>, C-42/93, [1994] E.C.R. I-4175.</span> Should the assessment of advantageous treatment on the basis of comparison with private action not be possible, the hypothetical investor test is suggested.<span class="editor-footnote">Nicolaides, Kekelekis, Buyskes, <em>State Aid Policy in the European Community: A Guide for Practicioners</em>, Kluwer Law International, 2005, p. 19.</span> It must be proved that <em>“the hypothetical private investor, ideally prudent, well informed and eager to realise a profit at least in the long term would not in the same circumstances act in the same way”.</em><span class="editor-footnote"><em>Déménagements-Manutention Transport SA</em> (DMT), C-256/97, [1999] E.C.R. I-3913, <em>Chronopost v Ufex and Others</em>, C-83/01, C-93/01, C-94/01, [2003] E.C.R. I-6993.</span> It can be concluded that even if this test is not perfect it enable the Commission to determine the extent of the control exercised over public investment.</p> <p class="editor-page-number" style="text-align: right;">46</p> <h2 style="text-align: justify;">3.2 Interpretation of the Scope of subsidy by WTO Appelate Body</h2> <p style="text-align: justify;">Some very controversial issues arise within the WTO framework such as the dilemma of whether a subsidy necessarily involves budgetary implications or whether the exclusive requirement is the conferral of an advantage.<span class="editor-footnote">Bronckers, Quick, <em>What is a Countervailable Subsidy under EEC Trade Law?</em>, Journal of World Trade 23/1989.</span> The requirement of<em> “cost to government”</em> can refer to expenditure or also to losses of public revenue leaving the scope of the term open to interpretation. Surprisingly enough the Appelate Body in <em>Canada – Civilian Aircraft</em> <span class="editor-footnote">WTO Appelate Body Report, <em>Canada – Measures Affecting the Export of Civilian Aircraft</em>, WT/DS70/ AB/R, 20.8.1999, para. 149–161.</span> adopted a very broad approach. While examining the benefit conferred upon a private body under a SCM Agreement it concluded that a transfer of State resources was not required whereas the ECJ in <em>PreussenElektra</em> came to the opposite conclusion.</p> <p style="text-align: justify;">As far as the <em>“marketplace”</em> concept is concerned it is applied in very similar way as in the EC. The Appelate Body held in <em>Canada – Civilian Aircraft</em> that a financial contribution will constitute an advantage if it is provided on terms that are more advantageous than those that would have been available to the recipient on the market. This seems to be the best means for assessing the <em>“trade-distorting potential ”</em> of a financial contribution. At the same time the <em>“public investor criterion”</em> requires to be taken into account due to the role of the State as the representative of public interest, such as the need to redistribute wealth or to generally address market failures.<span class="editor-footnote">Rubini L., supra, p. 168.</span></p> <h1 style="text-align: justify;">4. Conclusion</h1> <p style="text-align: justify;">It may be difficult, even dangerous, to draw parallels between WTO and EC rules as they are each autonomous and are driven by different objectives. The main dilemma behind these concepts is whether control should focus only on the situation where trade distorting effects are proven to exist (WTO system) or whether there should be a general but rebuttable presumption that such effects already exist unless proven otherwise (EC system).<span class="editor-footnote">Bourgeois, <em>The GATT Rules for Industrial Subsidies and Countervailing Duties and the New GATT Round</em>, The New GATT Round of Multilateral trade Negotiations: Legal and Economic Problems, vol. V, 1991, p. 231.</span></p> <p style="text-align: justify;">Having thus reviewed the critical issues relating to the distinction between public investment and State aid at the EC level, it can be concluded that the jurisprudence of the ECJ has not always been consistent in evaluating what are the requirements.under Article 87(1) Th e ECJ sometimes seems to be too formalistic without effectively taking into account the impact of State conduct on the market. The restrictive position of the ECJ in its interpretation of the scope of State investment is, however, understandable with regard to the requirement of legal certainty. The Commission addressed the need for more a economics-based approach to state aids already in its 2005 Report on Competition Policy<span class="editor-footnote">This report can be found at, see in particular pages 119 to 130.</span> and made moves to reform the regime in the form of a state aid action plan for the years 2005 -2009.<span class="editor-footnote"></span> Whether this will bring the desired effect on current practice remains an open question. However, should a legislative measure, simply by virtue of the fact that it creates such an advantage without any further budgetary impact, be also capable of being classified as State aid in the future, then State discretionary powers in policy making would be substantially compromised.</p> <p style="text-align: justify;"><em>Kateřina Mandulová is an alumni of the Law Faculty of Charles University in Prague and the College of Europe in Brugge, Belgium. She currently works in the Prague law office of Gleiss Lutz v.o.s where she specializes in competition law.</em></p> 13.08.2012, 14:55 HEAL THE WORLD: THE SOCIAL RESPONSIBILITY OF COMPANIES. Corporate Social Responsibility: A Tool to Help, or to Promote a Company’s Portfolio? <p class="editor-page-number">40</p> <h1>1. Introduction</h1> <p style="text-align: justify;">Fifty years ago every CEO in the world would have laughed at the idea of the social responsibility of companies, if he even knew what it meant.<span class="editor-footnote">Hopkins, M., <em>The Planetary Bargain: Corporate Social Responsibility Matters, James &amp; James</em>/ Earthscan, 2003, pp. 1–2.</span> After the Great Depression and slow recovery marking the 1940s, in the 1950s almighty economic tycoons started to re-conquer pre-war economic dominance. The goal was clear and simple: get<br />planet Earth back to the level of commerce it had enjoyed before the depression. Companies did not care about their social profiles; they did not have to. However, this would change. The debate about Corporate Social Responsibility (“CSR”) began in the 1960s and has been rising in intensity ever since.<span class="editor-footnote">Hopkins, see above, pp. 2–3.</span></p> <p style="text-align: justify;">In this article, I will analyze the intentions of corporations in adopting CSR strategies. More precisely, whether corporations envisage saving the world from poverty and any repeats of tragedies such as Unocal’s behaviour in Burma<span class="editor-footnote">Lyčka, M., <em>Odpovědnost nadnárodních společností za chování v zahraničí z pohledu judikatury Spojených států amerických</em>, Jurisprudence 8/2005, Praha, p. 32.</span> or Union Carbide’s in Bhopal,<span class="editor-footnote">Bryan, N., <em>Bhopal Chemical Plant Accident</em>, 2003, Gareth Stevens Inc., Chicago, 2003</span> or whether they only dissimulate a fresh attempt to seize power from states and international organizations. To do so properly, I will fi rst defi ne the term of CSR. A brief review of legal instruments addressing CSR at the national as well as international level will follow. Then, I will concentrate on applying the rules contained in these instruments to the example of Unocal in Burma.</p> <p class="editor-page-number">41</p> <h1>2. What is Corporate Social Responsibility?</h1> <p style="text-align: justify;">Many scholars claim that a solid definition of CSR has yet to be established, while other scholars are convinced that there is one.<span class="editor-footnote">Yakovleva, N., <em>Corporate Social Responsibility in the Mining Industries</em>, Ashgate Publishing, Ltd., London. 2005, pp. 9–10.</span> Lea maintains that CSR is about corporations and other organizations going beyond what the law presently requires in relation to the environment and society, in particular to their employees, suppliers, customers and the communities in which they operate.<span class="editor-footnote">Lea, R., <em>Corporate social responsibility: IoD Opinion Member Survey,</em> The Institute of Directors, UK, 2002, p. 10.</span> CSR has also been defined as a continuing commitment by a corporation to behave ethically and contribute to economic development while improving the quality of life of its workforce and their families, as well as of the local community and society at large.<span class="editor-footnote">World Business Council for Sustainable Development. Corporate Social Responsibility: Meeting Changing Expectations. 1 March 1999. Available at: 3kDxBQDWW/CSRmeeting.pdf [accessed on 17 February 2007].</span></p> <p style="text-align: justify;">From the above definitions, it follows that there are two core elements of CSR: stakeholders, i.e. those who have a legitimate interest in a corporation and its conduct; and the duty of care of the corporations. I will address these two elements below.</p> <h2 style="text-align: justify;">2.1 Stakeholders</h2> <p style="text-align: justify;">Who holds a legitimate interest in a corporation and its conduct? Most of the studies converge on several groups of stakeholders, namely owners, managers, employees, governments (national as well as regional), those engaged in non-for-profit activities, local population and, even the public at large, including consumers.<span class="editor-footnote">Hopkins, see above, p. 49 et seq ; Sims R.R., <em>Ethics and Corporate Social Responsibility: Why Giants Fall</em>, Praeger/Greenwood, 2003, pp. 71 et seq ; Grayson D., Hodges, A., <em>Corporate Social Opportunity!: 7 steps to make corporate social responsibility work for you</em>. Greenleaf Publishing, 2004, p. 342.</span> Each of the groups above may play a part in, or must be considered in, the drafting, negotiating or executing CSR policies. However, their interests may vary and are sometimes irreconcilable. Finding a consensus when creating a CSR scheme is vitally important for its viability.</p> <h2 style="text-align: justify;">2.2 Duty of Care</h2> <p style="text-align: justify;">The behaviour of corporations and their representatives has traditionally been subject to a tortious duty of care, i.e. a requirement that a person act toward others with the degree of prudence that a reasonable person in the circumstances would. If the duty of care is breached, damages may be claimed. In certain jurisdictions, courts have been ready to apply the concept of duty of care as widely as to cover CSR. An example of this is the decision of the Supreme Court of Canada in the case of Bird Construction. The court ruled that <em>“the plaintiff s, being a member of the class for which the home was constructed, are entitled to a duty of care in construction commensurate with industry standards. In the light of the fact that the home was constructed as speculative, the homebuilder cannot reasonably argue he envisioned anything but a class of purchasers. By placing this product into the stream of commerce, the builder owes a duty of care to those who will use his product, so as to render him accountable for negligent workmanship.”</em><span class="editor-footnote"><em>Winnipeg Condominium Corporation No. 36 v. Bird Construction Co</em>. [1995] 1 S.C.R. 85.</span></p> <p style="text-align: justify;">In a CSR context, it could be argued that the business of corporations could entail a host of risks for their stakeholders who, similarly to the purchasers in the Bird Construction case, can expect that certain standards of corporate behaviour are observed, i.e. duty of care owed to them is fulfilled.</p> <h1 style="text-align: justify;">3. Hard Law and Soft Law Instruments in the CSR Area</h1> <p>Hard law and soft law instruments in the CSR area can be divided into three categories: national legislation, corporate codes of conduct and the binding and non-binding instruments of international law.</p> <h2>3.1 National Legislation</h2> <p style="text-align: justify;">Certain states have adopted, or at least tried to adopt, legislation to address CSR. An example of this could be the United Kingdom. In 1997, following the first white paper dealing with CSR, the Blair government established the Department for International Development, which is responsible for promoting sustainable development and reducing poverty.<span class="editor-footnote">See Department of International Developments. <em>DFID and corporate social responsibility.</em> 1997. Available at: [accessed on 13. 1. 2007].</span> Later on, the UK adopted the 2000 Amendment to the 1995 Pensions Act encouraging ethical investment,<span class="editor-footnote">The text of the Pension Act is available at 0026_en_1.htm ; the CSR aspects of this legislation is explained at side%20menu/personal%20finance/pensions.htm [accessed on 13 January 2007].</span> and a law transposing the OECD Convention on bribery of foreign public officials.<span class="editor-footnote">The Convention on Combating Bribery of Foreign Public Officials inInternational Business Transactions, adopted by the Negotiating Conference on 21 November 1997.</span> Moreover, the Companies Act 2006 has created a duty on the directors of companies to considered CSR in their governance. Finally, recent initiative of Christian Aid in the U.K. calling on wider CSR legislation may result in more solid basis for CSR in the U.K.<span class="editor-footnote">The initiative is available at [accessed on 11 January 2007].</span></p> <h2>3.2 Corporate Codes of Conduct</h2> <p style="text-align: justify;">Next to the national legislation promoting CSR, companies themselves often create self-imposed rules with the aim of rendering their conduct socially responsible. I will focus on the accomplishments of Nike Inc. (“Nike”). Nike’s program of CSR has been generally appreciated. It was designed to protect its employees globally from physical abuse and to guarantee them a “living wage,” free meals and health care. Despite these commitments, there had been several instances where the Nike’s employees charge Nike with unfair and deceptive practices, such as forced labour quarrels between 1996 and 1998,<span class="editor-footnote">Vogel, D. T<em>he Market For Virtue: the Potential and Limits of Corporate Social Responsibility</em>. Brookings Institution Press, 2005, pp. 77–78.</span> consumer boycotts,<span class="editor-footnote">Grayson D., Hodges, A., see above, p. 20.</span> and the Kasky case before the US courts.<span class="editor-footnote">Further information on the <em>Kasky case</em> is available at kasky_nike_justfacts.html and [accessed on 10 January 2007].</span></p> <p style="text-align: justify;">In the above case, Marc Kasky, a social activist, alleged that Nike does not honour its CSR commitments in its Asian facilities despite Nike’s statements in its public relations campaign and certain annual</p> <p class="editor-page-number" style="text-align: right;">42</p> <p style="text-align: justify;"> reports about its flawless CSR record. The main issue for the courts to resolve was the scope of the right to speech. The case reached the California Supreme Court which rejected Nike’s defence that the First Amendment to the U.S. Constitution immunized the company from being sued for an allegedly deceptive public relations campaign. A final decision on merits was, however, precluded by the settlement between the parties to suit in September 2002.<span class="editor-footnote">Ibid.</span></p> <p style="text-align: justify;">As illustrated above, corporations do not always follow their CSR policies and, therefore, when evaluating their achievement in the CSR area, their practices must be carefully analysed.</p> <h2 style="text-align: justify;">3.3 Binding and Non-binding Instruments of International Law</h2> <p style="text-align: justify;">Attempts to promote CSR have been also made in the field of international law. The United Nations (“UN”), as well as the International Labour Organisation, a UN specialized agency, are the two most productive players in this domain. They have adopted documents such as UN Global Compact, International Labour Organization Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy.</p> <p style="text-align: justify;">More recently, the UN completed the Draft Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights (the “Draft Norms”).<span class="editor-footnote">Approved on August 13, 2003, by U.N. Sub-Commission on the Promotion and Protection of Human Rights resolution 2003/16, U.N. Doc. E/CN.4/Sub.2/2003/L.11 at 52 (2003).</span> The Draft Norms date back to 2003 and are the result of years of drafting by the U.N. Sub-Commission on the Promotion and Protection of Human Rights (the “Sub-Commission”). They address a wide range of human rights issues, such as prohibition of forced or compulsory labour, protection of the environment and right to security of persons. In this regard, they follow the structure of some of the previous UN documents in this area such the Global Compact.</p> <p style="text-align: justify;">Despite the ambitious content of the Draft Norms, there are two inherent problems. First, there has been a problem with finding their legal basis. It seems to be resolved by a recourse to the last recital of the Preamble to the Universal Declaration of Human Rights which states that <em>“every organ of society … shall strive … to promote respect for [the human] rights and freedoms.”</em><span class="editor-footnote">G.A.Res. 217A, U.N.GAOR, 3d Sess., U.N. Doc. A/810, at 71(1948).</span> In the view of the Sub-Commission, “every organ of society” also encompasses transnational corporations. More importantly, the Draft Norms, even if adopted, would remain an instrument of international law. This means that the sole responsibility for their implementation as well as enforcement rests with the states, since there is currently no general enforcement mechanism of international law that enforces obligations of individuals and corporations.</p> <p style="text-align: justify;">To draw a conclusion, the above efforts of the UN are laudable. However, due to the lack of implementation and enforcement mechanisms of international law, we can only rely on national legislation and on the benevolence of the corporations themselves.</p> <h1 style="text-align: justify;">4. Unocal’s Case in Burma</h1> <p style="text-align: justify;">A ruthless military junta has governed Burma for years now, and has led the country to poverty, without much hope of improvement. Since the national economy of Burma did not prosper, the military leaders decided to open the country’s economy and resources to transnational corporations. Following this, a consortium of Unocal and TotalFinaElf formed a joint venture with the view of constructing the Yadana pipeline linking Burma with Thailand, traversing the Tenaserim region.<span class="editor-footnote">Lyčka, M. <em>Odpovědnost nadnárodních společností za chování v zahraničí z pohledu judikatury Spojených států amerických</em>, Jurisprudence 8/2005, p. 32.</span> The habitants of the Tenaserim region had fiercely protested against the construction of the pipeline.</p> <p style="text-align: justify;">In spite of its comprehensive CSR policy, the consortium hired the Burmese army, widely known to have a record of human rights abuses, to secure the route of the pipeline. The plaintiffs claimed that this led to forced relocation and labour, rape, torture and murder. Despite this fact, Unocal presented its CSR record as flawless.<span class="editor-footnote">Doe v. Unocal, CV 96-6959-RAP (BQRx), 963 F. Supp. 880 (C.D. Cal. 1997).</span></p> <p style="text-align: justify;">In this situation two U.S. lawyers presided over a committee of affected Tenaserim villagers. The lawyers found solutions to help the victims. They bypassed the Burmese courts and brought claims on behalf of 15 Burmese citizens before the US courts on the grounds of the Alien Tort Claims Act (“ATCA”), a law originating from 1789.<span class="editor-footnote">United States Code, title 28, chapter 85, section 1350, see also scripts/;sec=1350. Interestingly, this law was used to pursue certain dictators such as Karadzic and Marcos in the 1980’s and 1990’s. Kadic v. Karadzic, 70 F.3d 232, 239 (2d Cir. 1995) and In re Estate of Ferdinand Marcos, 25 F.3d 1467 (9th Cir.1994).</span> They alleged that Unocal aided and abetted in grievously violating the human rights of Tenaserim villagers and breached their CSR commitments and public proclamations.</p> <p class="editor-page-number" style="text-align: right;">43</p> <p style="text-align: justify;">One of the crucial issues of the case was the question of standing before the U.S. courts. This turned out to be controversial because if the U.S. courts allowed the standing of the applicants, it could open the floodgates to similar claims. ATCA generally grants jurisdiction to U.S. federal courts over <em>“any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.”</em> In accepting the jurisdiction, the courts of several instances in the Unocal case gave a broad interpretation to the jurisdiction clause. They relied upon the US Supreme Court decision in Alvarez-Machain<span class="editor-footnote"><em>Sosa v. Alvarez-Machain</em> (2004) (03-339) 542 U.S. 692 (2004) 331 F.3d 604.</span> where the court held that violation of basic human rights in international law could constitute a separate ground of action under ATCA.</p> <p style="text-align: justify;">The merits of the case were never considered in detail in court, but in the final hearing to take place the judges ordered that there was a legal case to be answered. A retrial of this issue in front of a larger panel of judges was later ordered, but on the eve of this occurring Unocal settled out of court.<span class="editor-footnote">See information about the settlement at [accessed on 13. 1. 2007].</span> This meant that some of the more important legal issues were never heard and settled in higher courts, and no precedent was set concerning the liability of American corporations for human rights abuses committed abroad in which they aided and abetted or from which they benefited. However the case made some important legal developments and suggests that in future other American companies may be held accountable for worldwide human rights violations.</p> <p style="text-align: justify;">To conclude, the U.S. courts tried to pave the way for foreign victims to sue corporations for breaches of certain human rights protected by international law as well as by self-imposed corporate codes of conduct. Nonetheless, it is clear that the victims may ask for remedy in the above way only is specifi c circumstances where serious violations of basic human rights are present. This line of legal action is in its infancy; the law is uncertain and any action would be lengthy.</p> <h1 style="text-align: justify;">5. Conclusion</h1> <p style="text-align: justify;">In the article, two definitions of CSR were discussed showing that there are two core elements of CSR: stakeholders, i.e. those who have a legitimate interest in a corporation and its conduct; and the duty of care of the corporations. Before the courts of some states, it has been successfully argued that the duty of care of corporations may entail the social responsibility of corporations. As far as the legal sources of CSR rules are concerned, there are some in international law, in the legislation of certain states and in the codes of conduct of certain corporations. However, due to the lack of any enforcement mechanism of international law, only national legislation and corporate codes of conduct can be relied upon. As illustrated by two examples, corporations do not always follow their CSR policies and, therefore, when evaluating their achievement in the CSR area, their practices must be carefully analysed.</p> <p style="text-align: justify;"><em>Martin Lyčka is a fi ft h year student of the Charles University Law Faculty in Prague. In 2005/2006 he studied at the Katholieke Universiteit Leuven in the framework of the Socrates/Erasmus programme.</em></p> 12.08.2012, 13:41 GENEROSITY VERSUS ALTRUISM:Foundations & Charities in the United States, Europe and in the Czech Republic <p class="editor-page-number">37</p> <h1>1. Introduction</h1> <p style="text-align: justify;">Mother Theresa was perhaps the foremost symbol of philanthropy and passionate care giving. Would she have followed the same path if giving had not brought her such spiritual and emotional satisfaction? Many people and organizations find purpose in <em>“spiritual intelligence”</em> or <em>“spiritual capital”</em> by <em>“giving” to “charities”</em> or by devotion to a certain cause. The term <em>“spiritual”</em> in this case does not refer to religion but to <em>“having a deep sense of purpose.”</em></p> <p style="text-align: justify;">Could someone who denies being altruistic actually be more so? For example, not giving money to street children in poverty-ridden parts of the world, claiming that such giving conditions them to grow up as beggars? Generosity is the readiness or liberality in giving, and also freedom from meanness or smallness of mind or character. Often equated with charity as a virtue, generosity is widely accepted as a desirable trait.</p> <p style="text-align: justify;">The word <em>“charity”</em> entered the English language through the French word <em>“charite”</em> derived from the Latin <em>“caritas.”</em> Almsgiving, the act of giving money, goods or time to the unfortunate, is described as charity or charitable giving.</p> <p style="text-align: justify;">Philanthropy is the act of donating money, goods, time, or effort to support a charitable cause, usually over an extended period of time and in regard to a defined objective. Philanthropy may encompass any altruistic activity, which is intended to promote good or improve the quality of life.</p> <p style="text-align: justify;">Altruism is an unselfish concern for the welfare of others. It is a traditional virtue in many cultures, and central to many religious traditions. In English, this idea was oft en described as the Golden rule of ethics. In Buddhism it is considered a fundamental attribute of human nature.</p> <p style="text-align: justify;">Altruism has a built-in paradox, i.e. it is most likely to happen when it satisfies some deeper meaning within the human psyche and is therefore a selfish act with benevolent consequences for others. Richard Ebstein an Israeli scientist, and his colleagues have found an altruism gene! Ebstein said about two-thirds of a random sample carry it. Interestingly enough, the risk-taking gene, which is linked to a tendency for taking drugs, smoking and other dangerous behavior, is a different – or opposite – variant of the altruism gene. Instead of promoting dopamine expression, the risk-taking variant reduces it. Ebstein is certain that other altruism genes exist. <em>“I think genes have only half of the influence on altruistic behavior, with the rest involving environmental factors, such as education.”</em><span class="editor-footnote">The Jerusalem Post. Article by Judy Siegel about Israeli researchers, who found ‘altruism gene’. Published Jan 20, 2005, pg 5, Section News.</span></p> <p class="editor-page-number" style="text-align: right;">38</p> <h1 style="text-align: justify;">2. Giving patterns</h1> <h2>2.1 Differences between Europe and the United States</h2> <p style="text-align: justify;">In America, donors believe that individuals can spend money more effectively than the state. In Europe, private philanthropy is considered complementary to state action. Attitudes are now changing everywhere. Aging populations are stretching the capacity of the welfare state. The motivation for bolstering philanthropy is pragmatic; it fills in the gaps of state provision and widens financial support for non-profit organizations, which are frequent channels for state cash. That is an uninspiring vision compared with Mr. Bush’s points of light and an appeal to community spirit.</p> <p style="text-align: justify;">A striking sign of Europe’s change in attitude was shown by the British government, which has helped to back the <em>“Giving Campaign,”</em> a program that increases charitable giving in tax-efficient ways and has made tax treatment of gifts more generous. In the U.K., if you donate land or a building to charity, you will get full income tax relief. A higher taxpayer who donates property worth GBP 100,000 to charity will get a GBP 40, 000 reduction in his income tax. Since April 2003, a higher taxpayer can claim an 18% tax relief for Gift Aid donations. Since April 2004, anyone completing his tax return has been able to choose to have all or part of his tax rebate given to the charity of his choice.</p> <p style="text-align: justify;">If government wants people to be more generous, can they do much about it? Th e best example of tax relief through charitable gifts is the United States. Theresa Lloyd, author of the study <em>“Why Rich People Give”</em> in Britain, points enviously to the U.S. practice of <em>“planned giving,”</em> whereby an irrevocable gift of a capital sum is accompanied with immediate tax relief and makes it possible for the donor to continue to live on the income from the capital. Such a scheme does not exist in Europe.<span class="editor-footnote">The Economist print edition. <em>Philanthropy:</em> <em>Doing well and doing good.</em> Published Jul 29th 2004.</span></p> <p style="text-align: justify;">Such tax relief does not automatically lead to higher giving. In America, one-third of company staff is typically enrolled in payroll giving. In Germany, payroll giving is non-existent. In Britain, with similar tax benefits to America, only 2% of staff typically give. Lord Joffe, formerly head of Oxfam, one of Britain’s biggest international charities, says that British companies do not promote payroll giving. In America, payroll giving is not only promoted, but also expected.<span class="editor-footnote">Ibid.</span></p> <p style="text-align: justify;">Taxes affect giving in two ways. High taxes reduce income, leaving less money to donate. Generous tax exemptions cut the price of giving and allow people to give more with less loss of income. Some recent studies suggest that governments may give up a great deal in tax revenue to stimulate fairly small amounts of giving. The relationship between giving and taxation can also have perverse effects.</p> <p style="text-align: justify;">Public attitudes toward philanthropy are as important as tax incentives and differ vastly between Europe and the United States, affecting the behaviour of both donors and recipients. Europeans feel uneasy with the idea of competing to demonstrate public generosity due to old attitudes equating wealth with a sense of impropriety. Lord Joffe argues that Britain’s donors often do not know how much they should give. In a recent debate in the House of Lords, he argued for a benchmark to give the wealthy some idea of an appropriate amount. At a meeting, people were asked to raise their hands if they gave more than 1% of their incomes to charity. Hardly any did. After the meeting, many apparently raised the amount they donated.<span class="editor-footnote">Philanthropy UK, <em>Generosity vs Altruism</em>, Issue 2, April 2002.</span></p> <p style="text-align: justify;">Even more important is the attitude of would-be beneficiaries. Europeans tend to be embarrassed about fund-raising. Few of Europe’s impoverished universities employ professional fund-raisers, yet top American universities typically employ hundreds. At least two of Britain’s best university fund-raisers, at the London School of Economics and at Bristol University, are American imports.</p> <p style="text-align: justify;">These European attitudes towards fund-raising prompt the questions: Is the practice correctly understood or do Europeans lack the necessary skills? There are many laughable stories about European recipients. In one case, a well-known potential donor rang a charity to ask whether he could visit. He was told fi rmly no, but was welcome to send a cheque.</p> <h2 style="text-align: justify;">2.2 Changing Attitudes to Altruism</h2> <p style="text-align: justify;">Behaviour may change as donors adjust. On both sides of the Atlantic, the number of philanthropic foundations has risen. Moreover, whereas foundations in the past were generally established in bequests, new foundations are often set up as the previously mentioned <em>“planned giving”</em> organizations. According to the Centre on Philanthropy of Indiana University, there has been “an explosion” of new private foundations in the U.S., increasing from about 22,000 in the early 1980s to 65,000 today. Many of the newcomers were founded in the mid-1990s with dotcom money and donors tended to be younger.</p> <p style="text-align: justify;">Similarly, according to a study by Helmut Anheier at the University of California, Los Angeles, there are few philanthropic foundations in France, Austria or Belgium but they are booming in Italy where they are a relatively new phenomenon. Setting up a foundation often starts as a means of preserving control of a family business and for avoiding taxes and death duties.<span class="editor-footnote">See fn. no. 2 above.</span></p> <p style="text-align: justify;">The result all over is a more directed and engaged approach to philanthropy. The new wealthy want to be involved and make sure their money is properly used. Bill Gates argues that you have to work just as hard at giving away your money as you do at making it.</p> <p style="text-align: justify;">Foundation directors must take a different approach. A few years ago, Silicon Valley’s entrepreneurs built partnerships and insisted on exit strategies through <em>“venture philanthropy,”</em> transferring their creative skills to the foundation. Today, the best foundations are increasingly business-like, demanding clarity and accountability. Their task is not just handing out money, but forging alliances and building networks with government, industry or charity groups.</p> <p style="text-align: justify;">Some 4.9% of families in America with a net worth of $1m or more accounted for 42% of all donations to charitable organizations in 1997. Moreover, 0.22% of families with incomes of $1m or more contributed about 13% of charitable dollars. Further concentration in bequests is also astonishing: the 0.4% of estates worth $20m or more account for 58% of the value of all bequests.</p> <p style="text-align: justify;">Interestingly, as estate values increase, the proportion going to heirs’ shrinks and the share left to charity increases. Estates of $20m and more left an average of 49% of their value to charity and 21% to heirs, the rest going in taxes. Could it be that today’s rich think that inheriting too much money may harm their children?<span class="editor-footnote">See fn. no. 2 above.</span></p> <p class="editor-page-number" style="text-align: right;"> 39</p> <h2 style="text-align: justify;">2.3 A Rosy Future for Charities?</h2> <p style="text-align: justify;">Years of accumulated wealth – in America and in Europe – is about to change hands as the post-war generation dies off. In the United States between 1998 and 2052 somewhere between $41 trillion and $136 trillion will change hands. For the moment, they bet cautiously on the bottom end – a figure that is four times the present size of the entire American economy and almost as large as the entire world’s wealth today.</p> <p style="text-align: justify;">What do these trends imply for charity? Firstly, as people’s incomes and wealth grow, so will the sums going to charity – even if tomorrow’s rich are no more generous than today’s. In fact, people become more generous as they grow richer and they are as generous in life as in death. For instance, from 1995 to 1997, the value of final estates rose 65% in the United States, but bequests to heirs grew by 57% whereas charitable bequests rose 110%. Among the largest estates, the shift was even greater.<span class="editor-footnote">See fn. no. 2 above.</span></p> <p style="text-align: justify;">This suggests that more money will flow to charities. The populations of the rich will be increasingly older and wealthier. Charities may benefit to an unprecedented extent. Is this really an attractive prospect, a world of burgeoning philanthropy, full of donors who want to control where their money goes and how it is spent? We may begin to start hearing <em>“We don’t like what the wealthy are giving to. It’s undemocratic.”</em></p> <h1 style="text-align: justify;">3. Grant Making Practices</h1> <p>There are three potential models of charitable sponsorship: government backed, corporate, and religious.</p> <h2>3.1 Public Private Partnership</h2> <p style="text-align: justify;">The Croatian government established an innovative funding mechanism that today is called the Foundation for Civil Society Development, and it is currently the largest donor agency in Croatia, co-funded by the Croatian National Lottery. Slovakia’s PONTIS Foundation has been transformed from being 100% foreign funded in 1997 into a 100% re-granter of Slovak business funds. Some past strategic decisions were analyzed and recommendations were made for working with business. Indigenous and international donors should trust local institutions and try to increase funding from local sources as soon as possible.<span class="editor-footnote">Philanthropy UK, <em>Generosity vs Altruism,</em> Issue 2, April 2002.</span></p> <p style="text-align: justify;">Community foundations already exist in the U.K.’s fast growing philanthropy field. Their expertise in making grants and building capability is backed by local trustee management. Thus, they are called upon to help deliver short-term programs as well as emergency assistance on behalf of other grant makers. Further, a guideline exists between HM Customs &amp; Excise and the Community Foundation Network to clarify VAT treatment in respect of funds managed by community foundations on behalf of their donors. Grants pursuing streams of money from government can sometimes be deemed within the scope of VAT and therefore any fees received from grant making would include VAT. In brief, guidelines establish control.</p> <h2 style="text-align: justify;">3.2 Corporate Philantropy</h2> <p style="text-align: justify;">Corporate giving or corporate philanthropy is practiced in some form by multinational and local companies in all Central and Eastern European countries.</p> <p style="text-align: justify;">Various studies show that the more sophisticated corporate giving is, the more it focuses not only on <em>“philanthropic”</em> endeavors, but also on long-term strategic company involvement in the community. Research studies from Ukraine demonstrate that corporate giving is understood more as <em>“corporate charity,”</em> motivated by altruism and the desire to improve the corporation’s public image. </p> <p style="text-align: justify;">Examples of multinational companies such as BP or Citigroup demonstrate long-term strategic involvement in the community; not only in the terminology but also in the way <em>“corporate giving”</em> is perceived – not as corporate <em>“charity”</em> but as <em>“social investment.”</em> Both companies are involved in development programs either through corporate foundations or social investment programs in the countries where they operate. These efforts may bring complex benefits to shareholders, while also improving the companies’ public image.</p> <h2 style="text-align: justify;">3.3 Religious Giving</h2> <p style="text-align: justify;">Religion is a powerful force for generosity. American generosity for instance outstrips that of most other countries, especially in terms of money, and particularly if gifts to religious bodies are included. Most religions encourage giving, often setting a benchmark (10% is the goal of Christians, Jews and Sikhs alike). For Muslims, the Zakat or charity tax is the fourth pillar of Islam, as important as prayer, fasting or pilgrimage.</p> <h2>3.4 Non-profit Sector in the Post-communist Countries</h2> <p style="text-align: justify;">In the majority of organizations established in the mid-90s, the original membership was foreign and the main aim was to exchange information. Gradually, local donors became involved and agendas were expanded to include legislative lobbying and philanthropic promotion in broader terms. Organizations established later from local donors aimed to promote philanthropy from the start. After providing basic information on the number of members, staff size, and budget composition, participants would go on to consider existing challenges and opportunities facing their organizations.</p> <p style="text-align: justify;">EU membership impacted the type and nature of funding and its role in this new environment. Briefly, this means that less private funding is available for organizational development, policy development and advocacy, watchdog activities, and local-level community development, whereas public funding is available for social service provision.</p> <h1 style="text-align: justify;">4. Measuring Philantropy</h1> <p style="text-align: justify;">Measuring philanthropy is difficult but two things are clear. Private giving is small in all wealthy nations and relative to state spending. People have become less sentimental and more informed when they give to charity. Getting that warm glow is no longer enough; they want information. People are increasingly likely to make reasoned decisions regarding donations based on how effectively the charity communicates its message and require hard evidence of the impact their support will have.</p> <p style="text-align: justify;">One of the most ambitious attempts to measure charitable capacity was a study led by Lester Salamon of Johns Hopkins University. They examined 36 countries around the world, excluding donations to religious congregations (an important point in America), and found that giving varied in developed countries in the second half of the</p> <p class="editor-page-number" style="text-align: right;">40</p> <p style="text-align: justify;">1990s from around 1% of the GDP in the United States (1.3% in Israel, where much generosity comes from abroad) to less than 0.1% in Italy, where cash donations account for the same proportion of GDP as they do in India.<span class="editor-footnote">See fn. no. 2 above.</span></p> <p style="text-align: justify;">Around 60% of private giving is through volunteering, the value of which was measured by ascribing to it the average wage of a community worker. Volunteering is particularly high in the Netherlands, Sweden and other Scandinavian countries, as well as in a few developing countries. In America, the balance between volunteering time and of cash is more equal (if those to religious bodies are excluded) than in most of Europe.<span class="editor-footnote">Philanthropy UK, Generosity vs Altruism, Issue 2, April 2002.</span></p> <p style="text-align: justify;">Further, people in the U.K. feel strongly that certain types of care should be the responsibility of government, like that of homeless and orphans/children in need. U.K. givers are more likely to support animal sanctuaries or provide international aid instead of the local elderly and homeless.</p> <h1 style="text-align: justify;">5. Conclusion</h1> <p style="text-align: justify;">A clear model for a European foundation has not yet fully emerged. The role of foundations and private philanthropy is not clear in the European social welfare state model. Civil society funding should be a local issue, not a EU-level issue. It was noted that NGOs played an important role in state-level decision-making structures and processes related to EU development strategies and use of funding. The lingering questions seem to be what role they will play in the long-term and how they will access the appropriate funding.</p> <p style="text-align: justify;">Donors should use their funds towards bigger, long-term state investment, like education and judicial systems. Cooperation with the state is vulnerable due to rapidly changing political environments. Therefore, donors need agreements between the two sides in writing so that governments are accountable for their commitment. Donor funding should complement rather than substitute state funding and policy. Foreign donors must be aware of the sensitivity of large-scale engagement with the state; this can be interpreted as ‘buying the state’. Hence, they need to protect themselves by effectively communicating their aims and being precise over their contributions. Finally, contributors should resist the temptation to work with the state if there is little chance that the project will be sustained by the state without donors’ support.</p> <p style="text-align: justify;">Many examples were presented of corrupt practices of NGOs in several countries and numerous questions were raised on how to effectively combat such practices. It was stressed that people constitute the main driving force for changing this situation.</p> <p style="text-align: justify;"><em>Mgr. Anna Shalina, A.G. graduated from the Law Faculty of the Anglo-American College in Prague in 2000 and finished her Cambridge Diploma in English and EU Law in 2001. She continues to work on the Holocaust cases. Currently she is establishing a non-profit organization to help students and senior musicians &amp; artists with accommodation-related issues (e.g. building and renovating lodging, students dorms, etc).</em></p> 11.08.2012, 15:20 UNITED WE STAND, DIVIDED WE FALL! The Implementation of the Cross-Border Mergers Directive <p class="editor-page-number">35</p> <h1>1. Introduction</h1> <p style="text-align: justify;">For a long time, companies from more than half of the EU Member States have faced a considerable difficulty:<span class="editor-footnote">This article does not deal with cross-border mergers of companies based outside of the European Union. For this, see Meier, Olivier; Schier, Guillaume. <em>Enterprises multinationals.</em> Paris: Dunod, 2005, p. 99–105.</span> they could not merge cross-border, while keeping their legal personality.<span class="editor-footnote">For the purposes of this article, a merger is considered to be a process whereby a company (“closing company”) transfers its property to another company (the “successor company”) that has already existed or that will be created as a result of the merger.</span> However, the European Court of Justice (“ECJ”) decided in the <em>SEVIC</em> <em>Systems</em> case in 2005 that merging cross-border is part of the freedom of establishment under EC law and rendering it impossible for the successor company to maintain its legal personality in the host Member State breaches this fundamental principle.<span class="editor-footnote">Case C-411/03, SEVIC Systems [2005] ECR I-10805.</span> Meanwhile, the EU Commission presented a proposal for the Tenth Company Law Directive on cross-border mergers to address this issue<span class="editor-footnote">See Proposal for a Directive of the European Parliament and of the Council on cross-border mergers of companies with share capital (COM (2003) 703 final) (the “Proposal”).</span> which was fi nally passed as Directive 2005/56/EC on cross-border mergers of limited liability companies (the “Directive”).<span class="editor-footnote">Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies, OJ L 310, 25.11.2005, p. 1–9.</span> This article explores the nature of the Directive which needs to be implemented by the Member States by 15 December 2007.</p> <h1 style="text-align: justify;">2. Freedom of Establishment and the SEVIC Systems Case</h1> <p style="text-align: justify;">Under EU law, establishment has been described as carrying on the economic activity of a company, its agency, subsidiary or branch in another Member State for an indefinite period.<span class="editor-footnote">Compare Tichý, Luboš et al. <em>Evropské právo</em>. Praha: C. H. Beck, 1999, p. 361.</span> The freedom of establishment under article 43 of the EC Treaty covers both the right of primary establishment, i.e. the right to manage, transfer a registered office, central administration or principal place of business to another Member State, and the right of secondary establishment, i.e. right to conduct the activity in another Member State through, for example, an agency, branch or subsidiary.<span class="editor-footnote">Compare Dědič, Jan. – Čech, Petr. <em>Obchodní právo po vstupu do EU</em>. Praha: Bova Polygon, 2005, p. 40.</span></p> <p style="text-align: justify;">The <em>SEVIC Systems</em> judgment seems to link cross-border mergers with both the right of primary and secondary establishment.<span class="editor-footnote">See Kieniger, Eva-Maria. <em>Grenzüberschreitende Verschmelzungen in der EU – das SEVIC-Urteil des EuGH.</em> EWS, 2006, p. 51; the Opinion of Advocate General Tizzano in Case C-411/03, SEVIC Systems [2005] ECR I-10805, point 35.</span> On the facts, it was a merger between the German company SEVIC Systems AG and a Luxemburg company that provided for the dissolution without liquidation of the latter company and the transfer of the whole of its assets to the former. The German registration court in Neuwied rejected the application for registration of the merger in the commercial register by arguing that the relevant German law only applies to mergers between legal entities established in Germany. According to the Advocate General a merger constitutes an “effective means of transforming companies in that it makes it possible, within the framework of a single operation, to pursue a particular activity in new forms and without intrerruption, thereby reducing the complications, times and costs associated with other forms of company consolidation such as those which entail, for example, the dissolution of a company with liquidation of assets and the subsequent formation of a new company with the transfer of assets to the latter.”<span class="editor-footnote">The Opinion of Advocate General Tizzano in Case C-411/03, SEVIC Systems [2005] ECR I-10805, point 47.</span> The ECJ confirmed this and held that Articles 43 and 48 of the EC Treaty prevent the denial of the registration of a merger of companies from different Member States and that this denial was not justified on the facts of the case.<span class="editor-footnote">Case C-411/03, SEVIC Systems [2005] ECR I-10805, par 22-23.</span></p> <h1 style="text-align: justify;">3. The Cross- Border Merger Directive</h1> <h2>3.1 Rationale</h2> <p style="text-align: justify;">Was there a need for formal legislation allowing cross-border mergers after the SEVIC Systems case? It has been argued that there most definitely was, because the Member States would try to justify any restriction of the right of establishment under Article 46 of the EC Treaty, as they did when denying the mutual recognition of goods from other Member States in the 1970s.<span class="editor-footnote">Vossestein, Jan-Gert. <em>Companies’ Freedom of Establishment after SEVIC. </em>European Company Law, 2006, Vol. 3, Issue 4.</span> Moreover, since it was proposed in 1984,<span class="editor-footnote">A proposal for the Tenth Council Directive on cross-border mergers of companies, OJ C 23 25. 1. 1985, p. 11.</span> the draft Directive already existed when the SEVIC Systems judgment was issued. Although the final adoption of the Directive had been delayed due to a deadlock over employee participation in successor companies’ decision-making bodies lasting over several decades, the deadlock had been resolved by this time.<span class="editor-footnote">The Proposal, para. 2.</span></p> <h2>3.2 Scope</h2> <p style="text-align: justify;">The Directive has laid down a framework for cross-border mergers for limited liability companies (which are further defined by Article 1 of the First Company Law Directive<span class="editor-footnote">First Council Directive 68/151/EEC of 9 March 1968 on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community, OJ L 65, 14. 3. 1968, p. 8–12.</span> as companies with share</p> <p class="editor-page-number" style="text-align: right;"> 36</p> <p style="text-align: justify;"> capital) and for European Companies.<span class="editor-footnote">For example, this covers “companies incorporated with limited liability” in the UK and a joint stock company (<em>“akciová společnost”</em>) and a limited liability company (<em>“společnost s ručením omezením”</em>) under Czech law. See Art 2(1) of the Directive and Art 10 of Council Regulation (EC) No. 2157/2001.</span> It applies even to the non public limited liability companies. It only covers the cross-border mergers between companies which have their registered office, central administration or principal place of business within the Community. The cross border element means that the merging companies have to be governed by laws of two different Member States.</p> <h2 style="text-align: justify;">3.3 Substantive Rules</h2> <p style="text-align: justify;">As indicated by the Proposal, the basic principle underlying the cross-border merger procedure is that – unless otherwise provided by the Directive for reasons to do with the cross-border nature of the merger – the procedure is governed in each Member State by the rules applicable to mergers between companies governed exclusively by the law of that State (domestic mergers).<span class="editor-footnote">The Proposal, para. 3.2.</span></p> <p style="text-align: justify;">The Directive particularly prescribes several procedural steps which needs to be followed in a cross-border merger at least one month before the general meeting of the merging companies approve the merger. Firstly, the management or administrative organ of each of the merging companies shall draw up the so called <em>“common draft terms”</em> for a cross-border merger.<span class="editor-footnote">Art 5 of the Directive stipulates the minimum content of the common draft terms. They include, for example, the likely repercussions of the cross-border merger on employment and the date from which the holding of such securities or shares representing the company capital will entitle the holders to share in profits and any special conditions affecting that entitlement. This article was transposed by section 220a of the Commercial Code which governs the common draft terms (in Czech <em>“návrh smlouvy o fúzi ”</em>).</span> For the protection of shareholders, creditors and other third party stakeholders, the common draft terms have to be published in the commercial register for each of the merging companies according to the internal rules of the relevant Member States. Secondly, the management or administrative organ of each of the merging companies shall draw up a report intended for the members explaining and justifying the legal and economic aspects of the cross-border merger and explaining the implications of the cross-border merger for members, creditors and employees.<span class="editor-footnote">Art 7 of the Directive. This provision has been transposed by section 220b of the Czech Commercial Code which governs the report on the merger (in Czech <em>“zpráva o fúzi ”</em>).</span> Thirdly, an independent report examining the common draft terms must be prepared for each merging company unless all the members of each of the companies involved in the cross-border merger have so agreed.<span class="editor-footnote">Art 8 of the Directive.</span></p> <p style="text-align: justify;">Once the three procedural steps are completed and after the lapse of one month, the general meeting of each of the merging companies shall decide on the approval of the common draft terms of crossborder merger.<span class="editor-footnote">Art 9 of the Directive.</span> Subsequently, the court, notary or other authority competent to scrutinize the legality of the cross-border merger needs to issue both a pre-merger certificate, i.e. a certificate attesting to the proper completion of the pre-merger acts and formalities and a post-merger certificate, i.e. a certificate attesting to the proper completion of the pre-merger acts and formalities, including the approval of the common draft terms by the merging companies in the same terms and, where appropriate, of the arrangements for employee participation.<span class="editor-footnote">Art 10 and 11 of the Directive.</span> Finally, each cross-border merger has to be entered into the commercial register in the Member State where the succession company has already been or is being founded, after which date the merger cannot be declared null and void.<span class="editor-footnote">Art 13 and 17 of the Directive.</span></p> <p style="text-align: justify;">In respect of employee participation, it is stipulated that the company resulting from the cross-border merger shall be generally subject to the rules in force concerning employee participation, if any, in the Member State where it has its registered office. However, where one of the merging companies has a participation regime and the law of the Member State where the company created by merger is to be incorporated does not impose compulsory employee participation, Article 16 of the Directive determines the rules on employees’ involvement. Similarly as in the context of the European Company Statute, it establishes the negotiation procedure which should enable the merging companies to negotiate an appropriate regime to be applied for employee participation. Only if the merging companies fail to reach a negotiated solution, the participation system which best protects the acquired rights of the workers and which already exists in one of the merging companies is extended to the company created by merger.<span class="editor-footnote">Art 16 of the Directive. Proposal, explanatory notes to Article 14.</span> The relevant internal rules of the Member State of the closing company apply then, though they have to comply with the relevant EU legislation in the labour law area, including the rules on mass dismissal, the European Works Council, or the consultation procedures between employees and the top-management of the company.<span class="editor-footnote">For example, Directive 98/59/EC of 20 July 1998 on collective redundancies; Directive 2001/23/EC of 12 March 2001 on the safeguarding of employees‘ rights in the event of the transfer of undertakings, business or parts of undertakings or businesses; Directive 2002/14/EC of 11 March 2002 establishing a general framework for informing and consulting employees in the European Community; Directive 94/45/EC of 22 September 1994 on the establishment of a European Works Council.</span></p> <p style="text-align: justify;">Importantly, the Directive clearly stipulates the consequences of a merger, including that all the assets and liabilities of the closing company or merging companies are transferred to the acquiring or new company, the members of the closing company become members of the acquiring or new company and that the closing or merging company cease to exist.<span class="editor-footnote">Art 14 of the Directive.</span></p> <h2 style="text-align: justify;">3.4 Limits of the Directive</h2> <p style="text-align: justify;">The Directive only applies to the cross-border mergers of companies with share capital. In this respect, the <em>SEVIC Systems</em> decision does not seem to be limited and it seems that even other types of companies may try to invoke the freedom of establishment under Art 43 and 48 of the EC Treaty.<span class="editor-footnote">See Kappes, Stephan. Zulässigkeit grenzüberschreitender Verschmelzungen. NZG, 2006:3, p. 102</span> The Directive does not address the cross-border mergers where one of the companies is not located in the Community.</p> <p style="text-align: justify;">Moreover, difficulties may arise when different laws are applied to the pledge over shares of the closing company. For example, under Czech law, the pledge over the shares of the closing company</p> <p class="editor-page-number" style="text-align: right;">37</p> <p style="text-align: justify;">transfers to the succession company upon the merger. In the case of share certificates, the succession company is required to indorse the pledge on the certificates.<span class="editor-footnote">See Čech, Petr, <em>Transpozice směrnice ES o přeshraničních fúzích na pořadu dne.</em> Právní zpravodaj, 2006: 2, citing section 69a(4) of the Czech Commercial Code.</span> However, this provision is not applicable in a cross-border merger within the Community, where the closing company has its seat outside of the Czech Republic.</p> <p style="text-align: justify;">Finally, it has been pointed out that by allowing cross-border mergers with the effects predicted by the Directive, it is not clear what will be the impact of the merger on the licenses (such as banking licenses) and other authorizations of the closing company. For example, will a succession company in England automatically get the banking license of the closing company in the Czech Republic? The answer will depend on the way the Member States will transpose the Directive.<span class="editor-footnote">Ibid.</span></p> <h1 style="text-align: justify;">4. Conclusion</h1> <p style="text-align: justify;">As a result of the Directive, companies with share capital within the Community will be able to merge with companies from other Member States from 15th December 2007 and their corporate succession will be safeguarded. Although this was already indicated by the SEVIC Systems judgment of the ECJ in 2005, the Directive goes beyond this and prescribes certain rules on the merger procedure. What remains to be seen is the application of the regime to the companies without share capital and to the companies outside of the Community.Moreover, various other issues will remain open. For example, there will be various treatment among the Member States with regards to the effects of the cross-border merger on the pledge over the shares of the closing company or on the succession of licenses and other authorization granted by the public authorities of a Member State to the the closing company.</p> <p style="text-align: justify;"><em>Jan Lasák is a fifth year student of the Masaryk University Law Faculty in Brno. In 2007 he received B.A. degree from Politics and European Studies at the Faculty of Social Sciences, Masaryk University. In fall 2007 he studied at the John</em><br /><em>Marshall Law School in Chicago.</em></p> 09.08.2012, 15:06 EUROPEAN COMPANIES: DEAD END OR BOULEVARD TO THE FUTURE? A Review of the Advantages and Problems with the Creation of European Companies <p class="editor-page-number">31</p> <h1>1. Introduction</h1> <p style="text-align: justify;">More than three years have elapsed since the Regulation on the European Company (also called the Societas Europaea) entered into force. The idea of European Companies was pursued in order to facilitate the freedom of establishment of companies enshrined in Article 48 of the EC Treaty. Authors such as Steiner<span class="editor-footnote">Steiner, <em>EU Law</em>, 9th edition, Oxford University Press 2006.</span> have long held the position that despite Article 48 of the EC Treaty, and the necessity to ensure that safeguards extended to companies under Article 48EC stated in Article 44 (2)(g) EC Treaty, it has been rather difficult for a company to move its base of operations in the European Union, requiring the dissolution of a company as legal entity and then reestablished in another Member State. Efforts at harmonization were hindered, and thus it was deemed necessary to create a new type of company given certain legal freedoms – hence the Societas Europaea. However, no boom in founding European companies took place.As of September 2007, there were about 80 European companies registered throughout the European Union.2 The aim of this article is to examine why this new form of company has not achieved wider usage in the European business environment.</p> <h1 style="text-align: justify;">2. What is a European Company?</h1> <h2>2.1 A Public Limited Company of EC Law</h2> <p style="text-align: justify;">A European Company is a special type of public limited company. Similarly to a public limited company, it has a legal personality; its capital is divided into shares and no shareholder is liable for more than the amount he has subscribed<span class="editor-footnote">.Art. 1 of the SE Regulation.</span> Its shareholders shall meet at least once a year at a general meeting to receive information about the economic situation of the European Company, and vote on the most important corporate issues, e.g. on statute amendments, profit division, etc. Nevertheless, there are important differences compared to the public limited company formed under the national law of a Member State.</p> <p style="text-align: justify;">On the EC level, the European Company is regulated by the Council Regulation (EC) No. 2157/2001 on the Statute for a European Company.<span class="editor-footnote">Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European company (SE). OJ L 294, 10.11.2001, p. 1–21; the Regulation applies to the European Economic Area as well.</span> The employee involvement in the corporate governance of European companies is dealt with in the Council Directive No. 2001/86/EC.<span class="editor-footnote">Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees, OJ L 294, 10.11.2001, p. 22–32.</span> As the Regulation contains only 70 articles, many issues cannot be solved using its provisions only; the Regulation therefore refers to the statutes of the Societas Europaea. Should neither the Regulation nor the European Company’s statutes provide any guidance, the national law of the Member State where the Societas Europea has its seat comes into play: the Member States’ implementing regulation on European companies<span class="editor-footnote">In the Czech Republic, it is Act No. 627/2004 Coll., on the European Company (SEA).</span> along with the provisions of the law of the Member State where the Societas Europaea has its seat governing national PLCs of that Member State shall apply to the life of the Societas Europaea. Furthermore, the provision of the statutes of Societas Europaea shall be applied in the same way as for public limited companies formed under the national law of the respective Member State. Moreover, the national legislator may not discriminate against the European companies; this means that the special implementing laws of Member States on European companies may not be more harsh than the laws governing public limited companies formed under the law of that Member State.<span class="editor-footnote">Dědič, J., Čech, P. <em>Evropská (akciová) společnost.</em> 1st ed. Praha: Bova Polygon, 2006, p. 29–30, Kalls, S., Hügel, H.F. et al. <em>Europäische Aktiengesellschaft. SE-Kommentar.</em> 1st ed. Wien: Linde Verlag, 2004, p. 128.</span> Therefore, by establishing a European Company, companies are able to take advantage of protections they might otherwise lack.</p> <p style="text-align: justify;">The legal regulation system for the European companies is a complicated mixture of EC law and the domestic laws of Member States. It is relatively recent and mostly untested by the courts. At least in the Czech Republic, the establishment of a European Company is largely an unexplored adventure.</p> <h2 style="text-align: justify;">2.2 A One-tier System or a Two-tier System?</h2> <p style="text-align: justify;">A one-tier system for the administration of a company is a novelty in the Czech law compared to English or French law where it is well established. The one-tier system is a company structure where aside from the general meeting of the company, there may be only one other permanent body. In the Societas Europea Regulation, this permanent body is simply called an <em>“administrative organ.”</em> Since Czech law did not have any provision for a one-tier system, it was the duty of the Czech legislator to establish it for the European companies in the internal implementing regulations.<span class="editor-footnote">The same situation in German law is described by Schwarz, G.C. <em>Verordnung (EG) Nr. 2157/2001 des Rates über das Statut der Europäischen Gesellschaft (SE). Kommentar.</em> 1st ed. München: C. H. Beck, 2006, p. 745. In Czech SE Act, see § 26–43.</span></p> <p style="text-align: justify;">However, the one-tier governance system is not the only possible system. The Regulation provides a European Company with the choice between the one-tier and two-tier system structure.<span class="editor-footnote">Art. 39 (5) and 43 (4) SE Regulation.</span>The two-tier structure, based on the German corporate model, with the</p> <p class="editor-page-number" style="text-align: right;">32</p> <p style="text-align: justify;">management body appointed by the supervisory board, elected by the general meeting, is in fact the default system. Member States may, under their national laws, permit the management body to be appointed either by the supervisory board or the general meeting. The Czech legislator used this latter possibility in Section 23 of the SEA. Unlike in the Czech joint-stock company, the supervisory body may consist of one single individual.</p> <p style="text-align: justify;">The one-tier Czech system was inspired by the modernised French model of <em>societé anonyme</em>.<span class="editor-footnote">Dědič/Čech, op. cit., p. 329.</span> The administrative body (or <em>“the board of directors”</em>) elected by the general meeting is in charge of strategic decisions and has controlling functions. Th is administrative body appoints one person to be in charge of the daily management of the European Company; this person is called either a presidentgeneral director (PDG), if he or she is the member of the board of directors, or a general director (CEO), if he or she is outside the board of directors. Th e PDG or the CEO are in charge of the daily management of the company. Th is PDG or CEO may be assisted by one or more delegated directors general (DDG) appointed by the board of directors. Th e PDG, the CEO, the DDGs as well as the board of directors may each act on behalf of the European Company.</p> <p style="text-align: justify;">The freedom of choice between corporate governance systems enables the European Company founders to optimize its structure and minimize administrative costs.</p> <h2>2.3 Moving the Registered Office</h2> <p style="text-align: justify;">Before the Societas Europea Regulation came into force, the way how to move the registered offi ce of a company abroad was to wind it up and then to establish it afresh according to the law of the Member State where it is to have the new registered office. <span class="editor-footnote">Dědič/Čech, op. cit., p. 17. The only exception was the European economic interest grouping.</span> The Societas Europea Regulation provides the Societas Europea with a right to transfer its registered office to another Member State. Th anks to this Regulation, the operation will not result in the winding up of the Societas Europea or in the creation of a new legal person.<span class="editor-footnote">Art. 8 of the SEC.</span> However, as the company changes the jurisdiction, it must adapt its statutes to comply with the provisions of the law of the Member State where it shall have its new registered office. Such amendments to the statutes must be approved by the general meeting. The proposal on the transfer of the seat must be publicized in the national gazette in accordance with the First Company Law Directive.<span class="editor-footnote">First Council Directive 68/151/EEC of 9 March 1968 on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community, OJ L 65, 14. 3. 1968, p. 8–12.</span> The shareholders shall be provided with a thorough explanation in a report of the management or the administrative body. The Regulation also provides for protection of the creditors of the company and its minority shareholders. If the general meeting approves the transfer, the company needs to obtain a certificate attesting that the requirements of the law of the Member State of origin for the seat transfer were fulfilled. The determination of the competent authorities which shall issue the certificates was left to the Member States’ lawmakers – in the Czech Republic, the competent authorities are notaries.<span class="editor-footnote">§ 14 SEA.</span> The company then files the new statutes with the authority in charge of the company register in the Member State of the new seat. This authority may not re-examine what is attested in the issued certifi cate; it may only check, whether</p> <p class="editor-page-number" style="text-align: right;">33</p> <p style="text-align: justify;">the requirements of the law of a Member State to which the registered office is supposed to be transferred are fulfilled by the transferring company, and whether its statutes comply with this law.</p> <p style="text-align: justify;">The seat transfer takes effect when it is registered. However, third parties may rely on the previous registered office until the transfer is published in the official journals of both Member States concerned.<span class="editor-footnote">Dědič/Čech, op. cit., p. 452.</span> The creditors of the company are further protected by the right to sue the company before the court of the previous registered office, if the cause of action arose prior to the transfer of the registered office. This ability enables the European Company to move around the EU seeking the best conditions for its business. The only limit is that the real headquarters and registered office must be in the same Member State.</p> <h2>2.4 Employee representation</h2> <p style="text-align: justify;">Some Member States provide for employee representation in the governing bodies of the public limited comapnies formed under their laws. The extent of the employee representation was the principal problem in the negotiations prior to the adoption of the Societas Europea Regulation. <span class="editor-footnote">Theisen, M.R., Wenz, M. et al. <em>Die Europäische Aktiengesellschaft. Recht, Steuern und Betriebswirtschaft der Societas Europaea (SE).</em> 2nd ed. Stuttgart: Schäffer-Poeschel Verlag, 2005, p. 35</span>The negotiations finally resulted in a complicated compromise.</p> <p style="text-align: justify;">The employees of the companies (and their subsidiaries) which take part in the formation of the Societas Europea shall elect a special negotiating body (the SNB). This body then enters into negotiations with the management of the founding companies. If the negotiations do not bring any result within six months, the Standard Rules of the Societas Europea Directive (Annex) shall apply. These rules are based on the <em>“before – after”</em> principle: of the different forms of representation in the founding companies, the system that gives the employees a higher protection shall be chosen.<span class="editor-footnote">The rules for employee representation are more complicated. See SE Directive 2001/86/EC and § 46–64 SEA. See further Dědič/Čech, op. cit., p. 297, for Czech Republic, Theisen/Wenz, op. cit., p. 122, 331, for Germany, Kalss/Hügel, op. cit., p. 715, for Austria.</span></p> <p style="text-align: justify;">On one hand, this ability enables some companies to escape from the rigid internal rules on employee representation. On the other, the negotiations may be very long and limit the flexibility of the formation procedure. This difficulty arose already during the initial legislative discussions relating to the European Company, and was one of the major ‘bones of contention’ that made some Member States hesitant about being involved in this legislation.</p> <h1 style="text-align: justify;">3. How to Form a European Company?</h1> <h2>3.1 A Limited Number of Ways</h2> <p style="text-align: justify;">European companies may only be formed by one of the procedures foreseen by the Societas Europea Regulation.<span class="editor-footnote">Art. 1 (1).</span> The founders may be only those entities enumerated in the Regulation for each respective way of formation. These entities must be legal entities, must be governed by the law of a Member State, and must have their registered and head office within the EU. However, these strict rules apply merely to the formation procedure. Once the Societas Europea is registered, it can be, for example, sold as a ready-made company to a single natural person on the next day.<span class="editor-footnote">There have been several ready-made SEs formed and some of them already sold in Germany. See 7.pdf.</span> Where the Societas Europea Regulation does not contain special provisions, the formation of the Societas Europea shall be governed by the law of the Member State concerning the public limited companies where the Societas Europea has its registered office.</p> <h2 style="text-align: justify;">3.2 Merger</h2> <p style="text-align: justify;">The European Company may be formed by a merger of public limited companies, if at least two of them are governed by the law of different Member States.<span class="editor-footnote">Art. 2 (1) SE Regulation.</span> The internal legislation of Member States regarding mergers was harmonized by the Third Company Directive.<span class="editor-footnote">Third Council Directive 78/855/EEC of 9 October 1978 based on Article 54 (3) (g) of the Treaty concerning mergers of public limited liability companies, OJ L 295, 20.10.1978, p. 36–43</span> There are two ways in which to carry-out the merger. The first one is a merger by acquisition, when one of the merging companies continues to exist and takes the form of European Company. The remaining company or companies cease to exist without liquidation and their assets and liabilities are transferred to the Societas Europea. The second way is the merger by the formation of a new company. In this case, all the companies to be merged cease to exist and their assets and liabilities are transferred to the newly formed Societas Europea.</p> <p style="text-align: justify;">The general meeting of each merging company shall approve the merger by qualified majority. Those who voted against the merger may demand that the newly formed Societas Europea buy out their shares. The creditors may demand provision of a security deposit, if there is a serious danger that their claims may become unenforceable. The owners of the company bonds are protected in a similar way.<span class="editor-footnote">This applies for the Czech Republic. See § 17 SEA and § 220j, 220k, 220m ComC. The protection of minority shareholders, creditors and bond owners is in the competence of the national legislator of the Member State, where the merging company has its registered office (Art. 24 SERE).</span></p> <p style="text-align: justify;">Each merging company must obtain a certificate attesting that all the requirements and formalities of the law where it has its seat have been completed. In the Czech Republic, similarly to the process of moving the registered office, it is the notaries who issue this certifi cate. The certificate and the agreement on employee representation must be submitted to the authority in charge of the company register in the Member State where the new Societas Europea shall have its registered office. This authority must examine whether the approved statutes of the Societas Europea are in accordance with the law of its Member State of origin and the agreement on employee involvement.<span class="editor-footnote">Art. 26 of the SE Regulation.</span> The merger takes effect on the date on which the new Societas Europea is registered. Until the new Cross-Border Merger Directive<span class="editor-footnote">Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies (Text with EEA relevance), OJ L 310, 25.11.2005, p. 1–9.</span> is transposed, it is not possible to merge companies from different Member States in a different way.</p> <h2 style="text-align: justify;">3.3 Holding</h2> <p style="text-align: justify;">Czech company law does not specifically regulate the formation of a holding company. By contrast, however, under the regulations concerning European companies, private or public limited companies may take part in the formation of a holding of European companies,</p> <p class="editor-page-number" style="text-align: right;">34</p> <p style="text-align: justify;">if each of at least two of these companies is governed by the laws of different Member States or has had a subsidiary company or a branch in another Member State for at least two years.<span class="editor-footnote">Art. 2 (2) SE Regulation.</span> The formation of a holding European Company is based on the idea that shareholders of the involved companies put their shares as a non-cash contribution into the new European Company. The involved companies become subsidiaries of the new Societas Europea which will become their majority shareholder. The shareholders of the companies promoting this operation become shareholders of the Societas Europea.</p> <p style="text-align: justify;">The formation of the holding European Company starts when the management or administrative bodies of the companies promoting the formation draw up draft terms of the merger. Like in the merger procedure, these draft terms have to be published, accompanied with the reports of the company bodies and independent experts. The draft terms must contain the shares exchange ratio and a minimum proportion of shares that the shareholders must offer as contribution to the registered capital of the new Societas Europea. This contribution may not be less than 50 %.</p> <p style="text-align: justify;">If the shareholders do not offer the minimum proportion witin three months, the formation of the holding does not take place. If they do so, the offer must be published and the remaining shareholders have an additional period of one month to contribute their shares. The protection of the shareholders who voted against, and of the creditors is similar to the merger procedure. Unlike in the event of the formation of the European Company through a merger, no <em>“national law compliance”</em> certificates are required in the case of creation of a holding European Company. The formation of the holding shall be scrutinized by the registering authority of the prospective seat of the Societas Europea; if the scrutiny is passed without objections of the registering authority, the formation of the holding becomes effective on the day of the registration.</p> <h2 style="text-align: justify;">3.4 Subsidiary</h2> <p style="text-align: justify;">Th is way of formation is open to any legal entity, including those with limited legal personality, like the German <em>Gesellschaft des bürgerlichen Rechts</em>. To form a European Company in the form of a subsidiary, there must be at least two founding entities which must either be governed by the law of different Member States or have had a subsidiary or a branch in another Member State for al least two years.<span class="editor-footnote">This applies for the Czech Republic. See § 17 SEA and § 220j, 220k, 220m ComC. The protection of minority shareholders, creditors and bond owners is in the competence of the national legislator of the Member State, where the merging company has its registered office (Art. 24 SERE).</span> The Societas Europaea will become a common subsidiary of the promoting companies that shall be its only shareholders at the time of its registration.<span class="editor-footnote">Art. 26 of the SE Regulation.</span> Once a Societas Europea has been created, it may set up one or more subsidiaries.<span class="editor-footnote">Art. 2 (3) SE Regulation.</span> At the time of the registration of such subsidiaries, the Societas Europea must be their only shareholder.<span class="editor-footnote">Dědič/Čech, op. cit., p. 244. Hodál, P., Alexander, J. <em>Evropské právo obchodních společností</em>, 1st ed. Praha: Linde, 2005, p. 189, have a different opinion, advocating a possibility of founding the joint venture SE by offering a minority of shares to the public.</span></p> <h2 style="text-align: justify;">3.5 Conversion</h2> <p style="text-align: justify;">A national public limited company may be transformed into a Societas Europea, if it has for at least two years had a subsidiary in another Member State.<span class="editor-footnote">Art. 2 (4) SE Regulation.</span> The public limited company continues to exist, though in a new legal form of a Societas Europea. Transfer of the registered office at the same time is forbidden. Also in this situation, draft terms shall be drawn up by the company bodies. They must be published and accompanied with an explanatory report. An independent expert must confirm that the company has net assets at least equivalent to its capital, plus reserves which must not be distributed. The general meeting shall approve the conversion by a qualified majority.<span class="editor-footnote">For all the qualified majorities mentioned above, the Third Directive (art. 7) sets out a minimum of 2/3 of all votes in the general meeting. Czech law requires at least ¾ majority (§ 220e (10) ComC).</span> The conversion takes effect on the date of its registration.</p> <h1>4. Conclusion: Why (Not) Form a European Company?</h1> <p style="text-align: justify;">It is apparent that the possibilities for forming a European Company are limited. Th is factor, in connection with the minimum subscribed capital of 120,000 EUR, implies that the Societas Europea is not a legal form accessible to the general public. Likewise, it is not very suitable for small and medium-sized enterprises.<span class="editor-footnote">Manz, G., Mayer, B., et al. <em>Europäiche Aktiengesellschaft</em> <em>SE</em>. 1st ed. Baden-Baden: Nomos, 2005, p. 43, Thümmel, R.C. <em>Die Europäische Aktiengesellschaft (SE). Ein Leitfaden für die Unternehmensund Beratungspraxis.</em> 1st ed. Frankfurt am Main: Verlag Recht und Wirtschaft, 2005, p. 36.</span> Rather, it is designed for big transnational corporations and it offers them a unified and desirably prestigious label. Some of the Societas Europeas have explained their choice of this legal form by their willingness to express their European identity and because of the advantages of the label for propagation.<span class="editor-footnote">See Merkt, H. <em>Die Europäische Gesellschaft als börsenotierte Gesellschaft</em>, in Lutter, M., Hommelhof, P. (eds.), <em>Die Europäische Aktiengesellschaft. Prinzipien, Gestaltungsmöglichkeiten und Grundfragen aus der Praxis</em>. 1st ed. Köln: Otto Schmidt, 2005. p. 179, for the Austrian STRABAG SE, or Wagner, <em>J. Praktische Erfahrungen mit der Europäischen Aktiengesellschaft. Europäisches Wirtschafts- und Steuerrecht</em>, 2005, No. 12, p. 547, for the Finnish Elcoteq SE.</span></p> <p style="text-align: justify;">The ability to move the registered office and the freedom of choice of the corporate governance system are among the general advantages of the Societas Europea. On the other hand, the rather formal, complicated, very long and costly formation procedure<span class="editor-footnote">For example, the formation of Allianz SE (merger) took 13 months and cost about 95 million EUR (</span> to a certain extent counters these advantages. A thorough consideration is required before taking the decision to form a European Company. At the moment, the European Company is not a busy <em>“boulevard”</em>, but rather a newly built street, not yet well-known. In time, however, it may become a useful short cut.</p> <p style="text-align: justify;"><em>Dušan Hrabánek is a Charles University Law Faculty graduate. “Establishing a European Company” was the topic of his graduation essay. He is teaching European company law at Institut dalšího vzdělávání in Brno.</em></p> 05.08.2012, 14:22 WE SHALL OVERCOME The First Rosa Parks Memorial Lecture of the Common Law Society <p>hjlhlhlhl</p> 26.07.2012, 14:25 Takeover Bids Directive: Board Neutrality, Breakthrough, Squeeze-out and Sell-out <p class="editor-page-number">28</p> <h1>1. Introduction</h1> <p style="text-align: justify;">It took more than 15 years of negotiations at the Community level to adopt the Takeover Bids Directive1 (the “Directive”) which the Member States were obliged to implement by 20 May 2006.2 The question arises of how far its fi nal wording departed from the original proposal. The “Portuguese compromise,” thanks to which the third Commission proposal of the Directive was finally adopted, introduced a number of optional provisions enabling the Member States to differentiate in the implementation.</p> <p class="editor-page-number" style="text-align: right;">29</p> <p style="text-align: justify;">The aim of this article is to give a brief insight into two areas of the Directive.3 The first area which is discussed concerns the application of the board neutrality rule and breakthrough rule in connection to the defensive measures of the board. Th e second area relates to squeeze-out and sell-out rights, with an update on the Slovak and the Czech implementation of the former right into national legislation. The squeeze-out right became a relatively controversial issue in Slovakia during the legislative process while in the Czech Republic its constitutionality has been challenged by several hundred minority shareholders.</p> <h1 style="text-align: justify;">2. The Board Neutrality Rule</h1> <p style="text-align: justify;">Board neutrality is contained in Article 9 of the Directive andmeans that the board of the target company refrains from taking any measures that may result in the frustration of the bid unless it has the prior authorization of the target company’s general meeting. These defensive measures are usually adopted by a company against a hostile takeover bid whether prior to or after the bid has been launched. Th ey are not defi ned in the Directive and have relatively poetic names.4 A hostile takeover means that either the bidder has made an off er without informing the board of the target company or the board of the target company have not recommended the bid to shareholders. Th is has important implications: a bidder must solely rely on public information without the opportunity of conducting a due diligence, with the result that the banks fi nancing the takeover are less willing to do so.</p> <p style="text-align: justify;">Given the diff erent policy views on this issue in the Community, the board neutrality rule constituted a real stumbling block to the adoption of the Directive. The rational of the board neutrality rule is based upon the belief that the board fi nds itself in a conflict of its own interest with the interest of the shareholders. This so-called “<em>shareholder choice</em>” position presumes that in the event of a takeover bid, the target company’s directors usually protect their own interests and their defensive measures adopted without the consent of shareholders could be detrimental for the target company as a whole. It follows the principal-agent theory of corporate law widely held by U.S. scholars. However, some Member States in the Community prefer the “<em>board defence</em>” approach. Th is approach is based on the assumption that the shareholders of the target are generally unable – due to limited experience and the difficulty of acting collectively and coordinating eff ectively – to make informed choices in the takeover context. Hence, it should be the target company’s directors who should be permitted to adopt defence measures since they are better placed to protect the interests of shareholders.5</p> <p style="text-align: justify;">As a result of the “<em>Portuguese compromise</em>,”6 Article 9 has become an optional provision under the Directive. At the present time, seven Member States have decided to favour the interests of the board<br />members, with the option for their companies to apply the board neutrality rule.7</p> <h1 style="text-align: justify;">3. The Breakthrough Rule</h1> <p style="text-align: justify;">Article 11 contains another controversial provision – the breakthrough rule. It was included for the fi rst time only in the third proposal based on the request of European Parliament and most of the Member States made during the discussions on the second proposal. Although the Commission did not accept all egalitarian provisions proposed by a report of the High Level Group of Experts (the “Winter Report”)8 the Article became problematic. It was possible to keep it in the Directive only under condition that the entire provision was made optional.9</p> <p style="text-align: justify;">The rule is intended to eliminate certain pre-bid defenses that are viewed as signifi cant impediments to a level playing fi eld during bids on the Community cross-border takeover market. For instance, it states that where, following a bid, the bidder holds 75 % or more of the capital carrying voting rights of the target company:  (i) multiple-vote shares carry only one vote each at the first general meeting of the target company following closure of the bid called by the bidder in order to amend the articles of association or to remove or appoint board members; (ii) restrictions on the transfer of shares of the target company and on voting rights are ineff ective vis-à-vis the bidder; and (iii) any extraordinary rights of shareholders concerning the appointment or removal of board members of the target company do not apply. As Hertig and McCahery indicated, the rule, where adopted, guarantees that any mechanisms or structures that deviate from the principles of shareholder decision-making and proportionality between risk-bearing and control will be “broken through,” since it allows the bidder to amend the articles of association of the target and remove any pre-bid takeover defenses.10</p> <h1 style="text-align: justify;">4. Squeeze-out and Sell-out Rights</h1> <h2>4.1 Squeeze-out and Sell-out Rights under the Directive</h2> <p>As will be indicated below in parts 4.2 and 4.3, the right to squeezeout minority shareholders from a company appeared to be the nightmare of majority shareholders in the Czech Republic. The</p> <p class="editor-page-number">30</p> <p style="text-align: justify;">squeeze out right is enshrined in Article 15 of the Directive and, in the takeover context, it allows a majority shareholder holding 90% (or, optionally 95 %) of capital and voting rights of the target to require the remaining shareholders to sell him their shares at a fair price.11 It was fi rst introduced by the Th ird Proposal of the Directive as a result of the Winter Report.12 Importantly, the Member States may allow the squeeze out right outside of the context of the takeover.13</p> <p style="text-align: justify;">Similarly, minority shareholders enjoy a sell-out right, i.e. the right to force a majority shareholder to purchase their shares at a fair price. However, the squeeze-out right and sell-out right do not seem to be equal. Firstly, minority shareholders are generally unable to initiate a takeover bid; and, secondly, a sell-out cannot be carried out outside the context of a takeover.14</p> <h2 style="text-align: justify;">4.2 Implementation of the Squeeze-out Right into Czech Law</h2> <p style="text-align: justify;">The Czech Commercial Code stipulates two squeeze-out rights: a general squeeze-out right which was introduced in June 2005 and which refl ects Article 15 of the Directive; and a “<em>fake</em>” squeeze-out right which was introduced in December 2000 and the exercise of which leads to the winding-up of the company without its liquidation and with the takeover of the company’s assets by the majority shareholder.15</p> <p style="text-align: justify;">The fake squeeze-out right was inspired by Austrian legislation16 and has turned out to be controversial with the protection of the minority shareholders circumvented. Its weakest aspect relates to the supervision of the determination of the fair price to be paid to the minority shareholder. For example, as opposed to the Austrian legislation, minority shareholders bear the burden of proof in showing what is a fair price, even though they lack access to the company’s information to do so. In addition, the rulings of the Czech courts are not binding upon the other minority shareholders who have not fi led their claim. Moreover, the costs of the proceedings are borne by the losing party and not by the company. Most importantly, the registration of the winding-up of the company in the Commercial Register automatically stops litigation by the minority shareholders aimed at reviewing the fairness of the price, eventhough the latter proceedings are not <em>lis pendens</em> for the registration proceedings.17</p> <p style="text-align: justify;">There have been over a hundred claims from disgruntled minority shareholders, with an appeal pending to the Czech Constitutional Court. A minority Czech scholar points out that the last disadvantage mentioned above violates the right to a fair trial under Art 6 of the European Convention on Human Rights (the “ECHR”) and that the others violate the right to property under Art. 1 of the First Protocol to the ECHR on the ground of illegal expropriation.18 However, at least the violation of Art 1 does not seem to be so straightforward, since the protection against expropriation has traditionally been viewed by the case law as being aimed against expropriation done in the public interest.19 Here the squeeze-out concerns rights existing between private parties, i.e. it is generally dealing with an expropriation done in a private interest. It remains to be seen how the Czech Constitutional Court will tackle this issue; perhaps the result will already be known by the time this article goes to the press.</p> <h2 style="text-align: justify;">4.3 Implementation of the Squeeze-out right into Slovak Law</h2> <p style="text-align: justify;">The amendment of the Slovak Securities Act which implemented Article 15 of the Directive as of January 2007 avoided the above controversy with the Czech fake squeeze-out provision,20 although, in particular the to right to a fair price, succumbed, to certain extent, to lobbying by large companies. Th e price has to be adequate to the value of the shares, as evidenced by an independent expert chosen by the National Bank of Slovakia. Th is adequate price should equal the highest of the following: (i) the highest price paid for shares paid by the bidder over the last 12 months before the bid; (ii) a price set by an independent expert; (iii) the proportionate part of the value of the net assets of the company as determined by the last audited fi nancial statements before the bid; or (iv) the average price of shares at the stock exchange during the 12 months before the bid.21 Th e determination of the equitable price is supervised by the Slovak National Bank and a minority shareholder may ask for a judicial review of the fair price.</p> <h1 style="text-align: justify;">5. Conclusion</h1> <p style="text-align: justify;">The draft of the Directive tried to achieve certain level of harmonisation of takeovers regulation and to introduce several general principles applicable to takeovers at the EU level. Although it enjoyed relative success, its key provisions such as the board neutrality rule and the breakthrough rule were made optional. Th e squeeze-out and sell-out right right have been an interesting part of the Directive. A special form of the squeeze-out right connected with the winding-up of a company inspired by the Austrian legislation was introduced into the Czech Commercial Code in 2000 which has been the subject of a pending appeal before the Czech Constitutional Court. It remains to be seen whether the human rights dimension of the dispute will succeed, though it has gained minority support from some Czech scholars. Relatively recently, squeeze-out rights in the takeover context have been introduced into both Slovak and Czech law. In the former case, it seems that minority shareholders are better protected than was the case with the old squeeze-out right under the Czech law.</p> <p style="text-align: justify;"><em>Michal Kotlárik is a Ph.D. student at Comenius University in Bratislava and is currently working</em> <em>as a legal adviser at the Slovak Ministry of Justice in Bratislava.</em></p> 17.07.2012, 14:54 In the Name of Formal Truth <p class="editor-page-number">25</p> <h1>1. Introduction</h1> <p style="text-align: justify;">Why do we need company registration? Whom does the system serve better – companies and entrepreneurs or the state and its budget? By comparing two separate schemes, each representing a diff erent legal system, this article aims to provide a brief insight into the broad issue of company registration.</p> <h1 style="text-align: justify;">2. All Shall Become Registered</h1> <p style="text-align: justify;">The basis of what is called company registration lies in the huge increase in the foundation of companies which took place during the 19th century. During this period, the need for an means of unifying and documenting the process of coming into existence of companies had become a pressing matter. A variety of legislative initiativess led step by step to the establishment of the Registrar of Companies in England and the Commercial Register in the Czech lands.</p> <h2 style="text-align: justify;">2.1 Corporate Registration Concepts</h2> <p style="text-align: justify;">Currently, in the U.K. registration is conducted by a Department of Trade and Industry executive institution, (namely Companies House) which has an offi ce in Cardiff serving both England and Wales and another in Edinburgh serving Scotland. In the Czech Republic this task is traditionally reserved for each of the seven regional courts.</p> <p class="editor-page-number" style="text-align: justify;">26</p> <p style="text-align: justify;">However, recent European trends in the approach to company policy have had an increasing infl uence on both systems. The result has been the establishment of new types of registered companies (e.g. the European Company,1 – Societas Europaea and the European Economic Interest Grouping2) or in the steady development of the European Business Register (, which provides information on the companies’ registries all over Europe. Yet, even though this unifying legislation is playing an important role in the 21st century, there are still many fundamental diff erences between both systems.3</p> <h2 style="text-align: justify;">2.2 Registration of a Company: a Trouble-free Quest or a Way through the Jungle?</h2> <p style="text-align: justify;">Two main principles, laid down directly in the Commercial Code,govern company registration in the Czech Republic. Th is refl ects the First Companies’ Directive dealing with the disclosure of company<br />information.4 Th e rule on material publicity, set out in Section 29 of the Commercial Code, ensures that the data provided by the Commercial Register comes into effect <em>erga omnes</em> as of the day of their publication.5 Whereas the principle of formal publicity, set out in Section 28 of the Commercial Code, means information published in the Commercial Register is accessible to any person. In addition, under the principle of formal publicity, any person may look into and make copies or excerpts thereof. None of these principles is included in the U.K. Companies Act 1985, but the Data Protection Act 1998 and the Freedom of Information Act 20006 refl ect these principles. Both Acts contain regulations granting the freedom to demand and obtain information from public institutions, including the Companies House. As far as the basic principles are concerned, both systems have similar objectives.</p> <p style="text-align: justify;">Regarding the administrative operation of the registration procedure, however, the rules applying to the Commercial Register seem unreasonably stringent in comparison to the system of the Companies House. Originally, the fixed types of application forms for registration were intended to speed up the registration procedure. Aft er Act No. 216/2005 came into force, the courts began to reject<br />applications made on the basis of inappropriately fi lled out forms. As this restrictive interpretation of the relevant provisions was clearly not the legislators´ intention, legislators moved quickly to remedy this apparent defect. An amendment to the Commercial Code, contained in Act No. 79/2006, fixed this situation rapidly. It forced courts to allow entrepreneurs additional time to correct their applications before rejecting their requests.</p> <p style="text-align: justify;">This is not to say that there are no legal or factual obstructions to the establishment or administration of a company in the United Kingdom. Th ere exist many formalities, as within the Czech system, which companies have to fulfi ll. Companies House has more than 100 diff erent types of application forms available. By comparison, the Czech Commercial Register offers individuals 20 different types of application forms. By trying to adapt technically to the prevailing trends, Companies House does its best to help companies. However, many companies still fi nd certain procedures of Companies House unsatisfactory. For instance, the deadlines for the fi ling of annual returns are oft en impossible to meet7 and the violation of this duty oft en results in the imposition of heft y penalties. This compares unfavourably with the swift ness with which Companies House registers companies. Companies House normally completes the registration procedure within one or two days. By contrast, following the enactment of Act No. 216/2005, the Czech Registry Courts require fi ve working days to complete the registration process.</p> <h1 style="text-align: justify;">3. An Overpriced Right to Corporate Life</h1> <h2>3.1 United Kingdom</h2> <p style="text-align: justify;">The administrative fees companies have to pay during their existence make the creation and administration of a company expensive for a number of entrepreneurs. Eventhough registration in the United Kingdom is not that expensive in comparison to other countries, the entire process of registration of a limited liability company in the United Kingdom is estimated to cost no less than $264 (1% of an average income8).</p> <p style="text-align: justify;">Still, the system employed by Companies House brings significant advantages, from which the Czech system should take inspiration. Primarily, entrepreneurs have the option to request an expedited registration on the day of application, for which they pay more than twice the usual price.9 This improvement would certainly help the Czech Commercial Register to become more flexible, as well as increasing financial benefits. Last but not least, the practical inaccessibility of the Companies House offi ces and the development of modern technologies has resulted in the practice of Internet registration. This practice simplifies the procedure for both Companies House as well as for companies. Not only does</p> <p class="editor-page-number" style="text-align: justify;">27</p> <p style="text-align: justify;">registration through a specially paid Internet service10 cost less, but it saves the companies time as well. It is important to note, however,that the online register has come under considerable criticism due to the fact that it is inaccessible between the hours of 00:00 and 07:00 GMT, and is offl ine all day on Sunday.11 Although this is ostensibly done in order to process all updated data, it has led to the belief in some quarters that it hinders the ability of companies overseas to verify details of UK companies, especially of those in a diff erent time zone (for example, Sydney in Australia is approximately 10 hours ahead of the UK, and may have difficulty accessing the register during working hours).</p> <h2 style="text-align: justify;">3.2 Czech Republic</h2> <p style="text-align: justify;">In the Czech Republic, the fees for the registration of a limited liability company are much higher than those in the United Kingdom, amounting to $ 648 in total, which equals nearly 11% of the average income in the Czech Republic. Apart from its expensiveness,12 the system of the Commercial Register operates under severe handicaps, which require to be promptly rectifi ed in order to keep the system running eff ectively in the 21st century. Th e on-line accessibility of the Commercial Register was embodied in Czech law as recently as in 2005.13 In order to submit an application on-line or receive a certifi ed extract from the register, a certifi ed electronic signature, the accessibility of which is still complicated, must complete the application. It can be clearly seen from the operation of the Companies House system, that functional Internet services make registration considerably less expensive and increase its flexibility.</p> <p style="text-align: justify;">One significant advantage of the Czech Commercial Register is the electronic and hard copy excerpts, which contain an enormous amount of information. Unlike the excerpts provided by Companies House, both the paid (certifi ed) and the free (on-line) Czech excerpt include the same contents. The difference is only in the official validity of the paid excerpt, because the Internet accessible electronic excerpt has only an informative value. Furthermore, everyone can obtain a full excerpt from the Commercial Register showing all factual changes during the entire existence of the company. This can assist in the uncovering of mysteries and making clear any possible obscurity about the history of a particular company.</p> <p style="text-align: justify;">Attempts to introduce a “<em>higher price, faster registration</em>” rule in the Czech Republic, allowing speedier registrations for a higher price, were turned down in the early phase of the legislative process in the late 1990s. It was claimed that this solution would be incompatible with Art. 21 (4) of the Bill of Fundamental Rights and Liberties14 which ensures the equal treatment of all persons towards public institutions. Allowing faster registration at an increased price would give preferential treatment to the more affluent members of society.</p> <p style="text-align: justify;">Although the Constitutional incompatibility claim might not be completely unfounded, it might be worth introducing the “<em>higher price, faster registration</em>” rule into the Commercial Code and risk Constitutional review. It is true that the rule might be rejected and the current situation remain, but on the other hand the rule might just possibly pass Constitutional scrutiny. Should the latter happen,“t<em>he faster registration higher price</em>” would be etched into stone; since,following Constitutional review no-one would be able to challenge the rule and the Czech business environment would receive a significant boost forward.</p> <h1 style="text-align: justify;">4. Sheet Lightning at the Offing?</h1> <h2>4.1 United Kingdom</h2> <p style="text-align: justify;">In November 2006 legislators in the United Kingdom enacted a major reforming statute – the Companies Act 2006 – the majority of whose provisions will come into force in 2008. The main goal of the new Act is to simplify the procedures relating to the existence of a company and to increase its security. The Companies Act 2006 brings a broader use of electronic communication and altered incorporation forms. No longer will all companies be obliged to specify their subjects of business. In order to increase public access to information and legal security, companies will have to register any change concerning the status of the company. The new Companies Act should significantly simplify the commencement of business.</p> <p style="text-align: justify;"> The United Kingdom and the Czech Republic, along with other countries, were compared in the statement from the World Bank, “Doing Business 2004”. Both systems assessed against an ideal model based on the principle “<em>rich countries make fewer obstacles</em>.” The ideal conditions for registering a company were held to occur when new companies were only required to provide notifi cation of their existence and comply with tax and social security registration procedures. Any additional administrative formalities only act to hinder new companies, tying them down and discouraging entrepreneurs from starting a business.</p> <h2 style="text-align: justify;">4.2 Czech Republic</h2> <p style="text-align: justify;">In 2001, Czech legislators came up with a new proposal which prompted a great deal of interest, as it might have substantially changed the principle on which the Commercial Register is based. The plan was to replace the courts by specialized registrars (natural persons or companies having company registration as their sole subject of enterprise). One clear advantage of this idea would have been the abridgment of the registration period as well as the overall simplifi cation of the company registration procedure. This switchover would have made the Czech registration system quite similar to the English one.15 However, the proposal on registrars was eventually rejected. Similar fates met other proposed reforms, such as the creation of a unified register or the handover of the company registration agenda to the Economic chamber.16</p> <p style="text-align: justify;">A big challenge for Czech legislation was also to implement the previously mentioned amended First Company Directive17 dealing with electronic company registration. A number of documents have already been scanned and made accessible via the Internet. However, the transfer of the remaining vast quantity of fi les into electronic form may take many years.</p> <p class="editor-page-number" style="text-align: right;">28</p> <p style="text-align: justify;">The already mentioned Act No. 216/2005 amending the Commercial Code, brought significant changes to the procedures governing the commercial register. Th ese were largely transferred from the hands of judges to senior court offi cers, making the process of company registration faster and more flexible. To this end a legal fi ction was introduced recognising registration should the court not be able to decide on the application within 5 days. In contrast to these “<em>improvements</em>,” the complexity of the documents that must be submitted to the Commercial Register was left almost unaltered. Unlike the specifi c and original registration system of the United Kingdom, the Czech Commercial Register continues the traditions of the Austrian and German registries. However, numerous amendments have created a hybrid mixing of a judicially administered system and EC driven innovations. In the Czech Republic, several steps – such as the introduction of the legal fiction of registration – have led to the partial improvement of the Commercial Register; however, many things could still be modified in order to improve the effectiveness and security of Internet services.</p> <p style="text-align: justify;">These improvements in effectiveness need be followed by additional security enhancement. Even Companies House faces problems with unauthorized attempts to uncover the access codes of electronic services. In addition, the increasing prevalence of websites providing services which falsely purport to off er a license issued by Companies House demands security enhancement. The Commercial Register still deals with “<em>simpler</em>” complications arising from highly detailed excerpts, from which anyone can obtain sensitive personal information about natural persons, such as their birth number or address, which might misused.</p> <h1 style="text-align: justify;">5. Conclusion</h1> <p style="text-align: justify;">In conclusion, we can safely say that both institutions continue to maintain their specifi c position in the system of company law. The well developed administrative establishment of Companies House could never be so successful without its autonomy from the courts. Its position as a powerful executive institution has resulted in a system that may appear complicated at fi rst glance, but which is nonetheless cheap and eff ective, as it is governed mostly via the Internet. On the other hand, the role of the Czech courts in supervising the Commercial Register has lasted over 150 years and it would probably be a mistake to assume that a radical change of this tradition is the only way to proceed. T e Czech registration system has evolved over time and currently adequately serves all entrepreneurs, although suffering from certain limited shortcomings. A change of its fundamental principles, such as the proposed introduction of registrars or the privatization of the system, would result in registration anarchy. Today, all European registration systems, although supervised by a variety of different organizations,18 have begun to unify and to infl uence each other. This will affect the regulation of the Czech registration as well. The final question should therefore be how to make courts in the Czech Republic work as well as the Companies House in the United Kingdom?</p> <p style="text-align: justify;"><em>Dominika Adamová is a 4th year student of the Law Faculty of the Charles University in Prague. She is a student assistant in Cambridge Diploma in an Introduction to English and European Union Law course 2007–2009.</em></p> <p style="text-align: justify;"> </p> <p style="text-align: justify;"> </p> 17.07.2012, 12:46 Enforcement of Environmental Protection Through Criminal Law <p class="editor-page-number">33</p> <h2>1. Introduction</h2> <p style="text-align: justify;">Protection of the environment is one of the topics frequently discussed but which is much more difficult to implement in practice. This particularly applies in relation to companies which are often involved in serious infringements of environmental law. Compliance with environmental law is inversely proportional to its enforceability. Inability of state authorities to effectively enforce environmental law, as well as creativity of the companies in circumventing the law, creates the right atmosphere for companies to feel that they are able to do and get away with anything. In this regard, traditional forms of enforcement of environmental law through civil or administrative sanctions are becoming insufficient, and some jurisdictions are searching for more effective remedies. An example of this is the European Union ("<strong>EU</strong>") which has tried to regulate the rules on criminal liability for infringements of environmental law. What is the main idea behind this effort of the EU, and which new features will it bring to the individual Member States, especially to the Czech</p> <p class="editor-page-number" style="text-align: right;">34</p> <p style="text-align: justify;">Republic? Is corporate criminal liability the right solution to be followed in order to prevent the wrongdoing of companies or at least to make their illegal activities more difficult? How does environmental protection work in a jurisdiction where corporate criminal liability is a part of the law? The aim of this article is to, at least partially, address these questions in relation to three different legal systems - the EU, the Czech Republic and federal United States (<strong>"US</strong>") law.</p> <h2 style="text-align: justify;">2. What Does the New EU Legislation Bring?</h2> <p style="text-align: justify;">On 24 October 2008, the EU adopted a new Directive on protection of the environment through criminal law (the "<strong>Directive</strong>").<span class="editor-footnote">Directive 2008/99/EC of the European Parliament and of the Council of 19 November 2008 on the protection of the environment through criminal law (OJ L 328, 6.12.2008, p. 28-37). See also proposal for the Directive under document COM(2007)51 final, dated 9 February 2007. Available at:</span> In fact, this is the first time the EU has attempted to regulate the national laws of the Member States of the EU in the area of criminal law. The reason for adoption of the Directive is simple - criminal sanctions seem to be the sole adequate deterrent with which to achieve a high level of environmental protection throughout the EU. Although the national laws of the Member States often contain criminal liability for infringement of environmental law, definitions of environmental crimes and the level of sanctions differ greatly from one Member State to another. The EU had already tried to coordinate criminal environmental liability before the adoption of the Directive, without success. According to the proposal for the Directive which is surprisingly, relatively concise, the Directive mainly aims at setting the "minimum standard" of environmental protection through criminal law. It requires the Member States to treat serious environmental offences as criminal acts if such offences are committed intentionally or with at least gross negligence.</p> <p style="text-align: justify;">Importantly, the Directive does not define any new environmentally harmful activities. It merely subjects environmentally harmful activities that are already regarded as illegal by existing EU laws and relevant national laws to criminal law measures. The Directive suggests that individuals and legal persons who commit a criminal offence under the Directive should be subject to "criminal penalties" and "penalties", respectively.<span class="editor-footnote">Articles 5 and 7 of the Directive.</span> The lack of reference to criminal penalties in relation  to legal persons is the result of certain Member States including the Czech Republic and Germany failing to recognize criminal liability of legal persons in their national laws. Thus, according to the Explanatory memorandum to the proposal for the Directive, these Member States of the EU are not obliged to change their national systems by introducing corporate criminal liability.<span class="editor-footnote">COM(2007)51 final, dated 9 February 2007, page 8.</span> Nevertheless, somewhat confusingly, the Directive seems to suggest that although a legal person does not have to be a subject to criminal penalties, it commits a criminal offence. To a certain extent, it is possible to argue that the Directive thus introduces corporate criminal liability.</p> <p style="text-align: justify;">According to the Directive, the Member States of the EU have to ensure that legal persons can be held liable for the offences committed for their benefit by certain individuals acting on their behalf, or exercising control within the legal person, or in situations where a lack of supervision or control has made the commission of the offence possible. At the same time, the liability of legal persons does not exclude the criminal liability of individuals who committed the offence when acting for the company.<span class="editor-footnote">Article 6(3) of the Directive.</span> In this respect, inspiration has come from US laws. This principle - to have both legal persons and individuals criminally liable - could be seen as a crucial change for the countries that do not recognize corporate criminal liability.</p> <p style="text-align: justify;">Unlike in the US where statute does not define the individuals within the companies which could be held liable, the Directive defines these so called "responsible corporate officers" as persons who have a leading position within the legal person, based on (i) "a power of representation of the legal person", (ii) "authority to take decisions on behalf of the legal per person",<br />or (iii) "authority to exercise control within the legal person." In the author's view, defining responsible corporate officers in the Directive is useful. The reason is that, unlike the US courts, national courts in the EU do not generally get a high level of discretion to determine the meaning of general terms within statutes. In addition, national courts of different Member States of the EU would otherwise reach different interpretations of the term "responsible corporate officers" which could lead to forum shopping.</p> <h2 style="text-align: justify;">3. Is the Czech Republic Always the Last?</h2> <h2 style="text-align: justify;">3.1 Current situation</h2> <p style="text-align: justify;">As to the implementation of the Directive in the Czech Republic, there are no special measures planned to be taken. The reason is that the Czech Republic (as well as Germany and Finland) is already one of the most pro-active countries in terms of sanctioning environmental offences. In this regard, environmental offences stipulated in the Criminal Code correspond to those under the Directive and penalties under the Criminal Code are often more severe than those stipulated under the  Directive. Moreover, there is Act No. 167/2008 Coll., on Ecologic Harm, partially effective since 17 August 2008, which imposes sanctions for breaches of environmental law. This Act contains detailed obligations to prevent ecological harm and sanctions for causing ecological harm, although the sanctions are of an administrative rather than criminal nature.</p> <p style="text-align: justify;">Thus, the sole difference between the applicable Czech law and the Directive is the innovative approach relating to criminal liability of legal persons. Under Czech law, there are two major arguments generally offered for not having criminal corporate liability. The first is that a legal person cannot act in a criminal sense, i.e. it cannot act in an objectively visible manner (which is a so called "objective" requisite of a criminal act under Czech law). It means that the behavior of a legal person is always the behavior of a natural person<span class="editor-footnote">I.e. its statutory body, employee, or representative.</span> and cannot be imputed to a legal person when an "environmental crime" is committed. The second argument relates to the so called "<em>subjective</em>" requisite of a criminal act and means that a legal person can never act culpably, i.e. with a mental element relating to the circumstances constituting a crime. Only people can have an intention to commit or omit.<span class="editor-footnote">See Janda, P. Trestní odpovědnost právnických osob [2006] <em>Právní fórum</em> 5, pg. 168; Novotný, O., Dolenský, A., Jelínek, J. and Vanduchová, M. <em>Trestní právo hmotné - I. Obecná část</em>. Praha: Aspi Publishing, 2003, p. 133 and 134.</span> For these reasons, corporate criminal liability and criminal liability of both an acting individual and its company could also become an important change in Czech criminal law.</p> <h2 style="text-align: justify;">3.2 Draft Czech Criminal Code<span class="editor-footnote">See Draft Criminal Act - Document No. 410/2008 of the Lower Chamber of the Czech Parliament (5th Voting Period). Available at</span></h2> <p style="text-align: justify;">Neither the Criminal Code nor any other Czech statute currently contains criminal liability for legal persons. Legal persons can only be found liable through administrative law. Moreover, the new draft Criminal Code does not intend to introduce criminal corporate liability.<span class="editor-footnote">See Explanatory Report to draft Criminal Act - Document No. 410/2008 of the Lower Chamber of the Czech Parliament (5th Voting Period). Available at</span> Although this issue was extensively discussed when the draft Criminal Code was prepared, corporate liability was only to be introduced at the level of administrative law by the new draft Administrative Punishment Act.</p> <p class="editor-page-number" style="text-align: right;">35</p> <p style="text-align: justify;">However, regardless of the above, the new draft Criminal Code seems to suit environmental protection better, given that its penalties are better conceived. In this regard, it is often impossible to impose a fine for an infringement, the real focus is on stopping the wrongful activity. In addition, a court could prohibit certain activity or forfeit property. Finally, there can be longer sentences or higher fines imposed.</p> <h2 style="text-align: justify;">4. Environmental Criminal Liability in the US</h2> <p style="text-align: justify;">The concept of environmental criminal liability in the US is relatively new, yet older than in the EU. Since the mid-1980s, US Congress and state legislatures have passed numerous environmental protection statutes and the criminal law has become a tool for environmental enforcement. The main reason for the increased use of criminal enforcement was the same as the reason currently in the EU - insufficiency of functioning of civil liability and administrative penalties and also the ever increasing number of companies that are not effectively deterred from committing environmental crimes. We can even observe a trend where environmental fines imposed for violation of environmental rules become only one of a company's ordinary costs of doing business. That is why corporate criminal liability appears to be the sole effective method of deterring environmental violations.<span class="editor-footnote">Paddock, LeRoy C. Environmental enforcement at the turn of the century (August, 21 2008). Environmental Law, Vol. 21, p. 1509, 1991 GWU Legal Studies Research Paper No. 430; GWU Law School Public Law Research Paper No. 430. Available at SSRN:</span> It means not only to enforce the law through high fines, but also through effective criminal remedies such as prohibition of business, forfeiture of property, or publication of judgments.</p> <p style="text-align: justify;">Although environmental criminal liability is regulated on all levels in the US, i.e. federal, state and local, this article will only focus on the federal level. The most important federal statutes forming the basis of environmental criminal protection are the Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), the Clean Water Act of 1972 (CWA), the Clean Air Act of 1970 (CAA), and the Resource Conservation and Recovery Act of 1976 (RCRA).<span class="editor-footnote">Miller, Andrew B. <em>What makes companies behave? An analysis of criminal and civil penalties under environmental law</em> (December 2005). Available at SSRN:</span> In these statutes we find all the important types of environmental criminal liability resulting from general rules of criminal law. Under US criminal law, a person has to commit a prohibited act (<em>actus reus</em>) with a guilty mind (<em>mens rea</em>) to trigger criminal liability. There are five categories of the state of one's mind which could result in criminal liability. Four of these are similar to those under Czech criminal law and include intent, knowledge, recklessness or negligence. The fifth category is specific for the US criminal law - there are certain crimes which may be committed without a guilty mind.<span class="editor-footnote">Cole, E. Joseph. Environmental criminal liability: what federal officials know can hurt them - or should know (2004). Available at: However, strict and absolute liability offences are not exclusive to US law and are relevant to a range of common law jurisdictions.</span></p> <p style="text-align: justify;">In the US, individuals, corporations, or in fact both at the same time can be subject to environmental criminal liability. Below, I briefly examine corporate criminal liability, its relation to the liability of corporate officers and the concept of strict liability.</p> <h2 style="text-align: justify;">4.1 Corporate Criminal Liability</h2> <p style="text-align: justify;">Under US federal law, a corporation may be held criminally liable for the actions of its employees or agents that have violated environmental laws, if these acts were committed for the benefit of such company and were within the scope of the employee's or agent's authority. Such a company may be found to have knowingly engaged in criminal conduct based on proof that one employee knew facts relating to one element of a criminal offence and other employees had knowledge relating to other essential elements.<span class="editor-footnote">Tomko, Edwin J. and Wahl, Peter K.<em> Criminal Liability Concerns to the Environmental Professional - I Should Have Known Better (2001)</em>. Available at:; O´Connell, George L. and Allison, Craig C. <em>The Growing Web of Environmental Criminal Liability</em> (1996). Available at:</span> Put differently, even if no single employee or corporate officer had knowledge of all facts necessary to prove all of the elements of a criminal offence, the corporation can still be held criminally liable for violations of environmental law.<span class="editor-footnote">Chamber of Shipping. <em>Environmental Criminal Liability in the United States. A Handbook for the Marine Industry.</em> Library of Congress Card Number 00-106049: September 2000. Available at: US.pdf.</span></p> <p style="text-align: justify;">The most famous court case confirming the existence of corporate criminal liability under the US federal law is <em>New York Central &amp; Hudson River Railroad v. United States</em>.<span class="editor-footnote">New York Central &amp; Hudson River Railroad v. United States, 212 U.S. 481 (1909).</span> The case is about New York Central, a railroad company which was found to have violated statute by paying shippers a rebate for using the railroad line. The statute made the corporation criminally liable for the criminal acts committed by corporate directors, officers, and other persons acting on behalf of the corporation. Even though no evidence was produced showing that the director authorized or approved the prohibited rebates, the corporation was found criminally liable. The Court based this accountability on the imputed benefit received by the corporate principal from the acts of its agent.<span class="editor-footnote"><em>Ibid</em>.</span></p> <h2 style="text-align: justify;">4.2 Strict Liability</h2> <p style="text-align: justify;">Strict liability means that liability is imposed "in the absence of fault, knowledge, intent, negligence, breach of contract, or any other direct or indirect wrongdoing by the person held responsible."<span class="editor-footnote">Smith, Bruce C.:<em> Avoiding Environmental Liability</em> (1992).</span> Strict liability applies to individuals and corporations. An example of a statute which imposes strict liability is CERCLA. CERCLA foresees strict liability for a number of situations including owners or operators of a facility at the time of disposal or release of any hazardous substance, or any other person who arranged for disposal or treatment, who accepted the hazardous substances for transport to disposal or treatment, etc.<span class="editor-footnote">CERCLA § 9607 - Liability,</span> The rationale behind strict liability under CERCLA is to ensure that there will always be a person liable for clean-up costs. Strict liability is conceived as joint and several liability. This means that if a court can identify just one person out of many that polluted the environment, such a person can potentially be liable for all clean-up costs. The only remedy for such a person may be to claim contribution from any other potentially liable persons.</p> <p style="text-align: justify;">On the one hand, this concept is very severe and can be considered contrary to the principles of fairness and justice. On the other hand, it strengthens the protection of the environment. The purpose of strict liability is not to find scapegoats to pay for the costs of environmental damage. Rather. it works mostly in a preventive manner, although it can sometimes lead to reparation of environmental losses.</p> <h2 style="text-align: justify;">4.3 Responsible Corporate Officer Doctrine</h2> <p style="text-align: justify;">Not only a company through its employees, but also individual employees or corporate officers may be held liable for environmental crimes. Under this doctrine, refers to these employees as responsible corporate officers (the "RCO"), "corporate officers are criminally liable on the basis of their "responsible relation" for the acts they personally commit, or the acts of agents or subordinates, for crimes that they aid or abet, and for crimes they fail to prevent despite their responsible positions."<span class="editor-footnote">Chamber of Shipping, <em>op.cit.</em>, note 13.</span></p> <p class="editor-page-number" style="text-align: right;">36</p> <p style="text-align: justify;">Given that the environmental statutes only define general categories of individuals considered to be responsible corporate officers, the government prosecutors have an immense discretion in determining which, and whether a corporate officer may be deemed a responsible corporate officer. Generally, a corporate officer is found "responsible" if the environmental violation is committed, the corporate officer had the authority to stop or prevent the violation, and the corporate officer failed to do so, or, if the corporate officer had the authority to exercise control over the corporation's activity that caused the violation. Under this doctrine, there is no requirement that the officer in fact exercised such authority, or even that the corporation had expressly told the officer that he could exercise the authority.<span class="editor-footnote">Chamber of Shipping, <em>op. cit.</em>, note 13.</span> The relevant government agency or Court need only prove that the defendant had the responsibility and had either the authority to prevent or the ability to remedy a violation. They do not need to show that the individual had the intent to violate the law or even had any knowledge of the violation.</p> <p style="text-align: justify;">The RCO doctrine was first introduced in <em>United States v. Dotterweich</em> which addressed the question of individual liability of a corporate officer under a public welfare statute.<span class="editor-footnote">United States v. Dotterweich, 320 U.S. (1943),</span> Dotterweich, the president of a pharmaceutical company, was found guilty of shipping adulterated and misbranded goods in violation of the Food, Drug, and Cosmetic Act. He was responsible for the day-to-day supervision of his company. Although there was no evidence that he knew or participated in the illegal conduct, the Supreme Court stated that the offence could be committed "<em>by all who have a responsible share in the furtherance of the transaction which the statute outlaws.</em>" The Court weighed the potential risk of harm to the public against the hardship suffered by the corporate officer who, although not intending to violate the statute, was in a position of "responsible relation" to the danger such that he could be informed of the danger before loosing it on consumers.<em><span class="editor-footnote">Ibid.</span></em></p> <h2 style="text-align: justify;">5. Conclusion</h2> <p style="text-align: justify;">As we can see, the new proposed EU Directive is quite different from the US rules on corporate criminal liability in environmental matters. However, the proposed EU Directive contains several significant new features which in some ways resemble the US federal law. First, it de facto introduces criminal corporate liability, without naming it so, at the EU level. This will be new for certain Member States of the EU. Second, criminal corporate liability does not exclude liability of individuals if an environmental offence is committed. The possibility for individuals to commit a criminal offence (whether alone or together with the company) means that they cannot be exonerated from liability if the company is held liable. Thirdly, strict liability as in the US does not seem to be achievable in EU countries with a civil law system.</p> <p style="text-align: justify;">It is suggested that environmental protection through criminal law is the only effective method. Companies understand that prevention is generally cheaper than a fine or prohibition of an activity imposed in subsequent criminal proceedings. The adopted EU directive has a chance to influence this debate, even though its provisions could have been more courageous and better conceived.</p> <p style="text-align: justify;"><img src="images/jarolimkova.png" border="0" width="173" height="217" style="border: 0; float: left;" /><em>Andrea Jarolímková is a graduate of the Charles University Law Faculty in Prague where she is currently completing her PhD. She is a junior associate with Bird &amp; Bird in Prague where she focuses mainly on intellectual property law.</em></p> <p style="text-align: justify;"><em><br /></em></p> <p style="text-align: justify;"><em><br /></em></p> <p style="text-align: justify;"><em><br /></em></p> <p style="text-align: justify;"><em><br /></em></p> 19.06.2012, 21:57 What Is Moral Hazard And How Was It Invoked in the UK During the Northern Rock Crisis in 2007? <p class="editor-page-number" style="text-align: right;">27</p> <p style="text-align: justify;">This paper was submitted as a research essay at King's College London towards the author's LL.M degree in 2008.</p> <h2 style="text-align: justify;">1. Introduction</h2> <p style="text-align: justify;">The problem of "moral hazard" originally comes from the area of insurance. The insurance industry became aware some time ago that ownership of insurance increases the risk that insured parties will incur losses: holding insurance tends to dull the incentive for insured parties to take action to help prevent losses.<span class="editor-footnote">Jackson, H.E., Kaplow, L., Shavell, S.M., Viscusi, W. K., Cope, D. <em>Jackson, Kaplow, Shavell, Viscusi, and Cope's Analytical Methods for Lawyers</em>. Foundation Press 2003, p. 50.</span>Some definitions of the term still prefer to describe moral hazard using the insurance terminology, which may lead to a false impression that this phenomenon is solely confined to insurance.<span class="editor-footnote">Examples of such narrow definitions of moral hazard: "<em>An insurance problem; when the cost of a disaster is reduced with insurance, people have less incentive to avoid the disaster.</em>" (, accessed on 4th June 2008); "Refers to the likelihood of a person or organisation willing to take on more risk as they are covered by insurance." (, accessed on 4th June 2008); "The possibility that a person may act dishonestly in an insurance transaction." (, accessed on 4th June 2008).</span></p> <p style="text-align: justify;">However, it is now generally accepted that moral hazard is not merely an insurance problem, but that it can be found in a number of different situations, in which, for various reasons, economic agents do not have to bear the marginal costs of their actions. These economic agents may range from governments taking advantage of the IMF's default-staving safety net, the mere existence of which induces them to borrow irresponsibly, to reckless exploitation of public healthcare or social security systems by some individuals. It is therefore submitted that the term "moral hazard" should be defined in a much broader way in order to encapsulate the multitude of circumstances in which it may be invoked.</p> <p style="text-align: justify;">In the context of the aforementioned, it may thus be helpful to describe moral hazard as a situation in which the existence of a potential rescuer a creates itself the need for rescues to occur.<span class="editor-footnote">Dalhuisen, J.H. <em>Dalhuisen on Transnational and Comparative Commercial, Financial and Trade Law</em>. Third Edition, Hart Publishing, 2007, p. 1113 and p. 1143.</span>In other words, moral hazard arises when people behave recklessly because they know they will be saved if things go wrong.<span class="editor-footnote">See (accessed on 4th June 2008).</span> An equally relevant definition describes moral hazard as a term based on the principle that if actors are allowed to escape the consequences of their risky actions, they are more likely to engage in reckless behavior in the future.<span class="editor-footnote">See (accessed on 4th June 2008).</span> It is therefore possible to conclude that adverse incentives may be created as an unwanted by-product of safety nets of any kind and form, not necessarily connected with the existence of insurance.</p> <p style="text-align: justify;">One of the fields in which the problem of moral hazard has been identified and discussed is commercial banking. The current practice in the</p> <p class="editor-page-number" style="text-align: right;">28</p> <p style="text-align: justify;">industry includes several features that are capable of creating incentives for various participants to behave irresponsibly. The aim of this work is to identify these features and to evaluate their significance using the example of the Northern Rock Crisis of 2007. The author will also refer to the IPB Crisis 2000<span class="editor-footnote">Run on the third largest bank in the Czech Republic resulting in imposition of forced administration over the bank and subsequent sale of the bank's business. The author was personally involved in some of the numerous disputes resulting from the crisis.</span> and its aftermath, partly due to the notable parallels between these two crises, and partly in order to emphasize the potential significance of the subsequent arbitral award<span class="editor-footnote"><em>Saluka Investments BV (The Netherlands) v. The Czech Republic</em>, partial award, 17th March 2006.</span> in defining the limits of discretion of the State in providing State aid to banks in trouble.</p> <h2 style="text-align: justify;">2. Moral Hazard in Banking</h2> <p style="text-align: justify;">Modern banking systems contain a number of elements capable of invoking moral hazard behaviour in their participants. Banks benefit from sundry explicit and implicit guarantees: lender-of-last-resort facilities from central banks; formal deposit insurance; informal deposit insurance (of the kind just extracted from the Treasury by the crisis at Northern Rock); and, frequently, informal insurance of all debt liabilities and even of shareholders' funds in institutions deemed too big or too politically sensitive to fall.<span class="editor-footnote">Wolf, M. Why banking is an accident waiting to happen<em> Financial Times</em> 27th November 2007.</span> In order to maximize their profits, banks may consequently be tempted to engage in riskier investment strategies than they would dare to venture in the absence of such guarantees. It is also submitted that, as a result of these incentives, banks are willing to increase shareholder wealth by widening the distribution of returns on their portfolio beyond that which they would choose in an unprotected environment.<span class="editor-footnote">Milne, A., Whalley, A. E. <em>Bank Capital Regulation and Incentives for Risk-Taking (December 2001)</em>. Cass Business School Research Paper Available at SSRN: or DOI: 10.2139/ssrn.299319 (accessed on 15th July 2008).</span> Bank shareholders, whose liability is limited to the value of their shares, are generally happy to endorse such conduct as it increases the income that they receive from their shares. The temptation facing bonus-earning managers to engage in risky activities is also obvious, especially when they are protected from the consequences of failure, e.g. by guaranteed severance payments. Likewise, the depositors make use of the safety nets to maximize their returns. As a result, the interest rate on deposits becomes the most important, if not the only criterion considered in their decision to make a deposit with a particular bank while the credit/insolvency risk of the chosen financial institution is usually neglected as unimportant or irrelevant.</p> <p style="text-align: justify;">In the modern banking world, a further, distinct and very important type of moral hazard has emerged. It is the moral hazard, which results from asymmetric information between banks and their lenders. This information asymmetry has been significantly increased by the inherent complexity of modern financial products. Banks issue securities with attractive nominal interest rates, which are often backed by sophisticated portfolios containing good and bad assets, the true risk of which cannot easily be assessed by the investors. It is argued that in the current crisis, even the private rating agencies dramatically underestimated the risks involved, which helped lure international financial investors into purchasing mortgage-backed securities at exaggerated prices.<span class="editor-footnote">Sinn, H. W. Wenn Banken mit Zitronen handeln Börsen Zeitung, no. 81, 26th April 2008, English version available at (accessed on 8th July 2008).</span> In this environment, banks are naturally induced to sell "lemon bonds", and to use the proceeds to finance further risky lending.</p> <p style="text-align: justify;">The principal problem with the various instruments of risk redistribution described in the preceding paragraphs is that the costs of their  operation are not fully (and sometimes not even partly) borne by those who benefit from them. It is the taxpayers who ultimately pay in return for a variety of safety nets and state-sponsored insurance schemes. Taxes can therefore, in this context, be described as insurance premiums paid by the citizenry, hopefully in return for increased stability of the financial  system in general. Furthermore, reallocation of risk distorts the incentives of market participants to behave in an economically efficient manner. By protecting private investors, creditors, as well as financial institutions themselves from the outcome of their errors and misjudgements, moral hazard undermines the concept of liability.</p> <p style="text-align: justify;">Such mass production of moral hazard obviously requires a proper justification. The usual explanation is that banks provide an important public utility: a safe haven for money, for storing its value, and a payment system. The generally recognized susceptibility of the banking system to contagion that is capable of affecting the whole economy and the consequent necessity to minimize systemic risk is also an important reason for the decision to spend public funds on maintaining stability of the system.</p> <p style="text-align: justify;">It can be argued that most people prefer to incur the cost of moral hazard. They seem to accept it as a sort of insurance premium, the price of which is perceived as reasonable taking into account the gravity of the risks it should prevent. However, it is submitted that the wide acceptance of moral hazard is merely a result of an intuitive political consensus that these instruments are necessary and inherently connected with the business. It is also submitted that such consensus may be enhanced by various techniques, which are designed to mitigate political opposition against public expenditures of this kind.</p> <p style="text-align: justify;">John Hoefle, referring to the situation in the United States, points out that "<em>[m]ajor financial crises are never announced in the newspapers but are instead treated as a form of national security secret, so that various bailouts and market-manipulation activities can be performed behind the scenes.</em>"<span class="editor-footnote">Hoefle, J. The Federal Reserve vs. The United States <em>Executive Intelligence Review</em> 12th April, 2002.</span> In this respect he contrasts the position of the Federal Reserve, a private corporation answerable to the private banks that are its real owners, and the Bank of England, which is actually owned by the British Government. Measures of the latter institution therefore must be given greater publicity and issues of political accountability need to be considered more carefully in this context, than is the case in the United States. This problem has been clearly demonstrated also in the Northern Rock crisis.</p> <p style="text-align: justify;">Another way of suppressing objections against the expensive safety network is to make the price that is paid less conspicuous. Rather than taxing other banks or the taxpayers at large, central banks as lenders of last resort may impose an indirect tax in the form of inflation, i.e. by creating new money out of nothing with accounting entries. Adding new money to the<br />economy without adding new goods or services, however, is not without cost. It shifts the cost to the public, driving prices up for the consumers.<span class="editor-footnote">Brown, E. Bank Run or Stealth Bailout? Between Northern Rock and a Hard Place (, accessed on 4th June 2008)</span></p> <p style="text-align: justify;">The aforementioned techniques create an environment in which the notion of who bears the costs of what is considerably blurred. Besides, it seems to be impossible to present any credible risk-benefit analysis of the moral hazard problem as no one really knows how to measure, quantify it or how to describe its effects by means of an acceptable mathematical model. This leads to endless theoretical debates as well as empirical studies, which often reach opposite conclusions. Opinions on what level of moral hazard is inevitable for proper functioning of the financial sector thus differ considerably. Some authors conclude that moral hazard in banking is essentially no different from moral hazard in insurance, that it is clearly an undesirable phenomenon, and that</p> <p class="editor-page-number" style="text-align: right;">29</p> <p style="text-align: justify;">the best way to deal with it is to leave the costs of any protection measures to the parties affected without interference from governments.<span class="editor-footnote">See e.g. Benston, G. J. Safety Nets and Moral Hazard in Banking. In Kuniho Sawamoto, Zenta Nakajima, and Hiroo Taguchi (eds). <em>Financial Stability in a Changing Environment</em>. Bank of Japan: 1995, pp. 329-377.</span> Another group of authors also recognize the dangers of moral hazard, but, contrary to the laissez faire approach, they suggest that effective regulation and supervision should play a key role in keeping it within proper limits.<span class="editor-footnote">See e.g. Grossman, R. S. Deposit Insurance, Regulation, and Moral Hazard in the Thrift Industry: Evidence from the 1930s [1992] 82(4) <em>American Economic Review</em>, pp. 800-821</span> However, there are also powerful voices arguing that <em>"[m]oral hazard fundamentalists misunderstand the insurance analogy, fail to recognize the special features of public actions to maintain confidence in the financial sector and conflate what are in fact quite different policy issues. As a consequence, their proposed policies, if followed, would reduce the efficiency of the financial sector in normal times, exacerbate financial crises and increase economic instability.</em>"<span class="editor-footnote">Summers, L. Beware Moral Hazard Fundamentalists <em>Financial Times</em> 23rd September 2007.</span></p> <p style="text-align: justify;">Representatives of all three groups mentioned in the previous paragraph are usually able to present strong arguments in support of their respective cases. It is hard not to agree in principle with the proponents of the laissez faire approach, insisting that banks should be treated like any other firm in any other industry. If banks cannot meet their contractual obligations they should be required to "go under" and liquidate. This seems to be a perfectly fair solution. However, leaving aside the obvious dangers of systemic risk, which might adversely affect even persons who have never had anything to do with the particular bank in trouble, introduction of such policies may also be perceived as an undue penalty both for the depositors and the banks' shareholders who have deposited or invested their money under fundamentally different rules. None of these results can be described as particularly fair. One can also have understandable sympathy for the proposition that bank runs are necessary in order to keep the banking system under check and to prevent inflation.<span class="editor-footnote">Rothbard, M. <em>Anatomy of the Bank Run, Free Market</em> <em>September 1985</em>. Available at (accessed on 8th July 2008)</span> However, it is equally necessary to consider whether the benefit of the purgative effect of bank runs outweighs the cost of the general loss of confidence in the banking system.</p> <p style="text-align: justify;">Opponents of state intervention for the purposes of reduction of moral hazard also often argue that, given the uncertain effectiveness of such interventions, the most imporant factor inducing financial institutions not to succumb to moral hazard temptations is the banks' franchise value, i.e. a stream of earnings with a positive net expected value.<span class="editor-footnote">Franchise value is also referred to as "growth opportunities" (Herring, R. and Vankudre, P. Growth Opportunities and Risk-Taking by Financial-Intermediaries. [1987] 42 <em>Journal of Finance</em>, pp. 583-599), and as "charter value" (Marcus, A.. Deregulation and Bank Financial Policy. [1984] 8<em> Journal of Banking and Finance</em>, pp. 557-65).</span> Provided franchise value is sufficiently great, then shareholders should have an incentive to avoid liquidation by maintaining adequate capital in the bank and reducing the riskiness of bank assets. In the opinion of some authors, franchise value plays a crucial role in suppressing moral hazard. It has been argued that, assuming some degree of effective regulatory audit, it is only when franchise value is extremely low that the incentive to protect franchise value is eroded by the desire to exploit moral hazard.<span class="editor-footnote">Milne, A., Whalley, A. E. , <em>op. cit</em>, note 9.</span> However, it is necessary to keep in mind that while it is relatively easy to admit that the notion of "franchise value" can have some effect on banks' behaviour, a clear and generally accepted conclusion as to its practical importance has not been reached. The concept of franchise value itself is extremely difficult to quantify, and any suggestions as to its influence on shareholders' behaviour are thus necessarily even more speculative.</p> <p style="text-align: justify;">The proponents of using tighter regulation as a means of suppressing moral hazard in banking can be equally convincing in arguing their case. As a result of an analysis of balance-sheet data of various financial institutions, Grossman came to the conclusion that insured institutions operating under relatively permissive regulatory regimes were more prone to undertake risky lending activities than their tightly regulated counterparts.<span class="editor-footnote">Grossman, R. S., <em>op. cit.</em>, note 14, pp. 800-821.</span> Regulation also seems to be the only effective means of ensuring higher transparency of modern financial products especially in terms of assessment of their riskiness. However, one of the most recent and comprehensive empirical studies dealing with the effectiveness of regulation in banking shows that giving official supervisors greater powers has never enhanced bank operations or reduced bank fragility.<span class="editor-footnote">Barth, J.R., Caprio, G. Jr., Levine, R. <em>Rethinking Bank Regulation: Till Angels Govern.</em> Cambridge University Press, 2006.</span> By way of  comparison of various regulatory systems the study indicates that regulatory actions tend to lower bank development, induce less efficient banks, exacerbate corruption in bank lending, and intensify banking system fragility. Nevertheless, the authors of the study recognize that bank regulations and supervisory practices that force banks to disclose accurate information to the public generally tend to have a positive effect. Based on the aforementioned, it thus seems advisable to have only a limited confidence in the ability of regulation to deal with moral hazard. </p> <p style="text-align: justify;">In practice, governments use a variety of regulatory measures in order to reduce banks' incentives to take excessive risks. These involve imposition of capital adequacy ratios, rules on risk management and sometimes also liquidity requirements. As indicated above, the effectiveness of such measures is often questionable. It has been argued, for example,  that an increase in capital adequacy requirements will only have a short term impact, leading to an immediate increase in risk aversion and hence a reduction in bank lending. However, once the banks manage to replenish their capital, the changes in capital requirements cease to have any impact on incentives for risk-taking.<span class="editor-footnote">Milne, A., Whalley, A. E. ,<em> op. cit</em>, note 9.</span> Other authors go even further claiming  that the introduction of regulatory capital requirements indeed induces banks to shift their portfolio composition towards riskier assets, as they wish to retain their profitability even if the amount of capital that they are required to set aside increases.<span class="editor-footnote">Koehn, M., Santomero, A. Regulation of Bank Capital and Portfolio Risk. [1980] 35 <em>Journal of Finance</em>, pp. 1235- 44l; Kim D., Santomero, A. Risk in Banking and Capital Regulation [1988] 43<em> Journal of Finance</em>, pp. 1, 219-33; Sundaresan, N. Essays in Banking, Ph.D. diss. University of Massachusetts: 1996.</span> It is therefore possible to conclude that regulatory reforms can alter preferences and risk appetite of market participants, but they accomplish this task through very crude and often exploitable tactics. Their precise impact on reduction of moral hazard in banking is to a large extent unpredictable.</p> <p style="text-align: justify;">Given the unsatisfactory, or at least uncertain effectiveness of regulation in terms of suppression of moral hazard, attempts have been made to find alternative solutions by eliminating adverse incentives in the banking industry. Especially the notion of narrow banking has been repeatedly put forward as an alternative.<span class="editor-footnote">Dalhuisen, J.H., <em>op. cit.</em>, note 3, p. 1153.</span> Since we cannot be sure of our ability to prevent banks from acting upon their natural moral hazard incentives, the idea behind the concept is to transform these incentives themselves. Much of the moral hazard problem exists because banks can invest in more or less anything with depositor cash. Given the extensive safety nets, they thus prefer to invest in riskier asssets in order to obtain higher returns. An effective way to eliminate the problem might therefore be to require banks to invest depositor wealth only in safe assets, especially into money market mutual funds with limited investment possibilities largely confined to government securities and commercial papers. Banks acting in this way are generally described as "narrow banks". Other entities, referred to as finance houses or non-bank financial institutions, must then arise to invest in risky projects. As these institutions will raise their capital on domestic and international financial markets, their shareholders and other sophisticated suppliers of capital will have the right incentives to monitor them, so there should be no need for intrusive supervision of</p> <p class="editor-page-number" style="text-align: right;">30</p> <p style="text-align: justify;">state authorities. They would be essentially unregulated and allowed to go under.<span class="editor-footnote">Dalhuisen, J.H.,<em> ibid</em>.</span> Under such regime, these institutions would be motivated to capitalise themselves better and not to gamble with depositor wealth. Narrow banks, on the other hand, would remain able to provide the necessary liquidity, while the moral hazard problem as well as the chance that a financial crisis could wipe out peoples' savings would be considerably reduced.</p> <p style="text-align: justify;">However simple and effective the narrow banking solution may seem, there are numerous arguments which undermine its viability. It has been argued that the pool of safe assets is too small to back narrow banks, so that they would find it difficult to invest deposits. It has also been submitted that the world pool of liquid savings to invest is too small to support the non-bank financial institutions. Speculative as these arguments may be, they should not be rejected in a cavalier fashion without proper analysis of the problem.<span class="editor-footnote">See e.g. James, K., R. The Case for Narrow Banking (, 8th July 2008); Rajan, R.<em> Is There a Global Shortage of Fixed Assets? IMF speech</em>, 1 December 2006.</span> It has also been pointed out that providing liquidity and credit are actually one function, the performance of which by two different types of financial institutions is certainly not an optimal solution.<span class="editor-footnote">Kashyap, A., Rajan, R., Stein, J., 1999. <em>Banks as Liquidity Providers: An Explanation for the Co-existence of Lending and Deposit-taking</em>. National Bureau of Economic Research Working Paper 6962</span> Just as with deposits, customers can in many cases withdraw their credit on demand, and the occasions on which credit is withdrawn are random from the banks' perspective. In order to fulfill its obligations to honor either deposit withdrawals or loan commitments, the bank must carry liquid assets, which have an opportunity cost of low returns. It is therefore argued that, if depositor and borrower demands for liquidity are not perfectly correlated, wide banks enjoying a natural economy of scope demand a relatively smaller pool of costly liquid assets and thus are more efficient. Another study on narrow banking comes to the conclusion that non-bank financial institutions tend to suffer from high agency costs and provide a less stable supply of credit relative to deposit-insured banks.<span class="editor-footnote">Miles, W. <em>Can Narrow Banking Provide a Substitute for Depository Intermediaries?</em> First Annual Missouri Economics Conference, May 4-5, 2001 (, accessed on 30th June 2008).</span> Should the deposit insurance subsidy be removed, the overall supply of lending would become even more fragile. Therefore, if we want to achieve a stable credit supply and, at the same time, escape from the moral hazard dilemma, Miles concludes that narrow banking does not seem to provide a satisfactory solution. Given the complexity of the issues outlined above, it is submitted that it is by no means clear whether narrow banking could by itself provide an adequate answer for all the problems that it should ideally solve.</p> <p style="text-align: justify;">Authors claiming that the price paid by the public as a result of moral hazard is a prudent expenditure considering the gravity of the systemic risks which would otherwise arise in the absence of extensive safety nets often use the convincing argument that much of what financial authorities do in response to crises does not impose any costs on taxpayers and may actually make them better off. It is argued that a competent lender of last resort who lends freely at a penalty rate against good collateral actually turns a profit.<span class="editor-footnote">Summers, L. Beware Moral Hazard Fundamentalists <em>Financial Times</em>, 23rd September 2007.</span> Nevertheless, the fact remains that such facilities are only used in situations, where the borrower would have otherwise been unable to obtain the necessary funds on the market. If a  borrower in trouble can count on such a form of aid, a powerful incentive for irresponsible behaviour is inevitably created. It is therefore submitted that even if an increase in moral hazard does not necessarily have to make the taxpayer subject to any additional costs in every particular instance, the mere fact that it was increased makes it more likely that it will take its toll in the future. Again, the principal problem is that it is very hard to illustrate these dangers by means of exact figures.</p> <p style="text-align: justify;">Since it is difficult (if not impossible) to objectively quantify the relative value or importance of the conflicting objectives and solutions outlined above, most of the relevant writings remain confined to little more than persuasive rhetorical exercises. Striking the right balance between these objectives and solutions thus seems to be largely a result of an intuitive process, an art form rather than an exact science. Saying that, however, it would be unwise not to take appropriate lessons from crises that have</p> <p style="text-align: justify;"><img src="images/environmental%20-%20picture%20no.%203%20moral%20hazard.png" border="0" width="404" height="313" style="border: 0;" /></p> <p style="text-align: justify;">already happened in the past. In the end, it is only empirical experience (however painful it may be) combined with thorough analysis of the relevant issues, which can lead us to a solution, which is as close to the optimal one as possible. The Northern Rock crisis and its aftermath obviously provide a considerable amount of food for thought in this respect.</p> <h2 style="text-align: justify;">3. Northern Rock Crisis and its Moral Hazard Implications</h2> <p style="text-align: justify;">The Northern Rock crisis of September 2007 was definitely the most visible result of the liquidity crisis, which hit the financial sector in the UK as a consequence of the worldwide problems triggered by the collapse of the US sub-prime mortgage market. Funding problems of the country's eighth largest high street bank and fifth largest mortgage lender led to the first run on a British bank in more than a century. It is only natural that such an event has provoked extensive debate aimed predominantly at analysing the reasons for the crisis, allocating the blame, and on improving the regulatory framework as well as the procedures and policies of the relevant public bodies so that a similar crisis could be prevented or adequately handled in the future. One of the central topics of this debate was the general question of how to effectively maintain or restore confidence in the UK financial system without suffering any substantial increase in moral hazard. The second question was whether or to what extent the relevant authorities managed to achieve this goal in this case.</p> <p style="text-align: justify;">The first point to make here is that under the then current regulatory regime Northern Rock was allowed to develop a business model, where funding of long term mortgage debt relied substantially on short-term loans obtained on wholesale markets rather than on retail deposits. This meant that it did not have to maintain extensive and costly branch networks and could therefore boast of the lowest cost-to-income ratio in the banking sector, extremely rapid growth rate, and at the same time distribute generous dividends to its shareholders. Futhermore, it was not required to maintain any liquidity insurance, which would have otherwise provided a safeguard for the times when wholesale lenders would no longer be willing to lend. The difficulty was that this model was dependent on a continuous flow of funds through the inter-bank and wholesale markets.<span class="editor-footnote">Walker, G. Sub-Prime Loans, Inter-Bank Markets, Financial Support [2008] 29(1) <em>Company Lawyer</em>, pp. 22-25.</span></p> <p class="editor-page-number" style="text-align: right;">31</p> <p style="text-align: justify;">However, this flow has been seriously disrupted as a result of the global credit crunch of summer 2007, and Northern Rock consequently became unable to obtain funds to run its day-to-day operations. At the same time, due to the fears triggered by the sub-prime mortgage crisis, Northern Rock could no longer effectively use securitisation schemes in order to generate cash and unload risk by parcelling its home loans as bonds and selling them to willing investors, as it did in the past.</p> <p style="text-align: justify;">It is necessary to emphasize that Northern Rock's business model was quite a unique structure. All other banks rely heavily on retail deposits. No other UK bank appears to have conducted business in the same way as Northern Rock.<span class="editor-footnote">Harcourt-Webster, A. <em>Run on the Bank: Northern Crock, BBC Money Program.</em> 9th November 2007 (, accessed on 8th July 2008)</span> It was argued that Northern Rock was barely a bank at all and that it rather resembled a gigantic SIV. Like a structured investment vehicle, Northern Rock issued cheap debt to fund longer lending for higher yields. While SIVs invested in US sub-prime securities, Northern Rock sold mortgages. And, as with SIVs, when investors fled the markets the Rock struggled to refinance its debt as loans matured.<span class="editor-footnote">Farrell, S. Anatomy of a Credit Crisis <em>The Independen</em>t, 6th November 2007 (, accessed on 8th July 2008).</span> The fact that it was the only significant UK bank whose financing imploded during the crisis demonstrates that its problems were specific and home-grown, not generic and so the fault of others.<span class="editor-footnote">Wolf, M. The Big Lessons from Northern Rock <em>Financial Times</em> 15th November 2007.</span></p> <p style="text-align: justify;">The real trouble started on 13 September 2007, when it was revealed that Northern Rock had asked for and been granted emergency financial support from the Bank of England, in the latter's role as lender of last resort.<span class="editor-footnote">For a concise chronology of the crisis and its aftermath see e.g. "Timeline: Northern Rock Bank Crisis" (, accessed on 8th July 2008).</span> Despite the bank's and the relevant authorities' assurances that the bank was solvent and that there was no reason to panic, customers began to queue in front of the bank's branches in order to withdraw their deposits. In the following three days the bank had to pay its depositors more than L 2 bn of their money - about 8% of Northern Rock's total deposits.<span class="editor-footnote">Savers Return to Northern Rock, (, accessed on 8th July 2008).</span> At the same time, share prices of Northern Rock and of other mortgage banks in the UK saw a dramatic downfall. It was only thereafter that Chancellor Alastair Darling intervened by making a statement that the Treasury would guarantee all of the deposit liabilities of Northern Rock and that the same facilities would be made available to other similar banks in difficulty in the UK. This move has effectively stopped the run on the bank and has led to a significant recovery of the share prices of the relevant financial institutions. What it has not stopped, however, were questions, comments and criticisms focused on the way the crisis was handled.</p> <p style="text-align: justify;">It is necessary to emphasize that, facing the general credit crisis, the Bank of England refused to inject liquidity into the banking system, as other central banks<span class="editor-footnote">Most notably the European Central Bank and the Federal Reserve Bank.</span> have done, because doing so would encourage banks to go on taking excessive risk.<span class="editor-footnote">Prosser, D. The Fine Distinction between Lender of Last Resort and a Bail-Out <em>The Independent</em> 15th September 2007 (, accessed on 8th July 2008).</span> Instead it chose to make funds available to individual institutions in trouble, through its emergency loan facility. Under the traditional lender-of-last-resort rules, the central bank should support solvent but illiquid institutions provided that there is full collateral and a penal rate of interest is charged to act as a disincentive for use and reliance.<span class="editor-footnote">Walker, G., <em>op. cit</em>, note 29, pp. 22-25.</span> It is argued that this was exactly what the Bank has done in the case of Northern Rock. Nevertheless, the fact remains that, for various reasons, such a measure proved insufficient to prevent general panic resulting in the bank run and that it had to be reinforced by an extensive ad hoc public guarantee of deposits. Of course, the adverse effect of such guarantee on the level of moral hazard in banking may be considerable.</p> <p style="text-align: justify;"><br />Ironically enough, the liquidity support facility designed to help the bank overcome its temporary liquidity problems acted as the immediate trigger of the run. The information occupied most of the national newspaper's headlines and it can be argued that it was precisely the unnecessary publicity that induced people into massive scale withdrawals. Although the Governor of the Bank of England Mervyn King argued that he was statutorily prevented from providing financial support for Northern Rock in secret, commentators often disagree pointing out that undercover support was provided by the European Central Bank in the past without raising any such issues.<span class="editor-footnote">See e.g. Buiter, W. The Lessons from Northern Rock. <em>Financial Times</em> 13th November 2007.</span> It is submitted that it would be very useful to examine the possibilities of providing similar forms of public aid in a much more discrete manner in the future.</p> <p style="text-align: justify;">It was also clearly shown that the deposit insurance scheme in effect at the time of the crisis was insufficient to keep depositors calm in times of major market disturbances and was thus unable to contribute to greater  stability of the system. The amount covered was too low, the deductible for deposits over Ł 2000 was an invitation to run, and the time (allegedgly up to 6 months) it could take for depositors to get their money back was far too long.<span class="editor-footnote">Buiter, W., <em>ibid.</em></span> No wonder that a new scheme was announced very soon after the crisis, whereby the insurance cover was expanded to guarantee 100% of the first Ł 35,000 of savings. It is generally perceived that the risk of increase in moral hazard resulting from the more generous insurance scheme is worth taking if such insurance is capable to achieve what is expected. However, the efficiency of the new system will also depend on the speed at which the compensation will actually reach the affected depositors. If reimbursement takes too long, many depositors may still hoose to withdraw their funds immediately rather than wait for the compensation. Should this be the case, an<em> ad hoc</em> public guarantee of deposits may still be the only way to maintain financial stability in the future. Another principal question raised was how to maintain liquidity in the markets in times of crises without increasing moral hazard, and whether the Bank of England should act not only as the lender of last resort, but also as the market maker of last resort correcting market failures by providing liquidity to the markets. Buiter suggests that liquidity problems may be solved by changing the restrictive liquidity policy of the Bank of England.<span class="editor-footnote">Buiter, W.,<em> ibid</em>.</span> In his view, the Bank should give more support to illiquid markets in general by widening the range of acceptable collaterals, which could be used by the banks in liquidity-oriented open market operations. Such collateral would include illiquid instruments such as mortgages and asset-backed securities. Provided this collateral is priced severely or even punitively, and has a further 'haircut' or discount applied to it, there will be no moral hazard and the Bank can expect not to lose money. Furthermore, such liquidity facilities could be provided at longer maturities, provided that the interest rates would reflect liquidity risk premiums as well as default risk premiums. Market failures would thus be corrected without creating additional moral hazard.</p> <p style="text-align: justify;">However, most commentators seem to agree that the problems of Northern Rock were so serious that no general loosening of the liquidity policy would have saved it.<span class="editor-footnote">See e.g. Farrell, S., <em>op. cit</em>., note 31.</span> Consequently, a one-off emergency loan would have been necessary in any event. The only other option would be to treat Northern Rock, which only accounts for 2 or 3 percent of the assets of UK-registered banks, as not being systemically important, and to let it go under.</p> <p class="editor-page-number" style="text-align: right;">32</p> <p style="text-align: justify;">However, while it was undisputed that Northern Rock was not one of the biggest players on the market, it became equally apparent that its failure could easily trigger a more general credibility crisis. The immediate fall in share prices of other important mortgage lenders in the UK such as Alliance &amp; Leicester and Bradford and Bingley clearly indicated the general distrust of investors in similar institutions and revealed the inherent fragility of the banking system. There was a justifiable fear that people would start to think that if Northern Rock could be allowed to go under, perhaps others would also be allowed. The announcement of a public guarantee of all deposits was therefore largely driven by the need to avoid the danger of similar withdrawals being made at other mortgage lenders, rather than by the desire to save Northern Rock per se. The effect of this move may nevertheless be considered to have substantially increased the dangers of moral hazard the next time any bank gets into difficulty, with the general public assuming that the Treasury itself (and not just the Bank of England) will step in to support their deposit liabilities.<span class="editor-footnote">Walker, G., <em>op. cit</em>, note 29, pp. 22-25.</span></p> <p style="text-align: justify;">Assuming that the adoption of a more generous liquidity policy together with a more generous deposit insurance scheme would not be enough to keep Northern Rock afloat, and taking into account the fact that problems of this relatively small financial institution may seriously destabilise the whole system, the only viable solution for the future seems to be carefully designed regulatory reform. Such reform would have to be focused on detailed monitoring of liquidity of financial institutions and disclosure of their off-balance sheet and contingent liability exposures. Care must nevertheless be taken here not to overreact. Giving up Britain's light touch regulatory regime that attracts business to London might be a high price to pay for the increased stability of the system. Given these conflicting objectives, any large-scale legislative intervention seems to be too dangerous. The core of the reform should therefore probably lie in changing the supervisory practices and procedures of the Financial Services Authority and other relevant bodies so that these would be able to identify risky business models like the Northern Rock's in a timely fashion and deal with the problems before it is too late. Appropriate preventive measures would probably also have a considerable anti-moral-hazard effect.</p> <p style="text-align: justify;">The analysis of the moral hazard implications of the Northern Rock crisis would not be complete without discussing the problem of creating the right incentives for shareholders and management of financial institutions not to engage in excessively risky activities and to develop healthy business models instead. After all, it was their reckless dash for growth that was the ultimate reason for the crisis. A speedy imposition of public administration over mismanaged banks is sometimes presented as an effective way of dealing with the problem.<span class="editor-footnote">See eg. Buiter, W., <em>op. cit.</em>, note 38.</span> Once the bank is under public control, a long-term plan for it may be worked out, or its business may be sold off, in whole or in part. In such scenario, shareholders would be wiped out and would only be entitled to the proceeds of the sale after the bank's other creditors are satisfied. Day-to-day operations of the bank would no longer be carried out by its management, but by specially appointed public officials, who would give general priority to public interests over the interests of shareholders. Shareholders would thus be effectively punished for their irresponsibility. However, what remains questionable is whether the threat of losing their jobs combined with the threat of litigation for breach of directors' duties would constitute strong enough incentives to persuade bonus-oriented management to behave more reasonably. In this respect it is worth reminding that Northern Rock shareholders as well as its chief executive managed to retain their powers for many months after the run, which cannot be seen as a satisfactory result.</p> <h2 style="text-align: justify;">4. IPB Crisis and its Aftermath</h2> <p style="text-align: justify;">Many aspects of the IPB crisis, which hit the Czech financial sector in the year 2000, were very different from the Northern Rock affair. Being the third largest bank in the country with millions of retail depositors, it is beyond any question that IPB was systemically important for the Czech economy.<span class="editor-footnote">According to the studies of the Czech central bank, the collapse of IPB would have led to a serious endangering of the stability of the financial sector and to a decline in the growth of the GDP by 2 to 4%.</span> Unlike Northern Rock, whose problems originated mainly from reckless borrowing, IPB's difficulties resulted from a bad (non-performing) loan book, most of which was created in the post-revolutionary euphoria of the early nineties by its risk-prone and probably sometimes also corrupt management. Contrary to the situation at Northern Rock, after the commencement of the run, IPB was immediately taken under public administration and its whole business was subsequently sold off to another Czech bank, CSOB.</p> <p style="text-align: justify;">However, as far as the moral hazard implications of these two crises are concerned, it is possible to recognize astonishing similarities. As with Northern Rock, the run was escalated by the enormous attention of the media, and by the fact that the deposit insurance scheme was inadequate. Similarly to the UK system, deposits were covered only up to 90%, and up to a relatively low threshold amount, and payments were considerably delayed.<span class="editor-footnote">For an overview of the numerous collapses of Czech banks an the operation of the Deposit Insurance Fund see e.g. "How the Banks Were Going Bust" (;c=A030317_121357_fi_blind_bch, accessed on 14th July 2008).</span> The depositors' incentives for queuing in front of IPB's branch offices to withdraw their money were therefore identical. The harmful effect of the unnecessary publicity was recognized inter alia in the subsequent arbitration, where the tribunal referred to "<em>the Czech Government's unjustifiable and unreasonable conduct regarding the circulation of negative information about IPB during the week before the second run on IPB that led to its failure</em>."<span class="editor-footnote"><em>Saluka Investments BV (The Netherlands) v. The Czech Republic</em>, partial award, 17th March 2006, para. 504.</span> Another striking parallel can be found in the fact that the Czech government waited for three whole days of the run before it issued a 100% guarantee of customers' deposits.</p> <p style="text-align: justify;">This is, however, where the parallels end. Simultaneous to the issue of the state guarantee of deposits, a public administrator was appointed to run the bank. From that moment onwards, neither the management, nor the shareholders had any say in IPB's operations. The public administrator then sold the bank's business to CSOB, whereas the whole transaction was effected over the weekend and under very suspicious circumstances. The core of the problem lies in the fact that the state issued a guarantee to CSOB for the value of all bad loans, which CSOB purchased as a part of IPB's business. The Parliamentary Investigation Committee was thus able to reach the conclusion that "<em>CSOB has acquired the ownership of IPB completely "purified" by the state. It is not possible to say otherwise than as a gift</em>."<span class="editor-footnote"><em>Closing Report of the Investigation Committee of the Chamber of Deputies for the Clarification of the Decision Making of the State in IPB from the Time of its Establishment until the Imposition of Compulsory Administration and its Sale to CSOB</em>, file no. VKPS-1/2000/500, p. 21.</span> The gift to CSOB obviously had to be paid for by the taxpayers. This gave rise to numerous disputes and investigations, some of which are still pending. However, from the moral hazard perspective, it is clear that such move has given a powerful warning to shareholders and possibly also to management of other potentially irresponsible financial institutions. On the other hand, the unpredictable and inconsistent conduct of the Czech Government in relation to the question of provision of state aid to banks in trouble has raised justifiable concerns resulting in the delivery of a controversial, yet very important, arbitral award.</p> <p class="editor-page-number" style="text-align: right;">33</p> <h2 style="text-align: justify;">5. Conclusion - The Partial Award in Saluka Investments BV (The Netherlands) v. The Czech Republic and its Moral Hazard Implications</h2> <p style="text-align: justify;">Although many of the aspects of the IPB crisis have not yet been resolved, the contentious issues of the involvement of the Czech state in the crisis have already been carefully dealt with not only by the Parliamentary Investigation Committee, but also, and perhaps more importantly, by the arbitral tribunal in the investment arbitration of <em>Saluka Investments BV (The Netherlands) v. The Czech Republic</em>. In its partial award, the tribunal held that the Czech state failed to negotiate with IPB's shareholders (Saluka) in good faith about providing state aid, and that it was "<em>obliged to provide financial assistance to firms or industries in a way that does not amount to an unfair or inequitable treatment of a foreign investor.</em>"<span class="editor-footnote"><em>Saluka Investments BV (The Netherlands) v. The Czech Republic,</em> partial award, 17th March 2006, para. 446.</span> Based on the provisions of s. 3 (1) and (2) of the relevant bilateral investment treaty,<span class="editor-footnote">Agreement on Encouragement and Reciprocal Protection of Investments Between the Kingdom of The Netherlands and the Czech and Slovak Federal Republic, signed on 29 April 1991.</span> the tribunal summarized the limits for exercising the Czech state's discretion in relation to providing public aid to troubled banks as follows:<br />"The Respondent has violated the "fair and equitable treatment" obligation by responding to the bad debt problem in the Czech banking sector in a way which accorded IPB differential treatment without a reasonable justification. The Big Four banks<span class="editor-footnote">i.e. IPB, CSOB, KB and CS.</span> were in a comparable position regarding the bad debt problem. Nevertheless, the Czech Republic excluded IPB from the provisioning of financial assistance. Only in the course of CSOB's acquisition of IPB's business during IPB's forced administration was considerable financial assistance from the Czech Government forthcoming. Nomura (and subsequently Saluka) was justified, however, in expecting that the Czech Republic would provide financial assistance in an even-handed and consistent manner so as to include rather than exclude IPB. That expectation was frustrated by the Respondent. The Tribunal finds that the Respondent has not offered a reasonable justification for IPB's differential treatment."<span class="editor-footnote"><em>Saluka Investments BV (The Netherlands) v. The Czech Republic,</em> partial award, 17th March 2006, para. 498.</span></p> <p style="text-align: justify;">It is therefore possible to say that, if other banks on the market are treated in a particular way, a bank can have legitimate expectations that it will be saved by the State in case of trouble and that, if such expectations are not met, this may amount to a failure to protect an investment of a foreign investor - the bank's shareholder. It is therefore submitted that the tribunal has unequivocally acknowledged the fact that moral hazard is an inherent feature of the banking industry, that banks who count on state aid in their risk planning behave perfectly sensibly, and that such "legitimate expectations" shall be adequately protected. Thus, in the light of the mentioned award, the decision to save Northern Rock might have created a dangerous precedent opening floodgates to future bail-outs by establishing the banks' right to state aid and the States' corresponding duty to provide such aid. Due to the size of Northern Rock it may be assumed that a similar form of aid should be made available in the future also to small banks, whose systemic importance is negligible. Furthermore, the award indicates that, in order to avoid possible liability for violation of investment protection laws, any government policies in this field should be not only effective, but also even-handed, consistent and transparent.</p> <p style="text-align: justify;"> </p> <p style="text-align: justify;"><img src="images/ota%20hajek_1.jpg" border="0" width="176" height="219" style="border: 0; float: left;" /><em>Mgr. Otakar Hájek graduated from the Law Faculty of Charles University in Prague in 2006 and completed his LL.M. degree at King's College London in 2008. After working as an in-house lawyer in a London hedge fund, he joined Allen &amp; Overy in Prague in 2009. He is a corresponding member of the Editorial Board of the Common Law Review.</em></p> <p style="text-align: justify;"><em><br /></em></p> <p style="text-align: justify;"><em><br /></em></p> <p style="text-align: justify;"><em><br /></em></p> 28.05.2012, 21:53 Světová literatura a globální právo: Ponaučení z Goetha <p class="editor-supplement-number" style="text-align: right;">XII</p> <h2 style="text-align: justify;">1.      Úvodní poznámky</h2> <p style="text-align: justify;">Génius Goetha je stále předmětem obrovského množství literatury v mnoha jazycích, a to nejen pro šíři jeho zájmů – v tomto bodě přesahuje Shakespeara a Danta, s nimiž je srovnáván - ale též pro bohatost svého básnického výrazu.  Pro mne jako právníka, který věnoval svůj profesní život pochopení různých systémů a jejich komparaci, má zvláštní význam jeden aspekt Goethova díla, vedle jeho zalíbení pro čin spíše než slova: jeho schopnost dosáhnout syntézy mezi Severem a Středomořím, romantikou a klasikou, Východem a Západem.<br /><br />Žádný právník by neměl protestovat, že tyto snahy jsou podstatně odlišné od toho, o co se snaží komparatisté, neboť rozdíly, které musely být přemostěny tímto Goethovým úsilím, byly obrovské.  Navíc tak musel činit v době, kdy veřejné mínění vzývalo německou kulturu, literaturu, divadlo, operu, poezii a právo – potom, co byl objeven a pochopen <em>Volksgeist</em> německého národa.  Goethe byl úspěšný zčásti proto, že jeho neposedná a otevřená mysl mu dovolila přistupovat se sympatiemi k „odlišným“ kulturám, a také proto, že jeho literární vlohy mu umožnily napodobovat cizí styl a citovost způsobem, který mu vynesl obdiv expertů těchto odlišných kultur.  Jeho básnická sbírka známá pod obecným názvem „<em>West-östlicher Divan</em>“ je jedním z příkladů, nikoliv ovšem jediným, který tento názor podporuje.  <br /><br />Přemosťování kultur, zřejmé již v jeho raných dílech, se stalo Goethovou hlavní činností během posledních deseti let jeho života, když bojoval za vytvoření toho, co nazýval Weltliteratur – světovou literaturou.  Moderní angličtí akademici v oblasti práva mají tendenci v souladu s ochuzujícími požadavky naší doby být specialisty či „techniky“ tak nadanými jako zručnými, ale často přezírajícími výhody, které může poskytnout širší kulturní kontext.  Srovnávací právo je však disciplínou, která vyžaduje něco víc než schopnost používat sokratovské myšlení při nakládání s právními pravidly.  Ačkoliv podstata této myšlenky pozornosti sice nadaným, ale cizího práva neznalým právníkům, unikla, přesto se vyslovili o tom, jak a dokonce zda by mělo být srovnávací právo studováno.<span class="editor-footnote">Stapleton, Jane.  Benefits of Comparative Tort Reasoning – Lost in Translation.  [2007] 1 <em>Journal of Tort Law</em>, str.  1 a násl.  </span> Sklon vyslovit svůj názor je pochopitelný, protože právníci se často sebevědomě o mnohém vyjadřují; přesto výsledky takovýchto výletů do země neznámé -<em> terra incognita</em> - mohou být chabé.  Ostatně před 2500 lety to byl Thucydides, který ve své pohřební písni podotknul, že „<em>neznalost podněcuje ukvapenost, zatímco vědomost podporuje zdrženlivost</em>".<br /><br />Pojďme se však vrátit ke Goethovi, protože jeho myšlenky zasluhují pozornosti dokonce i ze strany právníků.<br /><br />Za prvé, Goethovy myšlenky, na rozdíl od myšlenek Bedřicha Velikého vyjádřené na první pohled současně, ale ve skutečnosti již dříve, byly velmi blízké představám některých moderních právníků o fungování srovnávacího práva.  Bedřich ve svém díle <em>De la literature allemande</em><span class="editor-footnote">Zveřejněno ve francouzštině v roce 1790.  </span> uvažoval o velkém překladatelském projektu z francouzštiny a klasických jazyků, kterým by se <em>pomohla vytvarovat německá kultura</em>, zatímco ignoroval její vlastní jedinečnost.<br /><br />Omylem Bedřicha Velikého bylo přesně to, co dělají ti, kteří se zabývají současným srovnávacím právem (nebo se do něj pletou) a kteří z nějakého důvodu předpokládají, že účel studia cizího právního řádu spočívá v nalézání precedentů k jejich rychlé a jednoduché transplantaci.  Takto to ovšem nikdy fungovat nemůže.  Při nejlepším může cizí řešení působit pouze silou přesvědčivosti, zejména pokud účelem jeho rozboru je ukázat, zda výsledek, kterého dosáhlo, je funkční v onom cizím systému a tudíž zda by též mohlo fungovat v systému vlastním.  Cizí myšlenka, řešení nebo právní institut mohou na druhé straně nabídnout tuzemskému právníku určitou výchozí pozici k analýze vlastního právního řádu, zejména tam, kde je nejasný, zastaralý či rozporuplný, ale sotva jsou schopné poskytnout více.  <br /><br />Za druhé, na rozdíl od Bedřicha Velikého nebylo Goetheovým cílem užívat cizí vzory pro formování myšlenek a postupů ve vlastní zemi, ale studovat je pro prohloubení pochopení, vzájemného porozumění a inspirace.  Slovy vynikajícího germanisty:<span class="editor-footnote">Hoffmeister, Gerhart.  Reception in Germany and Abroad.  In Lesley Sharpe (ed.). <em> The Cambridge Companion to Goethe</em>.  Cambridge: 2002, str.  232. </span></p> <blockquote style="text-align: justify;">„Pro Goetha nebyla Weltliteratur ani souhrnem všech národních literatur ani stále narůstajícím sborníkem významných světových děl, spíše ji chápal jako dynamický proces sbližování evropských národů – zejména Británie, Francie a Německa, <em>s cílem odstranění překážek národních předsudků, </em>které překážely mírovému soužití bezprostředně po Napoleonských válkách.  Za účelem naplnění této společenské funkce literatury vyzval Goethe tehdejší autory, aby spolu s ním sloužili jako přeshraniční zprostředkovatelé a prostředníci v časopisech, překladech a pamětech.  Doufal, že tento společný myšlenkový rámec se nakonec projeví větším smyslem pro porozumění a toleranci, nejdříve mezi inteligencí a potom též mezi prostými lidmi.“</blockquote> <p style="text-align: justify;">Čili Goethe nikdy neviděl přínos v postupu, kdy se osoba hledající inspiraci v cizích zdrojích zbavuje svých vlastních přirozených či kulturních znaků.  Touha pochopit, být ve styku, podporovat a učit se od tak rozmanité skupiny autorů, jakou byl lord Byron, Shelley, Carlyle, George Elliot, anebo Alessandro Manzoni – abych zmínil alespoň několik významných a sebevědomých jednotlivců – ho vedla k soustavné obhajobě významu „vzájemného obohacování“, „rozvoje vlastních schopností na základě kontaktu s ostatními“, ale též potřeby zachovat „osobitost každé národní literatury.“ A nebezpečí překladů, které zřejmě trápí profesorku Stapletonovou natolik, že si vypůjčuje jako podtitul svého článku titul holywoodského filmu, pojímá Goethe způsobem, který kdokoliv, kdo se pohybuje mezi různými právními kulturami, velmi ocení.  V této souvislosti Goethe napsal Thomasi Carlylemu:<span class="editor-footnote">Citováno v knize Friedenthal, Richard. <em> Goethe: His Life and Times</em>.  London: 1965 (1989 paperback edition), str.  513 (kurzíva přidána).</span></p> <p class="editor-supplement-number" style="text-align: right;">XIII</p> <blockquote style="text-align: justify;">„…překladatel pracuje nejen pro svoji vlastní zemi, ale též pro zemi, v jejímž jazyku je původní dílo.  Neboť se stává častěji než si člověk představí, že národ saje energii a sílu z určitého díla, které absorbuje do svého vnitřního života takovým způsobem, že už není dále schopen se z něj těšit a těžit z něj.  To platí zejména pro Němce, kteří přijímají až příliš rychle vše, co jim je nabízeno, a přeměnou častým opakováním jej v jistém smyslu ničí.  Je tak pro ně velkým přínosem, když vidí, že se něco jejich vlastního znovu objevuje obdařeno novým životem díky úspěšnému překladu.“</blockquote> <p style="text-align: justify;">Za třetí, ačkoliv se Goethe (stejně tak jako mnoho jeho současníků) snažil objevit<em> Volksgeist</em> jeho vlastního národa, aby na něm mohl budovat německou kulturu, divadlo a poesii, a tudíž neviděl německou literaturu jakožto produkt cizí (např.  francouzské nebo klasické) literatury, nikdy neviděl v kultuře – chápáno obecně - překážku vzájemného vypůjčování a inspirace.  Jeho vlastní dílo ukazuje na inspiraci jinými kulturami, ať se jedná o jeho díla z období <em>Sturm und Drang</em> (plné výpůjček z anglické literatury), jeho klasická dramata (např.  Ifigenie na Taurisdě, brilantní uzpůsobení klasického řeckého tématu jeho myšlence „morálního jednání“ a „univerzálního humanismu“) anebo později jeho <em>Römischen Elegien</em> nebo <em>West-östlicher Divan</em>.  V dílech<em> Römischen Elegien</em> a<em> West-östlicher Divan</em> jsou italské a perské motivy a styl mistrně znovu představeny a znovuvytvořeny prostřednictvím německého jazyka, což by ovšem většina lidí do té doby (a možná dokonce dodnes) bývala pokládala jednoduše za nemožné.<br /><br />Čas a prostor nám nedovolují se zabývat těmito myšlenkami hlouběji, ale dost již bylo řečeno v tom smyslu, že Goetheovo kulturní tažení mající za cíl sblížit různé jazyky a literatury obsahuje prvky přenosné do práva, kde, vedle sjednocujícího vlivu moderní globalizace, máme velmi praktickou potřebu (a nejenom básnické cíle) harmonizovat anebo dokonce sloučit různá právní řešení.  Dříve než se někdo vrhne na hledání rozdílů v právu, měl by si přečíst to, co Schiller poznamenal o způsobu, jakým jeho přítel „sloučil svou německou osobnost s osobností středomořskou“.  Stručně řečeno, úkol může být splněn, pokud existuje odhodlání jej splnit.<br /><br />Uvažují právníci o věcech tímto způsobem? Je možné je přesvědčit, aby otevřeli oči a (přinejmenším) zvážili možnost, že „je i jiný svět“<span class="editor-footnote">Bingham, T.H. 'There is a World Elsewhere': The Changing Perspectives of English Law. F.A Mann lecture given on 21 November 1991, published in [1992] 41 International &amp; Comparative Law Quarterly, pgs. 513-29 and reprinted in Bingham, T.H. The Business of Judging. Selected Essays and Speeches. Oxford: 2000, pg. 87 ff. Baroness Hale of Richmond in her recent but as yet un-published Maccabaean lecture "Minority Opinion?" at the British Academy seems to me to have argued along similar lines [Editorial note: the lecture has been subsequently published in Proceedings of the British Academy [2007] 154, 319-336].</span>, který je nejenom stejně tak starý (pokud ne dokonce ještě starší) než ten jejich, ale též možná užitečný, tedy přinejmenším pro ty, co si přejí udržet londýnské City coby jedno z center (obchodního) světa a nejsou plně absorbováni upjatým prostředím akademických klášterů? Dílo lorda Binghama bez pochyb patří do kategorie děl nápaditých, pionýrských a otevřených, o kterém lze předpokládat, že by Goetha přitahovalo a které ve skutečnosti velmi připomíná jeho vlastní náhled – což zdůvodňuje onen neobvyklý název tohoto eseje.  Průkopníci a osoby s originálním myšlením však nikdy netvoří většinu v žádné společnosti; na rozdíl od konzervativních tradicionalistů, kteří ji vždy tvoří.  To není nijak překvapivé, neboť následování zaběhnuté praxe je vždy bezpečnější a jednodušší, ačkoliv to neznamená, že ti, kteří upřednostňují “zachování“ věcí tak, jak jsou, nemohou být taktéž mimořádně nadaní.  Znamená to jen, jak dějiny napovídají, že jsou nakonec zapomenuti.<br /><br />Být konkrétní vždy pomáhá porozumění více než být obecný a mdlý, i když <em>nezamýšleným</em> důsledkem může být, že neshoda bude brána spíše osobně než věcně.  Přesto si myslím, že by člověk měl toto riziko podstoupit, i když v mém případě to není záměrné, neboť jsem se opakovaně snažil zahájit diskuzi ohledně významu uvažování a postoje soudů<span class="editor-footnote">Markesinis, B. Judicial Mentality: Mental Disposition or Outlook as a Factor Impeding Recourse to Foreign Law. [2006] 80 <em>Tulane Law Rev</em>, pp. 1325 ff.</span>  při výkladu soudních rozhodnutí vydaných soudci po celém světě.  Jinými slovy, nemůžete chápat a porozumět práci soudce bez znalosti jeho charakteru a osobnosti.<br /><br />To, co platí o soudcích, platí i o akademicích, a tak pohlížím na nejnovější článek profesorky Stapletonové ve stejném světle, i když dobrá třetina mne šokovala jakožto soustavný útok na moje názory způsobem, který může vyvolat dojem, že na mě útočí osobně a nejenom proto, že nesouhlasí jak s mými názory na mimosluvní právo odpovědnosti za škodu, tak se způsobem výuky srovnávacího práva.  <br /><br />V následujícím bych proto chtěl využít práce dvou právníků, jejichž talentu a vzdělání si velmi vážím, ale s jejichž postupy a názory bohužel silně nesouhlasím.  Jsou to lord Hoffmann a profesorka Stapletonová.  Chtěl bych zdůraznit, že i přestože se zaměřuji na jejich práci, mohl by ale neměl by v tom být spatřován útok na jejich osoby; jedná se spíše o nesouhlas s uvažováním, názorem, filozofií a metodologií, který potřebuje být konkretizován k tomu, aby čtenář mohl sám posoudit, v čem přesně intelektuální nesouhlas spočívá.  Pokud bude tento způsob srovnávání názorů brán osobně, budu prvním, kdo toho bude <em>hluboce</em> litovat; neboť o co usiluji, je metoda, která podle mého soudu může pomoci, aby předmět mého zájmu přežil nejenom v přeplněných studijních osnovách, ale aby rovněž prokázal svoji hodnotu v právní praxi. </p> <h2 style="text-align: justify;">2.      Dva styly zavírání očí před druhým světem</h2> <h2 style="text-align: justify;">2.1     Soudnictví</h2> <p style="text-align: justify;">Lord Hoffmann se doposud ve vztahu k cizímu právu rozhodl pro způsob, který můžeme nazvat lakonickým, či lhostejným nebo mlčícím.  Pro někoho, kdo začal svoji kariéru jako akademik a kdo je Jihoafričanem (a jak lze předpokládat, je alespoň zčásti ovlivněn dvojí právní kulturou této země) je tato rezervovanost stejně tak překvapením jako zklamáním.  Lord Hoffmann je také dlouhou dobu prezidentem Anglo-německého právnického sdružení a ačkoliv to neznamená, že bychom od něho mohli očekávat, že bude stoupencem nebo kritikem německého práva, tato skutečnost mohla ospravedlnit příležitostné výlety do cizího právního řádu založené na hluboké zkušenosti, kterou nabyl stykem s cizími právníky a jejich myšlenkami.  V jeho výrocích, ať už soudních či <em>mimosoudních</em>, jsou poukazy na užitečnost cizího práva, jak již bylo řečeno, pouze aforistické a odmítavé, případně žádné, i když mu kolegové soudci ukázali cestu.<br /><br />Příklad jeho skoupého a odmítavého stylu lze najít v předmluvě k nedávno vydané a zajímavé akademické studii.  Tam říká, že „srovnávací právo nám nepomáhá“.<span class="editor-footnote">Steven, R.<em> Torts and Rights</em>. Oxford University Press, Oxford, 2007, p. vi.</span> Tento kategorický soud je odůvodňován tvrzením, že „<em>evropští právníci mají stejné problémy; ale jejich odpovědi jsou zahalené nejasností či absencí odůvodnění</em>“.<br /><br />Nebyl bych překvapen, kdyby se mnozí na Kontinentu cítili částí výroku v kurzívě dotčeni.  Proč se britský soudce s tak imponujícím vzděláním vyjádřil tímto velmi kategorickým způsobem? Kdyby například tento svůj výrok omezil na rozsudky francouzského Cour de cassation (poznámka editora: Nejvyššího soudu), avšak bez francouzských soudů nižších instancí, měl by pravdu.  Kdyby zaměřil svůj útok proti rozhodnutím německých ústavních soudů, mohli bychom sympatizovat s jeho potížemi porozumět těmto rozhodnutím pro jejich komplikovanost a rozvláčnost.  Ale vyjadřovat tak obecné soudy, že obsáhnou celé evropské právní myšlení, je prostě nepřijatelné.  Kdo by se odvážil naznačit, že německá právní kultura ve věcech soukromého a veřejného práva vykazuje "absenci odůvodnění"? Od moderního soudce nelze očekávat, že</p> <p class="editor-supplement-number" style="text-align: right;">XIV</p> <p style="text-align: justify;">bude studovat německé právo tak detailně jako William Maitland (který popsal německé právo jako jednu z nejjemnějších kreací lidského mozku); dalo by se však očekávat, že alespoň ve své funkci předsedy Anglo-německého právnického sdružení mohl mít mnoho příležitostí vidět v praxi německou snahu o detailní a logickou argumentaci a obdivovat ji.<br /><br />Nejpravděpodobnější vysvětlení takové stručnosti musí tedy být, že nelze očekávat, aby někdo byl příliš podrobný ve své předmluvě.  Mohl by se též pokusit uniknout významu, jež jsem připsal jeho slovům, tvrzením, že myslel, že německé odůvodnění nebylo ve (všech či některých) anglických případech ani relevantní ani použitelné.  Avšak ani tento pokus uniknout významu tak širého výroku nemůže fungovat; to je prokázáno rozhodnutím, které uvádí několik řádek nad citovanou pasáží a které ho (pravděpodobně) přimělo k tomuto výroku.  Zde se odvolává na rozhodnutí Sněmovny lordů ve věci <em>Anns</em>, totiž, že německá právní argumentace je nejasná a neodhalitelná (pokud vůbec existuje), nebyla použitelná a anglickým soudům by nepomohla.</p> <p style="text-align: justify;">Přesto ve věci <em>Anns</em> předložil právní zástupce – na naléhání pana Tonyho Weira - lordům dvě německá rozhodnutí,<span class="editor-footnote">BGB 27. květen 1963, BGHZ 39, 358, anglická verze v: Markesinis, B.S. and Überath, H. <em>The German Law of Torts. A Comparative Treatise</em>. 4.vydání, 2002, str. 615 a 617.</span>  přeložená a vypracovaná panem Weirem, která se týkala pro tento případ jedné z klíčových otázek: jaká byla újma žalobce - hmotná škoda (jak navrhl lord Denning ve věci <em>Dotton</em><span class="editor-footnote"><em>Dutton v. Bognor Regis Urban District Council</em> [1972] 1 QB 373.</span> a potvrdil ve věci <em>Anns<span class="editor-footnote">Anns v. Merton London Borough Council [1978] AC 728.</span>) </em>nebo čistá ekonomická újma? Německá judikatura a doktrína se s tímto problémem opakovaně potýkaly, stejně tak jako otázkou, zda škoda způsobená na majetku je podobná škodě způsobená majetkem a tudíž způsobilá být předmětem žaloby založené na odpovědnosti za delikt nebo pouze na odpovědnosti smluvní.  Ve vztahu k nemovitostem to Němci zodpověděli správně: škoda byla čistou ekonomickou újmou – řešení, který po deseti letech odklonu následujícího po rozhodnutí ve věci Anns (které se německým konceptem odmítalo třeba i jen zabývat), převzala Sněmovna lordů jako správné ve věci <em>Murphy v.  Brentwood</em>.<span class="editor-footnote"><em>Murphy v. Brentwood District Council</em> [1991] 1 AC 398.</span> </p> <p style="text-align: justify;">Nikdo nenavrhuje, aby německé právo bylo v tomto ohledu používáno jako precedent; avšak máme zde odpověď na dosti pozoruhodnou otázku profesorky Stapletonové „<em>proč by se měl občan země A zajímat o právo země B</em>“? Nuže, zcela nezávisle na skutečnosti, že tam může podnikat, žít, platit daně a umřít, může jej, pokud je soudcem, také zajímat, jak řeší podobné problémy jiní, což mu pomůže při nalézání vlastního řešení, když se ocitne tváří v tvář novému problému, dosud nejudikovanému, obsahujícímu mezinárodní prvek apod.  Kdyby byla správná kvalifikace žalobcovy újmy v rozhodnutí ve věci <em>Murphy</em> přijata již před 10 lety v rozhodnutí ve věci <em>Anns</em>, ušetřilo by to stranám sporů obrovské náklady a akademikům mnoho inkoustu ve snaze dospět k řešení, ke kterému již dříve správně dospěli jejich němečtí kolegové.  Německé teoretizování je skutečný fenomén, avšak přes veškeré zesměšňování a karikování, tak příznačné pro Angličany, je důkladné a často lepší než naše.  <br /><br />Ignorování významu cizího práva tím, že o něm mlčíme, je další metodou, velmi oblíbenou lordem Hoffmannem.  Mohou být uvedeny dva příklady, které nabízejí možnost srovnání jeho přístupu s přístupem lorda Binghama.  Prvním je rozhodnutí ve věci <em>Fairchild</em><span class="editor-footnote"><em>Fairchild v. Glenhaven Funeral Services Ltd</em>. [2003] 1 AC 32</span> a druhý je rozhodnutí ve věci<em> East Berkshire<span class="editor-footnote">D. v. East Berkshire Community Health NHS Trust and Others [2005] 2 AC 373.</span></em>.<br /><br />V prvním z případů dva učení soudci anglického nejvyššího soudu – lord Bingham a lord Rodger of Earlsferry věnovali mnoho prostoru a, samozřejmě ještě více myšlenek, cizímu právu.  Pociťovali, jak je můžeme správně podezřívat, že anglické právo by mohlo danou otázku vyřešit velmi různě.  V situaci usoudili, že by bylo legitimní zkoumat, jak si s danou otázkou poradily jiné právní systémy a – a to je velmi důležité – jak si poradily se samotným principem.  Lord Hoffmann potřebu brát v úvahu cizí právní řád nepociťoval.<br /><br />Mlčení lorda Hoffmanna a – jak je třeba dodat, také ostatních lordů – by mohlo, předpokládám, být vysvětleno jedním z následujících důvodů: a) soudce anglického nejvyššího soudu je povinen řešit spory podle anglického práva, a nemá povinnost studovat či dovolávat se cizího práva; b) uvažování o cizím právu je nebezpečné, náročné a znamená ztrátu času, přispívá k zvýšení nákladů řízení (což jsou všechno argumenty, které byly vzneseny v minulosti); c) citace cizího práva v těchto případech je formou "chlubení", s kterým nesouhlasí; d) je-li soud schopen rozhodnout, používaje anglické precedenty či argumentaci, není důvod, aby se zabýval řešeními podle cizího práva; e) jeho kolegové se již o tuto metodu pokoušeli a on nevidí důvod tuto činnost opakovat, nebo (což je zajímavé ba přímo překvapivé) neměl argumenty nebo informace, aby oponoval jejich užití cizího práva.</p> <p style="text-align: justify;">Odvážil bych se tvrdit, že ve výše uvedeném výčtu lze nalézt důvod jeho mlčení. Leč přiznávám, že to je spekulace, a obdobně jako všechny spekulace, může být zcela neopodstatněná. Nicméně jestliže důvody, které jsem výše nabídl, mohou být nesprávné, důvod ke spekulacím je legitimní. Protože pokud se dva vzdělaní soudci anglického nejvyššího soudu zabývají těmito otázkami a třetí – akademicky a kulturně srovnatelně vzdělaný – se rozhodne v tomto ohledu mlčet, je třeba se ptát, proč tak činí.  Jde <em>skutečně</em> o snahu, jež nemá v rozsudcích národních soudů místo, nebo existují jiné důvody jeho mlčení?</p> <p style="text-align: justify;">Názor profesorky Stapletonové se blíží prvnímu přístupu, v každém případě to platí tam, kde jde o systémy užívající rozdílné jazyky. Přesto takový dialog mezi předními soudci reprezentujícími různé kultury (který ona zavrhuje či přinejmenším vnímá jako velmi nebezpečný) <em>probíhá</em> na celém světě; a ačkoliv se někomu nemusí líbit a americkým neokonzervatistům (a lordu Hoffmannovi) se skutečně nelíbí, není tento dialog ani zakázaný, ani zbytečný.  Konec konců jiní vysoce postavení britští soudci to činili stejně tak – např. lord Denning, Scarman, Woolf, Steyn, Hope, Clyde, Slynn, Sedley i Schiemann.  Profesorka Stapletonová s tím nemusí souhlasit, ale někteří z našich nejvýznamnějších soudců z celého světa smýšleli jinak.  Abychom se vyhnuli nekonečným výčtům, zmiňme pouze předsedu Nejvyššího soudu Kanady MacLoughlina a bývalého prezidenta Izraele Baraka, americké soudce Breyera, O´Connorrovou a Ginsburgovou, a bývalého předsedu Nejvyššího soudu Jižní Afriky Chaskalsona.  Profesorka Stapletonová o těchto jménech mlčí.  Můžeme se ptát proč, když zaujali velmi praktický a forenzní přístup ke srovnávacímu právu, velmi podobný přístupu, který rozvíjím již přes 40 let; nejsou tito lidé snad součástí jejích úvah?</p> <p style="text-align: justify;">Mlčení ochraňuje. Ticho též vyvolává dojem, že ‚ignoranci‘ cizího práva netřeba odůvodňovat.  Jako by předpokládá, že to je jasné; zřejmé pravdy není třeba odůvodňovat.<br /><br />Ticho Hoffmanna však vyžaduje další rozbor.  Proč bylo cizí právo hodno úvah v případu ve věci<em> Fairchild</em> a nikoliv ve věci <em>East Berkshire</em>? Zde nám žádná míra spekulace neposkytne jasnou odpověď. Pokud to bylo z důvodu nákladů, mělo to být zmíněno. Pokud byla důvodem chybějící souvislost, lord Bingham by se tím nezabýval. Anebo to je nepřímé obvinění, že vznáší pošetilé otázky jenom proto, že nemiluje intelektuální spory stejně jako lord Hoffmann? Jestliže – a to je zvlášť příznačné pro přístup lorda Hoffmanna k tomuto typu případů – rozhodnutí o neexistenci odpovědnosti bylo otázkou neúnosných státních</p> <p class="editor-supplement-number" style="text-align: right;">XV</p> <p style="text-align: justify;">nákladů, právní zástupce měl „urgovat“ jejich lordstva, aby to znovu uvážili z důvodů, které jsem mimo jiné naznačil před i po vydání rozhodnutí. Otázka nákladů není tak zřejmá, jak by si přáli ti, kteří ji prosazují, a mimoto jsem toho názoru, že není legitimní, aby soudce postavil své rozhodnutí na snaze ušetřit státní peníze.<br /><br />Profesorka Stapletonová se zastává lorda Hoffmanna nejen odmítáním spolehlivosti empirických důkazů, ale i tím, že tvrdí, že rozhodnutí lorda Hoffmanna v případu ve věci <em>Stovin v.  Wise</em><span class="editor-footnote">[1996] W.L.R. 388.</span> (které obsahuje jednu z nejdelších ukázek jeho neochoty přiznat deliktní odpovědnost místních úřadů za porušení zákonné povinnosti) nebylo založeno na empirickém důkazu, ani nemohlo na něčem takovém záviset, protože empirické průzkumy jsou nekompletní, nákladné, pravděpodobně se nebudou v budoucnu užívat a v mnohých státech vůbec neexistují.  Rozsudek lorda Hoffmanna tak byl do značné míry založen na jeho vlastním zhodnocení<em> rizik</em>, které by pravidlo zakládající deliktní odpovědnost mohlo přinést.<br /> <br />Rozhodování o <em>rizicích založené na soudcovském citu</em> není, myslím, nejlepší cestou řešení sporů, zejména když se renomovaní "profesoři práva" přou o to, jak reálná tato rizika jsou, a předseda anglického nejvyššího soudu zastává pochybovačné stanovisko. Zmiňuji-li „renomované profesory práva“, nedovolávám se přirozeně komparatistů jako jsem já, ale profesora Paula Craiga, profesora anglického práva na univerzitě v Oxfordu, a doktora Duncana Fairgrievea, velmi váženého (mladšího) oxfordského právníka. Tito pánové naznačili, že posun od „povinnosti“ k „porušení“ nepovede k trvalému hospodářskému chaosu, který je základem pochybností lorda Hoffmanna. Tím se ocitáme opět na samém počátku: přístup lorda Hoffmanna není přesvědčivější, nutnější nebo vhodnější než přístupy ostatních – abychom citovali Goetha – „jemu ve všem rovných“.  Rozdíl tedy, zdá se, není v ničem jiném než v mentalitě, postoji, dispozicích, tradici, zvycích, konzervatismu a tento výčet může pokračovat do nekonečna.  Co z toho však platí pro lorda Hoffmanna se však raději ani nepokoušejme odhadnout.<br /><br />Je-li tomu opravdu tak, advokát by měl mít možnost, ba dokonce měl by být podporován k předkládání důkazů bez ohledu na jejich původ, aby (anglickému) soudu pomohl nahlédnout, jak opodstatněné nebo vymyšlené jsou jeho obavy.  Konec konců soudy by nám rovněž měly sdělovat, proč je určité předložené důkazy nepřesvědčily; my bychom potřebovali znát odůvodnění, jelikož, citujme slova lorda Hoffmanna (vyslovená v jiném, avšak obdobném kontextu), „nejasné či neexistující odůvodnění“ toho není schopno.  Jakkoli se snažíme, je hodnocení „soudcovského citu“ velice obtížné.</p> <h2 style="text-align: justify;">2.2     Akademická sféra</h2> <p style="text-align: justify;">Profesorka Stapletonová, australská odbornice na deliktní právo s hlubokou znalostí anglického a amerického práva se nedávno vrhla do oblasti srovnávacího práva a metodologie.  Poté, co popsala tuto oblast zkoumání jako „vznešenou“ – a přiznávám (a jiní, kterým jsem ten text předložil, jsou téhož mínění), že si jsem nejistý ohledně významu tohoto jejího výroku – předložila řadu argumentů, proč je používání cizího práva nejen neužitečné, ale dokonce proč může být i nebezpečné. Je zřejmé, že nemůžeme analyzovat všechny její argumenty v tomto krátkém eseji; to bude zřejmě muset počkat na další článek. Postačí se zaměřit pouze na jednu nebo dvě úvahy, abychom ukázali, že nepochopila mé dílo, které je k mému překvapení hlavním terčem jejího článku. Důvody, které jí vedou k jejímu kritickému pohledu, jsou nepochybně legitimní; což nutně neznamená, že jsou objektivně správné.  Prvním důvodem je problém, který sama označuje jako problém monoglotů a jejich neschopnosti dostat se k cizím pramenům. Toto postesknutí konkretizuje následujícím způsobem:<span class="editor-footnote">Stapleton, J., <em>op.cit.</em>, pozn. č. 1, str. 34.</span></p> <blockquote style="text-align: justify;">„žádný z šesti nejvýznamnějších a nejpodrobnějších komentářů německého občanského zákoníku a dalších pramenů závazkového práva nebyly přeloženy do angličtiny. To neznamená, že anglicky mluvící osoby nemají tyto texty k dispozici a nemají tak podkladovou literaturu ke studiu jedné jediné obsáhlé práce o německém právu deliktní odpovědnosti (odkaz na čtvrté vydání mé knihy The German Law of Torts: A Comparative Treatise).<span class="editor-footnote">Markesinis, Basil and Unberath, Hannes. <em>The German Law of Torts: A Comparative Treatise </em>(4th ed.). Hart Publishing: 2002, 969 stran.</span></blockquote> <p style="text-align: justify;">S tímto výrokem se můžeme nejlépe vypořádat, jestliže ho rozdělíme do dvou částí.  <br /><br />Za prvé, její kritika, že žádný z německých<em> Kommentare</em> nebyl přeložen do angličtiny, má za cíl poukázat, že nemáme dostatek informací o tom, co Němci považují za německé právo.  V určitém smyslu má pravdu; ale podle mého názoru je naprosto nesprávné předpokládat, že byla-li by tato veliká (a objemná) díla přeložena – obdržela by, zdvořile řečeno, něco jiného než co říkám ve své knize. <br /><br />Důvod, proč její názor, že pouhý překlad by vyřešil její problém, je naprosto nesprávný, je jednoduchý – druh knih, na které se odvolává, je psán v extrémně složité němčině, kterým v některých případech – jako např.  Palandt – obtížně rozumějí dokonce němečtí právníci.  Kdokoliv informoval profesorku Stapletonovou o existenci těchto velkých německých knih, měl jí říci, že jsou prakticky nepoužitelné pro anglické právníky.  Co je namísto toho nutné učinit, je to, o co se snažím déle než 40 let – nepochybně někdy méně úspěšně než ostatní – „podávat německé právo v praktickém balení“ tak, aby bylo použitelné pro právníky z oblasti common law. Zajisté, někteří akademici mě kritizovali, že tímto způsobem mohu „zradit“ skutečnou podstatu a ducha německého práva; avšak tolik německých právníků a soudců výborné pověsti, kteří mi radili při psaní této knihy, recenzovali či napsali předmluvu do jejich různých vydání, vyjádřili opačný názor, že není třeba je na tomto místě citovat.  Moje vlastní svědomí je tedy v tomto směru čisté.<br /><br />Druhá část jejího tvrzení se týká mé knihy konkrétněji.  Ačkoliv tuto knihu ani konkrétní pasáže nijak nekomentuje, vyžaduje celkem případně dodatečné informace k tomu, o čemž právo je. Zároveň tvrdí, že tyto informace jsou málo dostupné či v podstatě nepřístupné čtenářům, kteří ovládají pouze jeden jazyk. I tento její názor je nesprávný, a to ze dvou důvodů.  <br /><br />Předně proto, že tvrdí, že existuje nedostatek důkazů o německém právu v právu anglickém.  Kniha profesora Christiana von Bara <em>Common European Law of Torts</em><span class="editor-footnote">von Bar, Christian. <em>The Common European Law of Torts</em>. Vol. 1. Oxford University Press: 1999; von Bar, Christian.<em> The Common European Law of Torts</em>. Vol. 2. Oxford University Press: 2000, které mají celkem 1268 stran.</span> je plná odkazů na německé právo deliktní odpovědnosti.  Stejně tak kniha profesora Waltera van Gervena s názvem <em>Tort Law</em>.<span class="editor-footnote">Van Gerven, Walter.<em> Tort Law (Reprint)</em>. Hart Publishing: 2001, v rozsahu 969 stran.</span>  James Gordley a profesor Arthur von Mehren, autoři díla <em>An Introduction into the Comparative Study of Private Law, Readings, Cases and Materials</em>,<span class="editor-footnote">Gordley, James and von Mehren, Arthur Taylor. <em>An Introduction into the Comparative Study of Private Law, Readings, Cases and Material</em>s. Cambridge University Press: 2006, v rozsahu 640 stran.</span> věnují též dostatek prostoru německému právu deliktní odpovědnosti v jedné z kapitol. Konečně, webová stránka texaské univerzity, kde jak profesorka Stapletonová tak já dosti soustavně pedagogicky působíme – obsahuje stránku s přeloženými francouzskými a německými případy z oblasti smluvního a deliktního práva – jde o téměř 900 případů, z nichž mnohé nejsou obsaženy ani ve shora uvedených knihách.</p> <p class="editor-supplement-number" style="text-align: right;">XVI</p> <p style="text-align: justify;">Způsob, kterým profesorka Stapletonová posuzuje tyto knihy, může být použit k posouzení správnosti jejího argumentu, že „potřebujeme nástroj“ k prověření správnosti Markesinisových podkladů, abychom je mohli vůbec používat.  Von Bar je citován pouze jedinkrát, a to v poznámce; van Gerven je citován pouze prostřednictvím kritické (až urážlivé) recenze jeho knihy; Gordley je plně ignorován, stejně jako zmíněná webová stránka.  Vzhledem k tomu, že angličtí studenti práva zdaleka takové množství případů v rámci svého kurzu deliktního práva neprostudují, a s ohledem na rozsáhlost materiálu, který existuje (ale je profesorkou Stapletonovou podceňován), její argument, že „neexistují jiné texty, které by pojednávaly podrobně o deliktní odpovědnosti v jiných právních systémech“, nepůsobí příliš přesvědčivě. To může být možná pravda ohledně systémů, jako je např.  španělský; nemohu však mluvit za tento systém, neboť jsem nikdy netvrdil, že jsem na něj odborník, ale mohu odmítnout její kritiku pokud jde o systém, který je předmětem mého zájmu.</p> <p style="text-align: justify;">Existuje i druhý důvod, proč se profesorka Stapletonová mýlí, když tvrdí, že dokonce i s podklady, na které se odvolávám, není naše znalost německého práva dostatečná. Takto jednoduše řečený má tento argument určitou sílu: naše znalost cizího právního systému nemůže být nikdy adekvátní, s ohledem na stále rostoucí rozsah legislativy a judikatury ve všech hlavních moderních právních systémech.<br /><br />Nicméně záleží na tom, jak zamýšlíte tento soubor práva užívat. Jestliže si přejete detailní radu ohledně velmi specifického problému cizího práva, musíte se obrátit na rodilého experta; to nepopírá podle mého soudu žádný znalec srovnávacího práva. Ale pokud berete cizí právo jako zdroj myšlenek, zejména tam, kde váš právní řád je nedostatečně vyvinut, rozporuplný anebo je zapotřebí jej harmonizovat s právními řády jiných států, pak rozsah informací, který je zapotřebí k takovému podniku, je k dispozici. To, co schází, je mentalita, tj. individuální postoj, který může být uzavřen cizím myšlenkám, který je k nim podezřívavý, protože jsou cizí, kterému jsou nepříjemné, protože pocházejí z kultur, které jsou cizí nebo se zdají být cizí potenciálnímu vypůjčiteli nebo obtížné pro chápání, protože u dané osoby existuje jazyková bariéra. Nemohu vypočítat všechny psychologické překážky, které <em>mohou</em> odůvodňovat zdrženlivost kolegů (a tady mluvím obecně) vůči užívání zahraničních pramenů. Avšak pokusil jsem se na jiném místě<span class="editor-footnote">Markesinis, Basil a Fedtke, Jörg. <em>Judicial Recourse to Foreign Law, A New Source of Inspiration?</em> Routledge- Cavendish: 2006, včetně esejů od Laurie Ackermannem (Ústavní soud Jižní Afriky), předsedou Nejvyššího soudu Barakem (Nejvyšší soud Izraele), Otto Brun-Bryde (německý Ústavní soud), Guy Canivet (francouzský Nejvyšší soud), sir Sydney Kentridge QC, Christos Rozakis (Soud pro lidská práva, Štrasburk) a Konrad Schiemann (Soud Evropských společenství).</span> vyvrátit podrobnějším způsobem, proč myslím, že běžně užívané argumenty ohledně nákladů, průtahů, nedostatku zkušeností a rozdílného sociálního pozadí jsou málo přesvědčivé jakožto důvod pro pasivitu. Dovolte mi raději připomenout konkrétní příklad z textu profesorky Stapletonové, který naznačuje, tedy alespoň podle mně, že může být z mnoha důvodů obtížné ji přesvědčit o opaku. Problém, který si vybrala k diskusi ohledně této myšlenky, je případ<em> Fairchild</em>, a na konci jejího textu, obtížná materie soukromoprávní odpovědnosti za porušení zákonných povinností místními úřady.<br /><br />Především se zdá, že věnuje neobvyklou pozornost následujícímu výroku Tonyho Weira:</p> <blockquote style="text-align: justify;">„průzkum, o něž se pokusila Sněmovna lordů, byl evidentně povrchní. Je pominuta zřejmá skutečnost, že v téměř žádné jurisdikci, která byla zkoumána, by Fairchildovi žalobci nezvítězili. Ve většině zemí nemůže zaměstnanec žalovat svého zaměstnavatele z deliktní odpovědnosti za škodu, protože tuto úlohu obstarává pojištění nebo sociální zabezpečení“.</blockquote> <p style="text-align: justify;">Profesorka Stapletonová kritizovala již dříve nedostatek informací potřebných k oponování určitému názoru prezentovanému právníkovi common law.  Přitom profesor Fedtke (německý právník s komparativním zaměřením) a já osobně jsme poskytli podstatně detailnější informaci, než která byla dána Weirem, který ji poskytl v určitém aforisticky laděném výroku.</p> <p style="text-align: justify;">Zopakuji-li to, co bylo řečeno jinde, zdůraznili jsme, že Sněmovna lordů použila zahraniční materiál v kontextu možné mnohosti škůdců, a zkoumala, v jaké míře test nezbytné příčiny (‘but for’ test) může přinést spravedlivé řešení. To byl základní koncepční problém, o kterém mělo být rozhodnuto; tento problém zaujal Weira nejvíce. Podotkli jsme, že užitečné a detailní informace Sněmovny lordů poskytnuté k této otázce ohledně zahraničního práva byly bezvadné. Ve skutečnosti Sněmovna lordů provedla historický krok, když citovala zásadní dílo používané německými praktiky, totiž Palandtův komentář, a dokonce důvodovou zprávu k BGB jak v němčině, tak v angličtině.  BGB je jak známo jeden ze základních německých pramenů, který profesorka Stapletonová nikdy neuváděla jako důkaz o tom, co je německé právo.</p> <p style="text-align: justify;">Kritika lordů soudců za to, že neposoudili jiné aspekty cizího práva, je jiná věc a to je třeba odlišovat od kritiky, že jejich přístup k cizímu právu nebyl ničím jiným než krátkým pohledem či velmi povrchním přístupem.  Weirova věta o tom, že „téměř žádná z jurisdikcí, o nichž jde řeč, by nepřipustila, aby žalobce Fairchildové zvítězil, je dalším problémem, který lordi soudci pominuli ve svých úvahách. Možná to měli učinit. Jestliže by tak učinili, objevili by situaci, která je odlišná od Weirovy představy.</p> <p style="text-align: justify;">To je druhý důvod, proč je jeho zamítavý výrok tak znepokojující. Přesněji vyjádřeno, je znepokojující, protože dle našeho názoru je matoucí. Podrobnější studium naznačuje, že v některých systémech včetně Španělska, Itálie, České republiky, Maďarska a Turecka by žaloba z odpovědnosti za škodu ve Fairchildově případu byla a je možná. Odpovědnost zaměstnavatele však neexistuje v Holandsku od roku 1967, když tradiční pojištění pracujících bylo integrováno do obecného zdravotního a penzijního pojišťovacího systému, který umožňuje oběti "azbestu" odškodňovat v režimu odpovědnosti za škodu.  Obdobně od roku 1997 jsou ve Francii nároky týkající se azbestu uplatnitelné nejen v rámci práva sociálního zabezpečení, nýbrž rovněž v režimu náhrady škody podle rozhodnutí odvolacího soudu v Dijonu z 18.  prosince 1997 (které se týkalo společnosti Eternit) a podle rozhodnutí sekce práva sociálního zabezpečení Kasačního soudu z 28. února 2002<span class="editor-footnote">Société Eternit industries contre M.-L.X et CPAM de Valenciennes, Les Petites Affiches, březen 2002, str. 15-19</span> (který rozhodl poprvé otázku azbestu, případ, který se opět týkal Eternitu a dalších společností, které byly spojeny s azbestovými nadnárodními společnostmi).<br /><br />Do pozdních 90. let 20. století byla odpovědnost francouzských zaměstnavatelů podle obecných pravidel odpovědnosti za škodu (doplňující pokrytí standardním základním odškodněním zaměstnanců) omezena na jednoznačně definované výjimky (faute inexcusable), které se týkaly méně než 0,05 % všech pracovních úrazů a nemocí.  Oba případy radikálně rozšířily koncept „faute inexcusable“ a vytvořily formu bezpečnostní garance zaměstnanců, obracející tradiční vztah pravidla a výjimky mezi (omezenou) odpovědností podle práva sociálního zabezpečení a (neomezenou) odpovědností za škodu. Zaměstnavatelé, jak argumentují soudy, si jednoduše nemohli neuvědomovat rizik azbestu (což je skutečnost podrobně zachycená v rámci popisu sporů ohledně škod způsobených azbestem v USA). Subjekty pojištující odpovědnost za škodu ve Francii tak dnes chápou odpovědnost zaměstnavatelů jako největší podtřídu obecné odpovědnosti (jak ohledně rozsahu pojistného, tak potenciálního rozsahu nároků).<span class="editor-footnote">Ohledně tohoto problému viz Munich Re Group. 2., 6. a 7. International Liability Forum. 1996, 2002 a 2003. Přístupné na Jedná se o typický důkladný německý průzkum - nevídaný, pokud je mi známo, ve Velké Británii.</span></p> <p class="editor-supplement-number" style="text-align: right;">XVII</p> <p style="text-align: justify;">Zatřetí, pečliví pozorovatelé německého systému by zjistili, že v tomto systému nahrazení úpravu odpovědnosti za škodu režimem pojištění zaměstnanců (<em>gesetzliche Unfallversicherung</em>) neplatí v případě, kdy zaměstnavatel způsobil škodu úmyslně nebo z nedbalosti, resp. hrubé nedbalosti. V německé judikatuře se často pojem hrubá nedbalost používá v případech, které bychom mohli označit za pouhou nedbalost.<br /><br />Začtvrté lze argumentovat, že v USA právo jednotlivých států často dovoluje zaměstnavatelům neúčastnit se systému pojištění zaměstnanců, a tam kde tomu tak skutečně je, aplikují se obecná ustanovení práva odpovědnosti za škodu.  Studenti amerického právního systému by měli vzít v úvahu negativní vedlejší účinky, které mělo pojištění zaměstnanců v praxi, zejména že nutilo právní zástupce žalobců nacházet nové dodatečné žalované.  Odpovědnost za škodu způsobenou vadou výrobku a spory v těchto věcech byly tudíž často živeny a rostly jako výsledek těžkostí, které systém pojištění zaměstnanců způsoboval žalobcům.<br /><br />A nakonec zkoumal profesor Weir výši odškodnění poskytovaného v režimu pojištění zaměstnanců v různých evropských právních řádech? Jeho stanovisko v CLJ je tak krátké, že nemůže o ničem vypovídat. Takováto studie však ukazuje, jak výrazně zanedbatelná je výše náhrady ve srovnání s tím, co je možné obdržet jako odškodnění v režimu obecného práva odpovědnosti za škodu. To je případ jak Německa tak Francie (kde rozhodnutí konstatující<em> faute inexcusable</em> může více než zdvojnásobit výši odškodnění v případech škod způsobených azbestem v režimu pojištění zaměstnanců.<span class="editor-footnote">Ohledně srovnávacího přehledu vztahu mezi obecným právem odpovědnosti za škodu a sociálním zabezpečením, včetně dělnického zabezpečení viz Magnus, U. (ed.). <em>The Impact of Social Security Law on Tort Law</em>. Springer: 2003. 56 Cal. 2d 583, 364 P. 2d 685, 1961.</span></p> <p style="text-align: justify;">Všechny tyto důležité skutečnosti jsou „ztraceny“, a to nikoliv v překladu, ale ve zkrácených výrocích; a taková „ztráta“ není zmírněna, v tomto ani případě omluvena, pečlivě volenými slovy Weyera „v téměř žádné jurisdikci“, citovanými výše. Ještě horší je, že živí provinciální přístup právníků jednotlivých států a jejich nedůvěru vůči nezpochybnitelným přínosům, které přináší studium cizích doktrín.  Jsem velmi hluboce přesvědčen, že zhuštěné výroky tohoto druhu mohou mít řečnický účinek, ale sotva mohou vést k odpovídajícímu porozumění cizího práva.<br /><br />Opakování argumentů, které byly použity v jiných souvislostech (a které jsou známy profesorce Stapletonové), má pouze jeden cíl. Chtěl bych zpochybnit snahy profesorky Stapletonové najít poklady a důvody před tím, než se rozhodne, jak důležité může cizí právo být. Jestliže byl můj výrok vyvrácen, protože je nesprávný, měla by to podrobně odůvodnit. Američtí soudci – např.  soudce Scalia – argumentovali tím, že srovnávací právo dovoluje soudci vybírat si výroky, které se mu nebo jí nejvíce hodí.  Mohlo se stát, že se (podvědomě) rozhodla obrátit svoji pozornost k stanovisku Weiera, protože – z hlediska filozofického – je to bližší rozhodnutí o neexistenci odpovědnosti? Přirozeně má plné právo zvolit si ten přístup, o kterém je přesvědčena, že je správný, stejně jako autora, který nejlépe odpovídá jejím účelům či jejímu myšlenkovému rozpoložení; avšak toto všechno její argument neposiluje.  Pouze jej činí odlišným.<br /><br />Filozofická „podezřívavost“, kterou profesorka Stapletonová živí k cizím právním řádům (tj.  k řádům jiným než z oblasti common law) vyplývá na povrch v další části jejího článku, kde udává následující důvod, proč citace cizího práva je zbytečný luxus. Poukazuje na dobře známé případy neuspokojených dědiců žalujících advokáta pro nedbale sepsanou závěť a píše:</p> <blockquote style="text-align: justify;">„Zmýlil se nějak Nejvyšší soud Kalifornie a Nejvyšší soud Austrálie nebo byly tyto soudy přinejmenším nerozumné, když neodkazovaly na německou koncepci smlouvy na ochranu a ve prospěch třetího v případech, kdy se usnesly, že nárok má základ v odpovědnosti za škodu způsobenou zaviněním a kdy v důsledku nedbalosti advokáta obmyšlený dědic nakonec nedědil?“</blockquote> <p style="text-align: justify;">Jako komparatista velmi rád povzbuzuji kolegy nekomparatisty v jejich zájmu o cizí právo.  Projeví-li však takový zájem a kritizují užívání cizího práva, táži se, zda jsem se nevyjádřil dostatečně jasně anebo zda nečetli celý můj text.  Profesorka Stapletonová je pečlivý odborník a přesto se mi zdá, že nevěnovala dostatečnou pozornost skutečnosti, kterou jsem zdůraznil, že totiž americké a anglické právo si dopřává toho luxusu, že při řešení tohoto problému užívá úpravu odpovědnosti za škodu (ale vzhledem k doktríně zvané<em> consideration</em> využití smluvního práva již tak snadné nebylo) zatímco naši němečtí kolegové mají opačné těžkosti: rigidní úpravu odpovědnosti za škodu a velmi flexibilní právo smluvní. A tak citace německého práva v tomto případě nebyla alespoň na první pohled nutná. Profesorka Stapletonová má tak pravdu, avšak jenom zčásti.<br /><br />Důvodem je, že v případu <em>Lucas v.  Hamm</em><span class="editor-footnote">56 Cal. 2d 583, 364 P. 2d 685, 1961.</span>, který je citován Stapletonovou jakožto případ odpovědnosti za škodu, soud akceptoval, jak to udělaly americké soudy v mnoha jiných případech,<span class="editor-footnote">Ohledně dalších informací, viz moje dílo Understanding American Law by Looking at it Through Foreign Eyes: Towards a Wider Theory for the Study and use of Foreign Law. [2006] 81 <em>Tulane Law Rev</em>, str. 123 a násl.</span> že žalovat ze smlouvy v tomto případě by bylo též možné. Profesorka Stapletonová se však ve svém článku o této skutečnosti nezmiňuje ačkoliv nikdo nemůže popírat, že si byla vědoma této dvojí volby (která je možná v americkém, ale nikoliv v anglickém právu). Není pochyb o tom, že si je taktéž vědoma toho, že možnost dodatečného smluvního přístupu byla poprvé navržena nikým menším než soudcem Benjaminem Cardozem. Jestliže se zastavíme v tomto bodě - ale my to neučiníme – neboť jsme již upozornili naše čtenáře na skutečnost, že německý smluvní přístup, tak jednoduše zavržený profesorkou Stapletonovou ve výše citovaném výroku, je možný i ve Spojených státech. Související otázka je, zda je to též žádoucí. Tedy, v případě, kdy může být relevantní srovnání s německým právem a (a) nutí právníky se zamyslet a (b) dokonce poskytuje řešení, která nejsou možná na základě amerického přístupu deliktní odpovědnosti. Profesorka Stapletonová však ani nedospívá do tohoto stadia zkoumání, neboť nevyužívá rozdílů nabízeného německým právem, aby zkoumala, zda existují řešení inspirovaná nesmyslnými alternativami.  První je podstatné pro každého učitele, který věří, že jeho povinnost je podnítit studenty k myšlení, reflektování a rozhodování, která pravidla práva jsou nezbytná a která jsou produktem jen pouhých náhod historie.  Profesor sir Otto Kahn-Freund na tom postavil celou svoji významnou přednášku.<span class="editor-footnote">Kahn-Freund, Otto. On Uses and Misuses of Comparative Law. [1974] 37 <em>MLR</em>, str. 1 a násl.</span> A možnosti volby mezi smluvním či deliktním právem, jež jsou k dispozici v americkém, ale nikoliv anglickém právu, plynou jasně ze srovnání právních řádů dvou zemí, jež jsou postaveny do vzájemné opozice.<br /><br />Zadruhé, a to je ještě důležitější, smluvní přístup má potenciální výhodu v tom, že pomáhá přesněji určit okruh žalobců prostřednictvím zkoumání, kdo byl zamýšlený beneficient, nebo vyjádřeno lépe slovy Cardoza, kdo byl „konečným beneficientem a středobodem transakce.“ Na rozdíl od několikastupňového, rozporuplného a údajně opakujícího se multikriteriálního testu použitého poprvé ve věci <em>Binkanja</em>,<span class="editor-footnote">49 Cal. 2d 647, 320 P. 2d 16, 1958.</span> smluvní přístup si udržuje věc pod kontrolou. V deliktním právu je stejně relevantní a dosud nevyjasněná otázka, zda právní zástupce žalovaného může uplatňovat vůči žalobci – beneficientovi námitky nebo omezující ustanovení, které může mít ve smlouvě se svým klientem. Jestliže přijmeme čistě deliktní přístup, musí být odpověď „nikoliv“, protože tato ustanovení jsou <em>res inter alios acta</em>.  V případě smluvního přístupu je odpovědí jasné „ano“. Vzhledem k tomu, že tato záležitost je důležitá nikoliv jen v případech porušení povinností advokátem, ale též v trojúhelníko-</p> <p class="editor-supplement-number" style="text-align: justify;">XVIII</p> <p style="text-align: justify;">vých vztazích týkajících se stavebnictví, teoretické zkoumání, zda mají být tyto nároky žalovatelné ze smlouvy či na základě deliktní odpovědnosti, se stává dokonce ještě důležitější.<br /><br />Způsob, jakým se common law vyhýbá tomuto dilematu, spočívající v tvrzení, že to je nárok, který je založen na podkladové smlouvě, je překrucováním věci.  Jestliže však si však někdo přeje dělat věci tímto způsobem, já to přijímám, protože v tomto kontextu je tento tzv.  deliktní způsob právě to, co německé právo činí prostřednictvím své „smlouvy s ochrannými účinky ve vztazích ke třetí straně“. Zde je konečně dovětek k tomuto rozporu v přístupu: německá žaloba <em>sui generis</em> založená na smlouvě není, jak by to nazvali Američané, smlouvou ve prospěch třetího, protože nedává neuspokojenému beneficientu v pozici žalobce právo žalovat svého advokáta a požadovat, aby napsal poslední vůli řádně a urychleně. V krátkosti ještě jednou, profesorka Stapletonová zahrnula příliš mnoho záležitostí do jedné věty, což ponechává čtenáře neuspokojeným. Je to prostě výsledek této strohosti; ale to, co říká, mne udivuje svojí povrchností, když ne samotnou nesprávností. Jakkoliv to nemusí být jednoduše pochopeno tím, kdo čte její text a kdo není dostatečně zběhlý v německém právu. </p> <h2 style="text-align: justify;">3.  Jak učit srovnávací právo</h2> <p style="text-align: justify;">Můj nesouhlas s profesorkou Stapletonovou začíná již s jejím úvodním výrokem:</p> <blockquote style="text-align: justify;">„V tomto článku tvrdím, že ušlechtilé poslání srovnávacího práva jakožto intelektuální činnosti je podrýván těmi, kdo se soustředí na jeho užitečnost v soudních procesech“.</blockquote> <p style="text-align: justify;">Jestliže považuje tento předmět za "propadák" podobně jako římské právo, ať je ještě vyučováno kdekoliv (což v zásadě vylučuje USA a většinu zemí Commonwealthu), nebo ve spojení s takovými předměty jako je antropologie, pak podle mého soudu to bude znamenat rychlou smrt tohoto předmětu. Ti, kteří píší nebo učí tímto způsobem, museli zaznamenat, že účast studentů na jejich výuce a citace jejich děl se zmenšují. To musí být nutně jeden ze signálů, že, jestliže skutečně považujete tento předmět za ušlechtilý, musíte najít cestu, jak ukázat jeho relevanci v naší době a tak jej učinit životaschopným. Nebudu se vracet k detailům, které jsem zdůraznil jinde, v neposlední řadě protože moje nová kniha s názvem<em> Engaging with Foreign Law</em> se rozsáhlým způsobem zabývá názory prezentovanými v článku profesorky Stapletonové. Nicméně chtěl bych se zmínit o třech aktuálnostech, tentokrát z Francie.<br /><br />Zaprvé ti, kteří nesledovali debaty mezi soudcem Breyerem a (bývalým) prvním prezidentem Guy Canivetem ohledně nutnosti srovnávacího studia, potřeby právní spolupráce a nevšimli si konstatování obou zmíněných soudců, že naše systémy se sbližují, nebudou schopni zaznamenat, jak atypický výrok profesorky Stapletonové ohledně názorů určitých významných soudců je. Akademici, zejména ti, kteří žijí v izolaci, mohou ignorovat tento vývoj a nebo jeho význam bagatelizovat; ale politici a praktici jej musí pečlivě sledovat, přinejmenším už jen proto, že by byl nemyslitelný před pěti lety.<br /><br />Zadruhé, poznamenávám s hrdostí (protože jsem hrál aktivní roli při zakládání obou), že Cornell Law School založila Centrum dokumentace amerického práva<em> v budově francouzského Nejvyššího soudu</em>.  Velkorysý dar, který to umožnil, byl přijat, protože jak lord Phillips, v té době předseda Evropské asociace předsedů Nejvyšších soudů, a Lamada, předseda francouzského Nejvyššího soudu, zdůraznili, že soudci musí studovat cizí právní řády a rozumět jim. Není třeba zdůrazňovat, že neměli na mysli studium teoretické nebo akademické, ale forenzní a praktické.  Ve stejném kontextu si dovolím upozornit na nejnovější vývoj spočívající ve zřízení funkce „law clerk“ u francouzského ústavního soudu. Tento vývoj byl realizován Cornellovou univerzitou a velmi příznivě přijat předsedou tohoto soudu Jeanem Luisem Debré. Debré v jednom společném tiskovém prohlášení s Cornell Law School zdůraznil nutnost takového studia v době zvýšené potřeby kooperace, porozumění a inspirace.<br /><br />Jestliže dáme dohromady tento posun s jinými příklady, z nichž některé zmiňuje profesorka Stapletonová ve svém článku, musíme se ptát, kdo jsou ti, kteří jsou orientováni na budoucnost? Zajisté to jsou pragmatici, ne teoretici. Tomu je však třeba být nakloněn a připravit se na nové s odvahou a nikoliv s hrůzou z jazykových překážek.<br /><br />Profesorka Stapletonová zřejmě omezuje tuto odvahu na ty (vyspělé) kultury common law, které používají stejný jazyk.  Zdá se, že připisuje mimořádně negativní význam otázce stejného jazyka a zapomíná například, jak Sněmovna lordů neporozuměla významu rozhodnutí Nejvyššího soudu USA ve věci<em> East River Steampship v. Transamerica Delaval Inc</em>.<span class="editor-footnote">476 U.S. 858, 1986.</span>, chápajíc jej jakožto rozhodnutí reprezentující americké právo; tak tomu samozřejmě nebylo, soud zde pouze rozhodoval o rozporném přístupu dvou soudů z odlišných obvodů.  Následný ostrý útok lorda Cooka<span class="editor-footnote">Cooke, Robin.<em> An Impossible Distinction</em>. [1991] 107 LQR, str. 46 a násl.</span> na své kolegy naznačuje, že stejný jazyk není nutně zárukou neomylnosti dokonce ani na úrovni Sněmovny lordů (tj. Nejvyššího soudu), která (abych si vypůjčil obecně známou větu) je neomylná, protože rozhoduje s konečnou platností a nikoliv opačně: konečná, protože neomylná.<span class="editor-footnote"><em>Brown v. Allen</em> 344 US 443, 540, 1953, (soudce Jackson).</span></p> <p style="text-align: justify;">Zajisté lze okamžitě vznést protiargument (a to značně pádný), že jestliže takové omyly se mohou stát v případě, kdy se jedná o stejný jazyk, padá na člověka hrůza při pomyšlení, oč to může být horší, jestliže se jedná o jiné jazyky. Jako obecný protiargument toto obstojí.  Přesto však se zdá, že profesorka Stapletonová podceňuje skutečnost, do jaké míry nás sbližuje globalizace, a tudíž nevyhnutelně velké množství právních norem bude třeba interpretovat víceméně harmonizovaným způsobem. Nejde jenom o případy, kdy jsou přijímány či ratifikovány mezinárodní úmluvy velkým množstvím států; relevantní je to v oblastech lidských práv, kde získává na popularitě názor, že přinejmenším některá základní práva jsou společná.<br /><br />Mohu opět předvídat její odpověď (stejně jako reakci lorda Hoffmanna), odvolávající se na odlišnosti v obsahu práva na svobodu projevu v USA, Anglii, a Evropské unii; a lord Hoffmann se bezpochyby rozhodne vyjádřit tuto rozdílnost a volbu poukázáním na historický původ common law, které by (dalo by se říci implicitně) považoval za nadřazené kontinentálnímu právu či právu formulovanému ve Štrasburku. Tyto argumenty jsou rovněž velmi silné, v každém případě pro ty, kdo uznávají názory zakládající se na patriotismu – to je mimochodem další rozdíl mezi Goethovým prosazováním německé kultury a jeho ochotě učit se od kultur ostatních – avšak ignorují realitu dnešní doby. A realita v Anglii je taková, že polici umožňujeme zadržovat osoby bez sdělení obvinění po dobu 28 dní, dokonce se chystáme tuto dobu prodloužit na 50 dní; překračujeme tedy takřka všechny hranice stanovené v jiných – "méně významných" (?) – právních systémech. A to vše ještě neříká nic o „příbuzném“ anglo-americkém právu, jež tolerovalo Guantanamo, Abu Ghraib, převážení podezřelých z terorismu k výslechu do jiných zemí, tzv. rendition, mučení, jež kontinentální právní systémy dnes nedovolují, bez ohledu na to, co dělaly před třemi stoletími. Podle mě patriotické proklamace lorda Hoffmanna o starobylosti common law obtížně zapadají do velmi špatné bilance Velké Británie, kterou má u Evropského soudu pro lidská práva ve Štrasburku pro porušování Úmluvy, kterou Velká Británie sama pomáhala sepsat. Jinými slovy,</p> <p class="editor-supplement-number" style="text-align: justify;">XIX</p> <p style="text-align: justify;">i když je uspokojující tvrdit, že „my jsme byli ti první“, záleží zároveň, a to možná ještě více, na tom, zda jsme stále ještě vpředu.  Někteří z nás by možná tvrdili, že tomu tak není.<br /><br />Ovšem je zde ještě jeden aspekt, který by měl být zmíněn, protože je blízký způsobu uvažovaní lorda Hoffmanna i profesorky Stapletonové, a ten se týká pomalu vznikajícího práva na ochranu osobnosti v anglickém právu.  <br /><br />Není právě toto oblast práva, v které je německé právo dále než anglické (ve smyslu, že my se přibližujeme blíže k nim a pryč od USA, spíše než, že by se německý koncept přibližoval k nám)? Není právě toto oblast práva, kde německé kasuistické právo, založené na judikatuře, může být přenositelné? A pokud někdo namítne, že v této oblasti se systémy principiálně rozchází, tedy že Američané upřednostňují právo na svobodu projevu před právem na ochranu osobnosti, není to pak jen otázka volby, ať už historické či osobní, ale ne neměnné, pokud budou sporné strany a soudci obeznámeni s faktem, že existují alternativy? Není lepšího způsobu jak dotyčné obeznámit s alternativami než jim předložit případy z německého práva, ukázat jim, že tyto případy neudusily svobodu projevu a neotevřely bránu záplavě soudních procesů. Pokud přitom právníci jako jsem já udělají chybu v metodologii či detailu, pomohou nám odborníci jako profesorka Stapletonové opravit naše chyby a vytříbit naše metody. Avšak tento přístup je velmi odlišný od toho, který profesorka Stapletonová upřednostňuje, tedy, že cokoliv co se nachází mimo Anglii, Austrálii a možná Nový Zéland je mimo hru, protože je jen málo pravděpodobné, že to bude k něčemu užitečné, a snad je i větší pravděpodobnost, že to bude nebezpečné. Pokud je tomu skutečně tak, pak profesorka Stapletonová neodepisuje jen mou práci; zavrhuje tím i praxi jihoafrického ústavního soudu, izraelského nejvyššího soudu, kanadského ústavního soudu, ale i do té míry, v jaké si je vědoma či se zajímá o jeho činnost, německého Spolkového ústavního soudu, který předvedl doslova divy v oblasti lidských práv srovnatelné s mnohem více publikovaným německým hospodářským zázrakem padesátých let. </p> <h2 style="text-align: justify;">4.  Doslov: Zpět ke Goethovi</h2> <p style="text-align: justify;">Tento esej jsem začal ocitováním některých Goethových názorů na to, co nazýval <em>Weltliteratur</em> – světovou literaturou – a naznačil jsem, že obsahují užitečné myšlenky pro ty, kteří se zajímají o srovnávací metodologii jakož i o zvládnutí právní stránky globalizace. Rád bych ji nyní zakončil nahlédnutím do těch samých zdrojů, abych se pokusil načrtnout odpověď na dvě další otázky. První z nich je, zda Goethova literatura může být vodítkem k tomu, proč někteří lidé vylučují bez rozmyslu a bez váhání cizí zkušenosti z ideového pole, jež je jim dostupné, a to jen proto, že pocházejí z jiné kultury nebo jsou vyjádřeny v jiném jazyce? Druhou otázkou je, jak Goethovo umělecké dílo přežilo „deformující“ účinek překladu? Může nám tato zkušenost říct něco o „nebezpečích“ překladu? <br /><br />K zodpovězení první otázky je třeba věnovat pozornost době, kdy bylo ono hodnocení vyřčeno.  Literární učenci stejně jako právní badatelé vykládající německé právo brali Goetha jak s entuziasmem, tak výsměchem a zamítnutím, avšak ne ve stejný čas. Sebevědomá vrcholná i pozdní viktoriánská Anglie byla z Goetha nadšená, stejně jako byli její právníci ze svých německých protějšků; v obou případech se jedná o některá opravdu významná jména. Až když průmyslová, politická, a nakonec vojenská síla Německa začala být viděna jako hrozba, začal zájem o vše německé pomalu mizet, a od počátku první světové války dosáhl hlubokého minima.<br /><br />Něco ne zcela odlišného možná probíhá i dnes, když se Anglie snaží vyrovnat s faktem, že může soupeřit s Německem pouze tehdy, pokud je brána jako přívěsek USA, jejichž rozlohu, moc a prestiž si může pokoušet přisvojit pomocí velmi zavádějící fráze o „zvláštním vztahu“ za účelem nadsazení vlastní velikosti. Odmysleme si to, a vše, co Britové – či přesněji řečeno, Angličané – mohou dělat, je dovolávat se svých hodnot a dokonalosti ze dnů minulých, aby tak zakryli skutečnost, že v oblastech mimo obchodní právo si již nemohou důvěryhodně nárokovat prvenství v právním myšlení (pokud vůbec někdy byly oněmi premianty). Ve skutečnosti toto tvrzení neobstojí při hlubším zkoumání ani na poli obchodního práva, ledaže bychom hovořili o common law(v celé své současné rozmanitosti), a ne pouze o anglickém obchodním nebo právu společností.  Jak nepříjemná pravda to je, může být pochopeno pouze, pokud vstřebáme fakt, že precedenční význam rozhodnutí našich nejvyšších soudů se v průběhu let oslabil, přestože v zemích Commonwealthu je uznáván (i když z velké části ignorován v Americe).  Zahrnuje to oblast lidských práv, kde nejen Evropský soud pro lidská práva ve Štrasburku, ale také novější soudy jako je Spolkový ústavní soud v Německu a v Jižní Africe, či nejvyšší soud v Izraeli a Kanadě, přicházejí s myšlenkami, jež mívají často jiný než anglický původ. Musím přiznat, že některá z „patriotických“ vzplanutí<span class="editor-footnote">„Svoboda od svévolného zatčení a zadržení je podstatou Britské svobody, jíž se občané této země těšili v době, kdy většina populace v Evropě mohla být zavřena do vězení z rozmaru jejich vládců." <em>A &amp; Ors. v. Secretary of State for the Home Dept.</em> [2004] UKHL 56, § 88.</span> lorda Hoffmanna ve smyslu „byli jsme tam jako první“ (a tedy nepotřebujeme rady od jiných) mne připadají jako nesmyslné, vezmeme-li v úvahu, že nás v současnosti již jiní předehnali.  Musí tedy být pokořující připustit, že na poli lidských práv – ochrana osobnosti, trest smrti, vydávání stíhaných osob jinému státu, sexuální identita a rovnoprávnost – dosáhl německý Spolkový ústavní soud pro své občany takovou lidskoprávní ochranu, která soupeří (jak Američané připustili) s ochranou poskytovanou americkými soudy svým občanům, a která převyšuje tu naši.  <br /><br />Přestože spousta tvrzení, která jsem zde uvedl, je sdílena mnoha jinými lidmi, je nepochybně kontroverzní prohlašovat to otevřeně a bez obalu. Jenže jaký má přínos vychloubání se naší minulostí, jestliže prvenství včerejška již v dnešní době neplatí? Takové konejšivé řeči mohou být psychologicky uklidňující; nejsou však o nic věrohodnější než věřit, že Británie stále vládne mořím. To vše se pak omezí na otázku mentality a psychologie jednotlivce, jež umožňuje soudním a akademickým názorům nadále odmítat fakt, že povědomí o jiných významných kulturách může vést k porozumění věcí.<br /><br />Je toto karikování? Pokud ano, je tomu tak jen do určité míry.  Protože ti, kdo zavrhují cizí právo – německé právo soukromé i veřejné – tak rušivě, že ho nemáme dostatek přeložený do anglického jazyka, abychom ho mohli využít alespoň jako zdroj pro další přemítání, se mu vyhýbají jednoduše proto, že jej vůbec neznají. Místo svou nevědomost napravili, pokoušejí se popřít něco, co existuje, či označit to za neužitečné.<br /><br />Přesně to se přihodilo s Goetheovým dílem, když doba přiměla občany k podezíravosti vůči Německu. Všeobecné klima ve společnosti mělo dopad na hodnocení velkých umělců, přestože oni samotní byli prosti šovinizmu. Joyce tak zavrhnl Goetha jako „nudného státního úředníka“<span class="editor-footnote">Ellmann, R.<em> James Joyce</em>. London: Oxford University Press, 1959, str. 406.</span>,  zatímco autor románu Milenec Lady Chatterleyové napadal totální nemravnost Wilhelma Meistera. Proč se tedy divit, že se současní právníci, méně obeznámeni s evropskou kulturou než Joyce či Lawrence, odmítají zabývat německým světem, protože ho považují za irelevantní, a to dokonce v době, kdy víme (a oni by to měli vědět taktéž), že nejsme kulturně soběstační o nic více než politicky a ekonomicky?</p> <p class="editor-supplement-number" style="text-align: right;">XX</p> <p style="text-align: justify;">K druhé otázce, týkající se nebezpečí být nesprávně instruován díly špatně přeloženými z cizího jazyka, nás Goethova tvorba může opět mnoho naučit. Dala totiž vzniknout významné obecné debatě o tom, zda poezie může vůbec být odpovídajícím způsobem podána v jiném jazyce.  Šlo o obecnou, ale i velmi specifickou debatu, neboť Goetheho používání různých přízvuků, metrických schémat a rýmů tak extrémně bohaté – ve Faustovi vskutku používá všechny představitelné metrické a strofické formy, a z toho důvodu bývá toto dílo označováno jako metrické pandemonium – že pro překladatele představuje značné problémy. Jako kdyby to vše ještě nestačilo, je text extrémně bohatý i ve svém filozickém významu. Na základě principu aplikovaném profesorkou Stapletonovou bychom si tedy mohli položit otázku, proč se vůbec obtěžovat s jeho překladem? Koneckonců, máme přece Shakespeara! Nicméně rychlý průzkum napoví, že existuje něco okolo jednoho sta anglických překladů Fausta, některé z nich podle expertů zcela výjimečné.  <br /><br />Právníci, dobří v argumentaci (a mudrlandství) mohou přispěchat s argumentem, že je přeci rozdíl mezi překladem poezie a právních textů.  Ve světle předchozího odstavce by se rozdíl neměl činit alespoň bez důsledného studia potíží, se kterými se překladatel Goethova díla setkává, a s vědomím skutečnosti, že tito překladatelé byli konfrontování nejen s komplexními metrickými a rytmickým problémy, ale také s komplexními myšlenkami.  <br /><br />Ve znamenité sbírce esejů vydané k výročí Goethových 250.  narozenin analyzoval profesor John R.  Williams<span class="editor-footnote">Williams, J. R. What Gets Lost? A Look at Some Recent English Translations of Goethe. In: Boyle, N. and Guthrie, J. (eds). <em>Goethe and the English-Speaking World. Essays from the Cambridge Symposium for His 250th Anniversary</em>. Rochester, NY: Camden House, 2002, str. 213 a násl.</span> osm slavných řádek z Fausta (501-509), jež obsahují Goethovu hlubokou myšlenku a metaforu, která způsobila nekonečné potíže kritikům a literárním kritikům.  Williams předkládá šest dobře známých anglických překladů tohoto textu a diskutuje jejich silné i slabé stránky. Ukazuje, co je v překladu ztraceno a co bylo získáno rozdílnými přístupy k textu.  Nesnáze, s nimiž se při překladu Goethova textu setkáváme, jsou velmi podobné těm, kterým jsme já a moji překladatelé museli čelit při psaní mých knih a sestavování mé webové stránky obsahující překlady soudních rozhodnutí. Kdokoliv, kdo pozorně čte tyto texty, může vyvodit závěry o rozdílných druzích překladu a o tom, čeho se snaží dosáhnout. Závěry profesora Johna R. Williamse jsou přesto o něco bohatší, neboť on přidává další dimenzi k umění překladu.  Uvádí:<span class="editor-footnote">Williams, J. R.,<em> ibid.</em>, p. 225 (kurzíva doplněna).</span></p> <blockquote style="text-align: justify;">„Překlady mohou být poučné nejen pro čtenáře bez znalosti němčiny, nýbrž i pro studenty německé literatury, za předpokladu, že jsou používány inteligentně společně s originálem, nikoliv jen jako pouhé taháky.“</blockquote> <p style="text-align: justify;">Dovoluji si tvrdit, že obdobné výhody mohou právníci čerpat z dostupných právních překladů, a přitom se setkat s obtížnostmi s homonymy, léčkami slovníkových překladů právních pojmů a potřebou nahradit je funkčními ekvivalenty. V každém případě, vzhledem k tomu, že ve srovnávacím právu nehledáme precedenty, ale podněty pro další přemítání a v ideálním případě záblesky originality, stávají se potíže s překladem vítanou intelektuální výzvou a úspěšné nalezení toho správného „ekvivalentu“ možným zdrojem obohacení. Vyjadřovat své vlastní kulturní zázemí skrze titulek hollywodského filmu se jeví jako snadné vyhýbání se tomu, co dnešní doba velmi potřebuje.</p> 24.05.2012, 22:51 Selling Goods Across the Channel: Comparative Aspects of an International Sales Contract <h2 style="text-align: justify;">1. Introduction</h2> <p style="text-align: justify;">Imagine a successful business meeting between Czech and English businessmen. A deal is struck, and a commercial relationship is established. A contract of international sale of goods is to be drafted. Incidentally, it will be governed by English law. What should a Czech party expect from an English law governed contract for international sale of goods? How would it differ from an international sales contract relating to goods governed by Czech law? </p> <h2 style="text-align: justify;">2. Which English law rules will govern the substance of an international sales contract?</h2> <p style="text-align: justify;">The first thing to determine is which rules from the voluminous corpus of English law will deal with the contract for the international sale of goods between an English and a Czech party? If the above mentioned sales contract had been subject to the Czech law, unless expressly excluded, it would have been governed by the United Nations Convention on Contracts for the International Sale of Goods (1980)<span class="editor-footnote">As of 17 July 2006, 68 States have adopted the CISG. For the full list of the Contracting States see</span> (the Vienna Convention).<span class="editor-footnote">Resolution of the High Court in Prague no. 8 Cmo 254/2002 from 5 November 2002, Soudní rozhledy, No. 6-2004, p. 232</span> The areas of contract law not dealt with in the Vienna Convention are regulated  by the Commercial Code and  other relevant provisions of Czech municipal law.<span class="editor-footnote">Act. No. 513/1991 Coll.</span></p> <h2 style="text-align: justify;">2.1 International instruments under English law</h2> <p style="text-align: justify;">Unlike the Czech Republic,<span class="editor-footnote">The Czechoslovak Socialist Republic signed the Vienna Convention on 1 September 1981 and deposited the instrument of ratification on 5 March 1990. The Convention had entered into effect on 1 April 1991. The Czech Republic deposited an instrument of succession with the United Nations on 30 September 1993, effective from 1 January 1993. The Slovak Republic deposited its instrument of succession on 28 May 1993. When acceding to the Vienna Convention, the former Czechoslovakia made a reservation in accordance with Art. 95 with respect to Article 1 subparagraph (1)(b) of the Vienna Convention with the consequence that the Vienna Convention only applies if both parties to the sales contract have places of business in different Contracting States. However, neither of the countries confirmed this reservation when acceding to the Vienna Convention in 1993.</span> the United Kingdom has neither signed nor ratified the Vienna Convention. Instead, the United Kingdom acceded to the Hague conventions on uniform sales laws of 1st July 1964: the Convention relating to a Uniform Law on the International Sale of Goods (the “ULIS”) and the Convention relating to a Uniform Law on the Formation of Contracts for the International Sale of Goods (the “ULFIS”). The ULIS and ULFIS were added to the Uniform Laws on International Sales Act 1967. They came into force on 1972.<span class="editor-footnote">Uniform Laws on International Sales Order 1972, (SI 1972/973)</span> However, due to the reservations expressed by the UK government, their provisions apply only if the parties expressly stipulate so in the contract.<span class="editor-footnote">Uniform Law on International Sales Act 1967, s. 1 (3)</span> Consequently, both the ULIS and ULFIS “had comparatively little effect, and in the United Kingdom virtually none.”<span class="editor-footnote">Chitty on Contracts, Volume II, Specific Contracts, 29th edition, Sweet &amp; Maxwell, 2004, London, p. 1291</span> Despite their limited use, when concluding a contract on the international sale of goods with a counterparty having its seat in the United Kingdom, it should always be verified whether or not the contractual documents refer to the ULIS and/or ULFIS. If, on rare occasions, the ULIS and/or ULFIS apply, the rights and obligations arising under the international sales contract will substantially differ from a contract governed by English law that is silent on their application.</p> <h2 style="text-align: justify;">2.2 Statutes concerning international sales contract</h2> <p style="text-align: justify;">A contract on the international sales of goods subjected to English law would be principally governed by the Sales of Goods Act 1979<span class="editor-footnote">The most important amendments to the Sales of Goods Act 1979 were: the Sale of Goods (Amendment) Act 1994, the Sale and Supply of Goods Act 1994 and the Sale of Goods (Amendment) Act 1995.</span> and the relevant case-law. Depending on the manner of transport and payment, different laws concerning means of payment and transport will be applicable to the international sale, for example, the Carriage of Goods by Sea Act 1992, Bills of Exchange Act 1882 etc.<span class="editor-footnote">Other relevant pieces of legislation in this respect are the Carriage by Air Act 1962, as amended (implementing among others the Warsaw Convention of 1929, as amended, and the Montreal Convention 1999), the Berne Convention concerning International Carriage by Rail (COTIF) 1980, the Convention on the Contract for the International Carriage of Goods by Road (CMR) Geneva 1956 etc.</span> Institute Cargo Clauses will come into play if the contract involves insurance of the cargo. In contrast to a contract for the supply of goods between two English parties, the protective provisions of the Unfair Contract Terms Act 1977 will not apply to an international supply contract. According to this Act an international supply contract is a contract “whose characteristics are the following— (a) either it is a contract of sale of goods or it is one under or in pursuance of which the possession or ownership of goods passes; and (b) it is made by parties whose places of business (or, if they have none, habitual residences) are in the territories of different States (the Channel Islands and the Isle of Man being treated for this purpose as different States from the United Kingdom)”<span class="editor-footnote">Unfair Contract Terms Act, s. 26(3)</span> on the condition that “either— (a) the goods in question are, at the time of the conclusion of the contract, in the course of carriage, or will be carried, from the territory of one State to the territory of another; or (b) the acts constituting the offer and acceptance have been done in the territories of different States; or (c) the contract provides for the goods to be delivered to the territory of a State other than that within whose territory those acts were done.11<span class="editor-footnote">Unfair Contract Terms Act, s. 26(4)</span></p> <h2 style="text-align: justify;">3. INCOTERMS and “common law incoterms”</h2> <p style="text-align: justify;">In order to facilitate international sale transactions, a large number of businessmen use internationally standardised terms issued since 1936 by the International Chamber of Commerce.<span class="editor-footnote">The International Chamber of Commerce (ICC) is a private, non-governmental organisation seated in Paris. See</span> The latest revision of the INCOTERMS<span class="editor-footnote">The acronym INCOTERMS stands for “International Commercial Terms."</span> stems from 2000<span class="editor-footnote">The first version of INCOTERMS was published in 1936. Before the latest version in 2000, they were revised several times, namely in 1953, 1967, 1976, 1980 and 1990.</span> (INCOTERMS 2000).<span class="editor-footnote">E Terms: Ex Works (EXW); F Terms: Free Carrier (FCA); Free on Board (FOB); Free Alongside Ship (FAS); C Terms: Cost Insurance Freight (CIF); Cost &amp; Freight (C&amp;F); Carriage Paid To (CPT, Carriage and Insurance Paid To (CIP)]; D Terms: Delivered At Frontier (DAF); Delivered Ex Ship (DBS); Delivered Ex Quay (DEQ); Delivered Duty Unpaid (DDU); Delivered Duty Paid (DDP).</span> The main contribution of INCOTERMS consists in the precise allocation of rights and obligations between the seller and the buyer when there is a transfer of risk on the delivery of goods. The Vienna Convention allows for the application of INCOTERMS through Articles 8(1) or 9 and recognizes their primacy over the provisions of the Convention. In order to incorporate INCOTERMS into the contract, contractual documents have to expressly refer to the particular clause and version of INCOTERMS, for example “CIF Hamburg INCOTERMS 2000”. A less literal view suggests that if the contract merely states, for instance, “CIF Hamburg”, it is understood that, thanks to the widespread usage of INCOTERMS, the reference is being made to the CIF clause as defined in the current version of INCOTERMS.<span class="editor-footnote">St Paul Guardian Insurance Co., et al. v Neuromed Medical Systems &amp; Support, et al, decision of U.S. District Court, S.D., New York, from March 26, 2002, No. 00 Civ. 9344 (SHS) available at;pos=67&amp;iid=486&amp;cid=44#IID486</span></p> <p style="text-align: justify;">In contrast to Czech law which to a large extent has to borrow rules governing international sales contracts from external sources, terms such as CIF and FOB are an innate part of the English law defined in the relevant judicial decisions. However, English law speaks more of CIF contracts or FOB contracts, than CIF/FOB clauses. Definitions of CIF and FOB contracts derive from 19th century trade usages, and thus, do not necessarily follow the patterns of INCOTERMS issued by the ICC.</p> <h2 style="text-align: justify;">3.1 English law “incoterms contracts”: example of an FOB contract</h2> <p style="text-align: justify;">An English FOB contract may be encountered in three versions: firstly, in a classic or strict FOB, secondly, in an FOB with additional services, and thirdly, in a simple FOB. A common feature of all three contracts is that risk of loss of goods passes at the same moment: when the goods are put on board the vessel.  FOB contracts differ in the allocation of rights and obligations of the buyer and the seller. These differences are illustrated in the case Pyrene &amp; Co v. Scindia Steam Navigation Co<span class="editor-footnote">[1954] 2 QB 402</span> and restated in a later case El Amria and El Minia.<span class="editor-footnote">[1982] 2 Lloyd’s Rep 28: “In the first, or classic type, the buyer nominates the ship and the seller puts the goods on board for the account of the buyer, procuring a bill of lading. The seller is then a party to the contract of carriage and if he has taken the bill of lading to his order, the only contract of carriage to which the buyer can become a party is that contained in the bill of lading which is endorsed to him by the seller. The second is a variant of the first, in that the seller arranges for the ship to come on the berth, but the legal incidents are the same. The third is where the seller puts the goods on board, takes a mate’s receipt and gives this to the buyer or his agent who then takes a bill of lading. In this latter type the buyer is a party to the contract of carriage ab initio.”</span> In order to complicate the picture, an English FOB may not necessarily coincide with an U.S. FOB. What is understood as FOB under English law means FOB vessel under U.S. law.<span class="editor-footnote">D’Arcy, L., Murray, C., Cleave, B., Schmitthoff’s Export Trade, The Law and Practice of International Trade, 10th Edition, Sweet &amp; Maxell 2000, London, p. 17</span></p> <h2 style="text-align: justify;">3.2 INCOTERMS 2000 FOB clause</h2> <p style="text-align: justify;">The FOB clause contained in INCOTERMS 2000 emanates from the classic FOB contract.<span class="editor-footnote"> D.M.Sassoon, C.I.F. and F.O.B. Contracts, 4th edition, Sweet and Maxwell, 1995, London, p. 350.</span></p> <p style="text-align: justify;">The risk passes from the seller to the buyer when goods are placed on the vessel, in other words when they pass the ship’s rail at the port of departure.<span class="editor-footnote">The term FOB is suitable only for water transport. If goods are not delivered by sea or inland water way transport, the term FCA should be used instead.</span> The seller is bound to obtain an export licence, arrange customs formalities, check, pack and mark the goods to make them suitable for shipping, deliver the goods at the agreed time on the vessel, give the buyer notice of the shipment, and prove the delivery. Typically, the seller pays for loading the vehicle, domestic inland transportation (including pier delivery), truck unloading, wharfage (if not included in the ocean rate), pier handling (if not included in the ocean rate), lighterage and ship loading costs.<span class="editor-footnote">Albert H. Kritzer (EDITOR) Revised by Allison E. Butler. Roadmap to Incoterms (2000) at</span> On the other hand, the buyer is obligated to pay the price, get the import licences, conclude the transport contract and the insurance policy, take over the goods, announce to the seller the name of the vessel, place of loading and the time of delivery, and accept the proof of delivery. The buyer assumes the costs of ocean transportation with surcharges, (bunker fuel, currency, congestion), forwarding fees, ship unloading costs, export license, marine insurance, war risk insurance, consular fees, import duties, taxes, fees, customs clearance and foreign inland transportation.<span class="editor-footnote">Ibid.</span></p> <h2 style="text-align: justify;">3.3 Transfer of risk and property</h2> <p style="text-align: justify;">As to the transfer of property in unascertained goods under English law, the property passes when the goods are identified,<span class="editor-footnote">Section 16 of the Sale of Goods Act</span> unless the buyer acquires a property interest in an undivided share before. In ascertained goods property passes when the parties intend it to pass.<span class="editor-footnote">Section 17(1) of the Sale of Goods Act</span> This very general rule receives specific application in the individual types of sales contract. In an FOB contract, the moment that property is transferred is the same as under the general rule contained in many continental laws, including Czech law: property passes upon physical transfer of the goods. Under documentary sales, as for example in a CIF contract, the property passes when the documents proving title to the goods are handed over to the buyer;<span class="editor-footnote">P.J. van der Zijden Wildhandel N.V. v. Tucker &amp; Cross Ltd. [1975] 2 Lloyds Rep. 240</span> however, if after such handover the shipped goods are revealed not to comply with the contract description, the property reverts back to the seller.<span class="editor-footnote">Kwei Tek Chao v. British Traders and Shippers Ltd [1954] 2 Q.B. 459</span></p> <p style="text-align: justify;">Under English law, the risk normally passes with the property.<span class="editor-footnote">Section 20(1) of the Sale of Goods Act  </span>This rule complements FOB contracts where property and risk will mostly pass at the same time; however, the rule will be displaced in CIF contracts where the risk generally passes when the goods are handed-over and not when the documents are tendered.<span class="editor-footnote">Kwei Tek Chao v. British Traders and Shippers Ltd [1954] 2 Q.B. 459</span></p> <h2 style="text-align: justify;">4. The contents of an English international sales contract</h2> <p style="text-align: justify;">Apart from the differences in the wording of contracts, an international sales contract governed by English law, will also diverge from the contract governed by Czech international sales law in the contents of the law governing the contract.</p> <h2 style="text-align: justify;">4.1 Terms implied by the Sale of Goods Act</h2> <p style="text-align: justify;">Any contract under English law contains two sets of terms: express terms, i.e. stipulations written into the contract by the parties themselves, and implied terms, i.e. terms which can not be discerned from the wording of the contract itself, but which still form part of the contract by virtue of the law. A sales contract between English persons has to contain implied terms specified in Sections 12 to 15 of the Sale of Goods Act which lay down the seller‘s obligations relating, for example, to the title, quality and fitness of the supplied goods. Thus, under such a sales contract, the seller selling goods in the course of a business would transfer to the buyer a proper title to the goods which have to be of satisfactory quality<span class="editor-footnote">Sale of Goods Act, Section 14(2)</span> and reasonably fit for any particular purpose for which the goods are being bought.<span class="editor-footnote">Sale of Goods Act, Section 14(3)</span> The seller is prohibited from unreasonably unfulfilling the obligations stated in Sections 13 to 15 Sale of Goods Act.<span class="editor-footnote">Section 6(3) Unfair Contract Terms Act; with respect to the consumer this prohibition is absolute (Section 6(2))</span> Yet, as indicated above,<span class="editor-footnote">See section 1.2 above</span> this prohibition does not apply to international supply contracts, including international sales contracts.</p> <h2 style="text-align: justify;">4.2 Terms implied by the common law</h2> <p style="text-align: justify;">Despite the possible exclusion of statutory implied terms established in the Sale of Goods Act, international sales contracts may contain terms implied by common law and by virtue of international conventions.<span class="editor-footnote">In addition, the contract may include terms implied by custom. These relate mostly to customs observed in individual ports. However, their description is outside of the scope of this article.</span> Examples of terms implied by the common law relating to the FOB as well as CIF contracts are the implied terms that both the goods and documents relating to these goods must strictly correspond to their contractual description<span class="editor-footnote">Arcos Ltd. V. Ronaasen &amp; Son [1933] A.C. 470 (with respect to CIF contract), Bowes v. Shand (1877) 2 App. Cas. 455, Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] Q.B. 44</span> and be fit for the particular purpose they are sold.<span class="editor-footnote">Section 14(3) of the Sales of Goods Act, Benjamin’s Sale of Goods, 4th Edition, Sweet &amp; Maxwell, 1992, London p. 1026</span> Furthermore, there exist the implied terms that the transported goods are able to endure normal transit,<span class="editor-footnote">Mash &amp; Murrel Ltd. v. Joseph I. Emanuel Ltd. [1961] W.L.R. 862, Gatoil International Inc. v. Tradax PetroleumLtd. (The Rio Sun) [1985] 1 Lloyd’s Rep. 351</span> that the goods must be dispatched and the bill of lading be dated within the stipulated time period,<span class="editor-footnote">Bowes v. Shand (1877) 2 App. Cas. 455,</span> and that the ship must not stop in ports if the contract provides that it is to sail directly from the port of departure to the port of destination.<span class="editor-footnote">Bergerco U.S.A. v. Vegoil Ltd. [1984] 1 Lloyd’s Report 440.</span> Specifically under a CIF contract, the insurance policy provided must be usual in the particular trade.<span class="editor-footnote">Ranson (T.W.) Ltd. v. Manufacture d’Engrais, etc (1922) 13 Ll.L.R. 205</span> This rule differs from the INCOTERMS standards under which, unless stipulated otherwise in the contract, the goods  only  require minimum insurance cover under Clause C of the Institute Cargo Clauses.<span class="editor-footnote">Incoterms 2000, ICC official rules for the interpretation of trade terms, International Chamber of Commerce, 1999, Paris p. 35 and 93</span></p> <h2 style="text-align: justify;">4.3 Free reign of exemption clauses?</h2> <p style="text-align: justify;">In an international sales contract governed by English law the parties are, in principle, free to exclude any liability for the performance of any contractual obligation. Given the inapplicability of statutory provisions, the only weapon capable of invalidating abusive exemption clauses are common law rules governing the interpretation of the terms of contract, for example, the contra preferentem rule. This rule ensures that broad liability exclusion clauses will be interpreted against the parties who made them.<span class="editor-footnote">Photo Production Ltd. V. Securicor Transport Ltd. [1980] A.C. 827</span> Finally, the exclusion clauses may not exclude obligations arising from international conventions to which United Kingdom is a party; for example, the obligations imposed upon the air carrier by the Warsaw Convention.<span class="editor-footnote">Chitty on Contracts, Volume I, General Principles, 29th edition, Sweet &amp; Maxwell, 2004, London, p. 852-853</span></p> <h2 style="text-align: justify;">4.4 No doctrine of fundamental breach</h2> <p style="text-align: justify;">Czech law as well as the Vienna Convention have adopted the same approach to the question of when the contract may be terminated unilaterally. If a party commits a fundamental breach of any of its contractual obligations, the other party may terminate the contract and claim damages. If the breach is not fundamental, the injured party may claim damages, but is not released from the contract. The definition of what constitutes a fundamental breach of the contract is the same under Czech law and the Vienna Convention.<span class="editor-footnote">Cf. Section 344 of the Czech Commercial Code</span> According to Art. 25 of the Vienna Convention, breach of the contract is fundamental “if it results in such detriment to the other party as substantially to deprive him of what he is entitled to expect under the contract, unless the party in breach did not foresee and a reasonable person of the same kind in the same circumstances would not have foreseen such a result.”</p> <h2 style="text-align: justify;">4.5 Conditions, warranties &amp; the perfect tender rule</h2> <p style="text-align: justify;">English law, by contrast, does not recognise the concept of fundamental breach and has a different approach towards the right to avoid a breached contract.<span class="editor-footnote">Suisse Atlantique Société d’Armement Maritime S.A. v. Rotterdamsche Kolen Centrale [1967] 1 A.C. 361</span> Whether the breach of a given contractual obligation would give rise to a right to terminate the contract depends on whether the infringed obligation is a condition or a warranty. If it is a condition, i.e. an obligation which is essential to the contract, its breach would entitle the injured party to avoid the contract and claim damages. A stipulation concerning the place of a delivery is an example of a condition in an FOB contract.<span class="editor-footnote">Petrotrade Inc. V. Stinnes Handel GmbH [1995] 1 Lloyd’s Rep. 142</span> By contrast, if the infringed obligation is a warranty, i.e. an obligation of secondary importance to the contract, the injured party can only claim damages. However, a contractual obligation may also be treated as an innominate term, i.e. neither a condition nor a warranty.<span class="editor-footnote">Hong Kong Fir Shipping Co. Ltd. V. Kawasaki Kisen Kaisha [1962] 2 Q.B. 26</span><br /><br />Generally, under English law, liability for fulfilment of any contractual obligation is strict. This means that any failure, however small, to meet any contractual obligation would be treated as a breach of contract (known as the perfect tender rule).<span class="editor-footnote">See Section 3.2. above; cf. § 2-601(a) UCC: “…`if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may reject the whole`…`"</span> However, the strictness of this rule has been lessened recently by the 1994 amendment to the Sale of Goods Act which does not allow the termination of the contract when breach of the implied terms under Section 13 to 15 of Sales of Goods Act “is so slight that it would be unreasonable to reject them [the goods]…”<span class="editor-footnote">Section 15A of the Sales of Goods Act</span> Similarly, the breach of an innominate term establishes a right to terminate the contract if it goes to the root of the contract or if it deprives the innocent party of the whole benefit of the contract.<span class="editor-footnote">Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Nord) [1976] Q.B. 44</span> Although the criteria allowing for termination of the contract in the case of “innominate terms” are not so far away from the fundamental breach test they are not identical. Under the Vienna Convention the breach of a condition has to be fundamental, i.e. significantly serious so as to allow the injured party to terminate the contract.<span class="editor-footnote">Bundesgerichtshof [Federal Supreme Court], Germany, 3 April 1996; No. VIII ZR 51/95. available at:</span></p> <h2 style="text-align: justify;">4.6 Remedies – the main area of divergence</h2> <p style="text-align: justify;">A final area of difference between an international sales contract governed by Czech or English law is the field of remedies available to the contracting parties. The divergences are considerable. The Czech regime of remedies for a domestic sales contract is almost identical to that of the Vienna Convention because the relevant provisions of the Commercial Code are almost a “copy – paste” of the corresponding provisions of the Vienna Convention. English law does not recognize the right to fix an additional period for a performance, to cure a failure to perform an obligation, to suspend the performance or to reduce the price. Under English law the principal remedy for breach of contract is damages which under certain conditions may comprise reduction of the price.<span class="editor-footnote">Harling v. Eddy [1951] 2 K.B. 739</span> Specific performance may not be available in all cases, however, an unpaid seller may obtain a lien over the goods or exercise his right of stoppage in transit, i.e. retain possession of the goods while they are being transported to the buyer.</p> <h2 style="text-align: justify;">5.  Conclusion – What to bear in mind in an English international sales contract</h2> <p style="text-align: justify;">In conclusion, when concluding an international sales contract under English law, it is crucial to expressly stipulate that the standard term clauses referred to in the contract are those defined under INCOTERMS 2000, e.g. FOB London INCOTERMS 2000. Or, if the contract is the “English law incoterms contract”, a person not coming from the common law culture must make sure that she fully understands which rights and obligations such a contract gives right to. When determining the moment of transfer of property, one should consider whether the contract is a documentary sale or not. Furthermore, under English law, there is nothing like the “fundamental breach doctrine.” A slight breach of condition is sufficient for the other party to terminate the contract. Finally, attention should be given to the fact that the principal remedy for breach of contract under English law is the award of damages.<br /><br />Mgr. Ondřej Vondráček, LL.M. is a doctoral student at the Faculty of Law, Charles University in Prague. He completed his postgraduate studies in European Law (LL.M.) at the College of Europe in Bruges and currently works as a lawyer.</p> 08.05.2012, 22:48 “How Loyal Do I Have to Be?” Fiduciary Duties of Companies’ Directors in English Law <p class="editor-page-number"> 17</p> <h1> 1. Introduction</h1> <p style="text-align: justify;">A fiduciary duty is the highest standard of care imposed at either equity or law, which expects from the fi duciary to be extremely loyal and honest to the person to whom the duty is owed. As was stated in famous case of <em>Bray v. Ford</em> by Lord Herschell “<em>a person in a fiduciary position … is not, unless otherwise expressly provided, entitled to make a profi t; … [or] put himself in a position where his interest and duty conflict</em>.”1 The fiduciary duty comprises a number of overlapping obligations intended to promote loyalty or faithfulness. The fiduciary duty was developed in the Chancery Courts2 and was intended to restrain subconscious abuse of legal power and position. Nowadays, fiduciary relationships exist in many areas of English law where the principles of good faith, loyalty and trust are highlighted. The purpose of this article is to evaluate the level of duty a fiduciary owes to the company, and to consider how these duties have been affected by the Companies Act 2006.</p> <h1 style="text-align: justify;">2. The Concept of Fiduciary Duty</h1> <p style="text-align: justify;">Acting in good faith in the best interests of the company is the paramount duty of directors. As stated by Millett LJ in Bristol and West Building Society v Mothew3: “<em>The principal is entitled to the single-minded loyalty of his fiduciary.” It is a subjective duty and the directors are required to act “bona fi de in what they consider – not what a court may consider – is in the interest of the company</em>…”4 Fiduciary duties will be applied strictly, in order to prevent fiduciaries such as company directors from being tempted to seek profit from their position.5 The directors may breach that duty even where they have not acted with conscious dishonesty, but have failed to direct their minds to the question of whether a transaction was in fact in the best interests of the company.</p> <h2 style="text-align: justify;">2.1 Directors as Trustees of the Company</h2> <p style="text-align: justify;">Fiduciary duties in company law are based on the concept that directors are trustees of the company and its property. Th e idea arose from the fact that before 1844 most joint stock companies were not incorporated and to validate their existence they vested the property of the company in the trustees. Th e directors were deemed to be trustees as long as they dealt with the entrusted property. Today, however, the description of directors as trustees seems not to be precise enough, because courts when administering equity tend to apply the term “<em>trustee</em>” to anyone in a fi duciary position – liquidator and the company,6 lawyer and the client,7 agent and the principal. The</p> <p class="editor-page-number" style="text-align: right;">18</p> <p style="text-align: justify;">directors are rather agents of the company and when it comes to the duties of care and skill, the analogy with a trustee breaks down – it is expected from the director that he will do the job with reasonable care and skill, which does not necessarily mean to the best of one’s ability.</p> <h2 style="text-align: justify;">2.2 Changes Brought by the Companies Act 2006</h2> <p style="text-align: justify;">Nevertheless, this article focuses on the duties of good faith where fi duciary requirements have been imposed on directors in a similar way as on trustees. We have to consider as well how the position of the company’s director has changed, if at all, with the enactment of the Companies Act 2006 (CA 2006) which received Royal Assent on 8th November 2006. The Act will, however, not come into force until October 2008. The new statute aims to clarify the law for directors by providing a single source of reference setting out their duties, which meets today’s economic requirements. One of the most signifi cant changes introduced by the Act is a new statutory statement of directors’ duties. Th e statement codifi es and replaces the common law and fiduciary duties that have been developed by the courts in case law over many years. At this stage a question emerges; what would the impact be on these “old” common law principles? Should we completely forget the case law or should the statutory provisions be interpreted ‘in the light of ’ common law principles? To answer these questions it is necessary to understand the nature of the fi duciary duties in common law and then try to fi nd the analogies with the CA 2006.</p> <h1 style="text-align: justify;">3. Fiduciary Duties – Owed to Whom and By Whom?</h1> <h2 style="text-align: justify;">3.1 Directors and Shadow Directors</h2> <p style="text-align: justify;">Under general equity principles, each director owes duties of good faith to the company individually. The duties generally only last while someone is a director, but some duties, such as the duty not to misuse company information, may endure beyond the time when a director leaves the offi ce.8 Th e CA 2006 in S. 170(2) confi rms that the duty to avoid confl icts of interest and the duty not to accept benefi ts from third parties remains even after a person has ceased to be a director. Th e liability for breach of fi duciary duties is also extended to “shadow” directors under S. 170(5) of the Act – those persons who instruct directors on what policy decisions are to be made, or what actions are to be taken. However, as S. 251(2) makes clear, an individual is not to be considered a shadow director where she only advises a director in a professional capacity.</p> <h2 style="text-align: justify;">3.2 Fiduciary Duties Towards the Company</h2> <p style="text-align: justify;">The fiduciary duties are owed to the company and to the company alone. In general, the directors owe no duties to individual shareholders as such or to a person who has not yet become a shareholder – such as a potential purchaser of shares in the company. This principle was established by the decision in <em>Percival v. Wright</em>,9 where directors purchased shares from their shareholders without revealing that negotiations were in progress for a sale of the undertakings at a favourable price. It seems that directors of a holding company do not even owe duties to its subsidiary when that subsidiary has an independent board of directors.10 However, there are two exceptions to that rule: under the fi rst from Briess v. Woolley11 directors can be authorized by the shareholders to negotiate on their behalf; under the second contained in Peskin v. Anderson,12 directors owe a fiduciary duty to shareholders where there is a “<em>special factual relationship</em>” – capable of generating fi duciary obligations (such as an obligation to use confi dential information acquired by the directors in that offi ce, for the benefi t of the shareholders). However, being a controlling shareholder is not such an example.13 Under the CA 2006 in S. 170(1) the principle from Percival v. Wright survived and concerns all general directors duties’s enshrined in S. 171–177 of the CA 2006.</p> <h2 style="text-align: justify;">3.3 Fiduciary Duties Towards Creditors and Shareholders?</h2> <p style="text-align: justify;">It is now well settled in English law that when the company is in some form of fi nancial diffi culty directors cannot ignore the interests of their companies’ creditors, but they have a duty to their company to consider those interests. One of the most important cases that confi rms that principle is <em>West Mercia Safety Wear Ltd v Dodd</em>,14 where a successful action for breach of duty under S. 212 of the Insolvency Act 1986 was brought. A similar duty owed to the creditors is now expressed in S. 172(3) of CA 2006, which concerns the duty to promote the success of the company.</p> <p style="text-align: justify;">As to the issue of whether fi duciary duties are also owed to shareholders, the answer has traditionally been negative. This has  stemmed from the decision in <em>Percival v. Wright</em>. Th is case has been quoted as the reason why insider dealing was thought not to give rise to direct liability of shareholders who were not “in the know.” However, there will be occasions when directors, particularly of public companies, will be communicating with their shareholders. They owe a general duty to shareholders to be honest and not to mislead15 or when seeking their approval of transactions or recommending particular courses of action to make full and honest disclosure.16</p> <p style="text-align: justify;">The traditional viewpoint evinced in Percival v Wright has been impacted by S. 309 of the Companies Act 1985, which provides that company directors must also have regard to the interests of shareholders in performing their functions. However, the duty is owed to the company alone “and is enforceable in the same way as any other fiduciary duty owed to a company by its directors.”17 We could have observed the court approach of this section in Peskin v Anderson. The CA 2006 does not repeat or change this provision, which indicates that this duty is still ruled by common law.</p> <h1 style="text-align: justify;">4. Observing the Constitution and Acting Ultra-Vires</h1> <p style="text-align: justify;">The duty to observe the constitution requires that directors do not cause the company to undertake activities outside of what is permitted by the objects clause in the company’s memorandum of association. To act outside of the rules laid down by the company constitution is to be acting ‘ultra-vires’, literally meaning ‘beyond the power’. In examining the CA 2006, the duty of S. 171(a) is not</p> <p class="editor-page-number" style="text-align: right;">19</p> <p style="text-align: justify;">significantly different from the previous case law, except that the Act extends the meaning of ‘<em>constitution’</em> to include decisions taken by members, or a class of them, or otherwise taken in accordance with the articles of association.</p> <p style="text-align: justify;">The classical breach of fiduciary duty occurs when the act is within the powers delegated to directors but which they have abused by exercising them for an improper purpose. Directors must exercise their powers only for the purpose for which those powers are conferred even if the manner in which they exercise their powers happens to be in the best interests of the company.18 For example, it might be a proper purpose to issue shares to a larger company in order to secure the fi nancial stability of the company.19 Hence, the mere fact that the incidental result was to deprive a shareholder of his voting majority would not be suffi cient to make a purpose improper, but if the purpose was found to be simply and solely to dilute the majority voting power, this act can be blocked. Th e CA 2006 has not changed the view on this duty and its S. 171(b) states that directors must only exercise their powers for the purposes for which they are conferred. Th is indicates that decisions on directors acting ultra-vires will be decided in line with the existing case law. However, it is interesting to note the eff ect that the CA 2006 may possibly have in relation to the principle recently established by the decision of the House of Lords in <em>Criterion Properties v. Stratford Properties</em>. It was decided by the House of Lords that breach of duty amounts to breach of trust and “<em>if a person dealing with an agent knows that the agent does not have actual authority to conclude the contract or transaction in question, the person cannot rely on apparent authority</em>.”20 Th us, such a contract under case law would be declared void and there would be no place for ostensible authority. But the Companies Act 2006 in S. 239 allows for the ratification of the conduct of a director that amounts to breach of duty or breach of trust towards the company by resolution of the shareholders of the company.</p> <h1 style="text-align: justify;">5. Directors’ Discretion</h1> <p style="text-align: justify;">The duty of a director not to fetter his discretion means in practice that a director may not bind himself to vote on board resolutions or in a particular pre-determined way. When voting he must consider all the circumstances at the time and decide then what is in the best interests of the company. If he were to agree in advance how to exercise his votes, he would have deprived himself of the ability to exercise proper judgment. Thus, it is not open for a director (even for the one who has been appointed by a shareholder or other third party under a special power in the company’s constitution) to agree to vote in accordance with the directions of an other person. Shareholders may insert into a company’s memorandum or articles of actions provisions limiting the matters on which the directors may reach decisions or take actions, but any restrictions on the directors’ powers agreed by directors outside the company’s constitution would be in breach of their fi duciary duties and, consequently, unenforceable.</p> <p style="text-align: justify;">However, this does not prevent the directors from causing their company to enter into a contract and undertaking to exercise their powers in such a way as to ensure the proper fulfi llment of the contract. If it is in the best interests of the company to enter into the contract, it is open to the directors to agree to exercise their powers to ensure that the contract is carried out. This was decided in Fulham Football Club Ltd v. Cabra Estates plc,21 where the Court of Appeal approved a rule established in an Australian case22. Two earlier cases23 held at first instance that undertakings by directors to recommend proposed transactions to shareholders for their approval were unenforceable. Th e court in the Fulham Football Club case stated that, whilst these cases may be justifi ed on their particular facts, they should not be read as laying down a general proposition that directors can never bind themselves as to the future exercise of their powers. These cases, it seems, still support the principle that directors should not give an unqualified undertaking in advance to recommend a course of action to shareholders in case, at the time of the recommendation, the directors are no longer of the view that the proposed course of action is in the best interests of the company, since the recommendation could not have been made honestly. These principles remain unchanged by the CA 2006, and are in fact expressly stated in S. 173, where it is stated that “<em>a director of a company must exercise independent judgement</em>.”</p> <h1 style="text-align: justify;">6. Conflict of Interest</h1> <p style="text-align: justify;">Th e duty to avoid confl ict of interest requires that a director must not enter into transactions in which he has an interest which confl icts with his duty to the company, and must not make a profi t from opportunities that arise due to his position or information gained by virtue of his position. This principle was laid down in the case of Aberdeen <em>Rly Co v Blaikie Bros</em> (1854)24 where Lord Cranworth LC stated that “<em>no one… shall be allowed to enter into engagements in which he has, or can have, a personal interest confl icting, or which may possibly conflict, with the interests of those whom he is bound to protect</em>.” The rules on the absence of conflict of interest are not absolute: the company may give its consent, provided that the company is fully informed before the consent is given. The body that gives the consent may be either the board of directors (provided there is a sufficient number of disinterested directors) or the general meeting. The general rule that a director must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company is kept by the S. 175 of the Companies Act 2006. Moreover, the Act specifically refers to the exploitation of any property, information or opportunity; and it is immaterial whether the Company could take advantage of the property, information or opportunity.</p> <h2 style="text-align: justify;">6.1 Authorisation of Conflict of Interest</h2> <p style="text-align: justify;">Subsection (5) of S. 175 of the Companies Act 2006 introduces a new rule that independent directors can authorise a director’s conflict of interest. Nonetheless, such authorization is restricted; in the case of a private company, if there is anything in the company’s ‘constitution’ which invalidates the authorization; or in the case of a public company, if its constitution does not enable the directors to authorize the matter.</p> <p class="editor-page-number" style="text-align: right;">20</p> <h2 style="text-align: justify;">6.2 Benefits to Directors</h2> <p style="text-align: justify;">A director must not accept a benefit from a third party conferred by virtue of his position as a director. The common law view on this duty can be found in the well-known case of <em>Attorney General for Hong Kong v Reid</em>25 where after fi ve years of litigation in three diff erent jurisdictions it was held that any benefit a fiduciary receives during the course of his duties is held in trust for his principal. The company can rescind any contract between it and the third party, and therefore, director and third party are jointly liable in damages for fraud. The Companies Act contains this duty in its S. 176 and refl ects the previous case law. Subsections (3) and (4) provides that this duty is not infringed by a director receiving a benefi t from a person (e.g. a service company) by whom his services as a director or some other capacity are provided, nor is the duty infringed if the benefi t cannot reasonably be regarded as likely to give rise to a confl ict of interest. These benefits cannot be authorised by the directors because of the general duty to avoid confl icts; however, under certain circumstances they could be authorised by the shareholders.</p> <h2 style="text-align: justify;">6.3 The Disclosure Duty</h2> <p style="text-align: justify;">Under S. 177 of the Companies Act 2006, if a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of the interest to the other directors prior to the transaction. It is possible to fi nd in those provisions what was established earlier in the case law, primarily since Guiness v. Saunders26 where it was accepted that if a director fails to declare his interest, the transaction is voidable at the instance of the company; any benefi ts received by the director are recoverable by the company if it acts while it is still possible to restore both parties to their former positions. It is also implicit in the judgment that if the director has duly declared his interest, the transaction will not be voidable despite the fact that<br />the company has not specifi cally consented to it. It is worth noticing that under existing law, the directors are not entitled to benefit from any contract or arrangement with the company unless the shareholders have sanctioned it or the articles of association permit it. The shareholders’ sanction is no longer required under S. 180 of the CA 2006 except for certain transactions like loans or substantial property transactions contained in Chapter 4 of the CA. Section 180 is meaningful when referring to case law, because in subsection (1) it is stated that previous equitable and common law  principles requiring the consent or approval of members will be set aside as long as the disclosure made by director complies with S.177. Under S. 183 CA 2006 it is moreover a criminal off ence for a director not to inform the board when he acquired an interest in a contract.</p> <h1 style="text-align: justify;">7. Conclusion: Position of Case Law After CA 2006</h1> <p style="text-align: justify;">At the end it is essential to consider what would be the position of the existing common law aft er the enactment of the CA 2006. First of all,the old principle according to which a director cannot compete with the company is still governed by common law. Secondly, one should refer to the specifi c provisions of the Companies Act that describe the position of the director’s duties from the case law aft er codifi cation. In S. 170(3) and (4) it is stated that the cases should be considered in interpreting and applying the duties and the Company Law Review declared that this codifi cation should not change the essential ature of the director’s duties. Subsequently S. 178 refers to the civil consequences. Thus, the remedies and their enforcement have remained the same as in the case law. Yet, it is hard to say whether the Act lives up to expectations.27 Rather than making changes to the doctrine, the Act seems instead to have codifi ed the existing principles, obtained from various cases, into one coherent and structured statute. In some areas, the Act appears to have enhanced the protection given to companies, whereas in relation to breach of trust, it appears that protection has been lessened.28</p> <p style="text-align: justify;"> </p> <p style="text-align: justify;"><em>Robert Makowski is a fifth year student of the Warsaw University Law Faculty in Poland. In October 2007, he graduated English and European Union Law Course organized in Warsaw by the Cambridge University.</em></p> 04.05.2012, 22:18 Editorial <p class="Nadpis1" style="text-align: center;" align="center"><strong><span style="font-size: 9pt; line-height: 120%; font-family: 'Times New Roman'; text-transform: none;">Editorial<br /></span></strong></p> <p style="text-align: center;"><strong><span style="font-size: 9pt; line-height: 120%; font-family: 'Times New Roman'; text-transform: none;">COMMON LAW REVIEW WITH A NEW COMPARATIVE IMAGE</span></strong></p> <p><span style="font-family: 'Times New Roman';">Dear readers,</span></p> <p class="Text1" style="text-align: justify;"><span style="font-family: 'Times New Roman';">You are opening a brand new issue of the Common Law Review. Although, at first glance, it might seem that it does not differ from its predecessors, its contents meet new challenges.</span></p> <p class="Text1" style="text-align: justify;"><span style="font-family: 'Times New Roman';">The new issue takes a comparative approach – comparison of legal terms from the common law and continental culture, including comparison with Czech legal terms. The goal of this new approach is, firstly, to illustrate to Czech readers how a certain generally known legal problem is being solved by Anglo-American law, and secondly, to make Czech law accessible to foreign lawyers, students and to everybody interested in law. </span></p> <p class="Text1" style="text-align: justify;"><span style="font-family: 'Times New Roman';">As is apparent from the title itself, the Common Law Review for the first time in its history is focusing on a theme drawn exclusively from the field of private law. Since the law of contract or the law of obligations form both in Anglo-Saxon and the Continental law culture the very foundations of private law, the focus on this fundamental category of private law is a fully logical step. The perspective from which the Common Law Review compares the contract law range from taking a general approach to contracts and obligations over to specific questions of individual law. It also surveys connections seemingly not dealing primarily with contract law, but which in practice have an important bearing on contracts.</span></p> <p class="Text1" style="text-align: justify;"><span style="font-family: 'Times New Roman';">Last but not least, this <em>“Contract Law Review“</em> tries to cover certain current topics of Czech and European private law. An example of this is provided by the Rome Convention on the Law Applicable to Civil and Commercial Relations which came into force in the Czech Republic this year and which has introduced to Czech law certain rules of Anglo-Saxon origin.</span></p> <p class="Text1" style="text-align: justify;"><span style="font-family: 'Times New Roman';">I hope you will like the new approach to the Common Law Review and will find in it interesting and useful ideas and comments.</span></p> <p class="Text1" style="text-align: justify;"><span style="font-family: 'Times New Roman';">Mgr. Ondřej Vondráček LL.M </span></p> <p class="Nadpis1" style="text-align: center;" align="center"><strong><span style="font-size: 9pt; line-height: 120%; font-family: 'Times New Roman'; text-transform: none;"><br /></span></strong></p> <p class="Nadpis1" style="text-align: center;" align="center"><strong><span style="font-size: 9pt; line-height: 120%; font-family: 'Times New Roman'; text-transform: none;">COMMON LAW REVIEW V NOVÉM KOMPARATIVNÍM HÁVU</span></strong></p> <p class="Text11odstavec" style="text-align: justify;"><span style="font-family: 'Times New Roman';">Vážení čtenáři,</span></p> <p class="Text1" style="text-align: justify;"><span style="font-family: 'Times New Roman';">dostává se Vám do ruky zbrusu nové číslo Common Law Review. Ač se na první pohled může zdát, že se nijak neliší od svého předchůdce, jeho obsah doznal nový náboj.</span></p> <p class="Text1" style="text-align: justify;"><span style="font-family: 'Times New Roman';">Nové číslo se vydává cestou komparace právních institutů kultury common law a kultury kontinentální, včetně srovnání s instituty českého práva. Cílem tohoto nového přístupu je jednak osvětlit českým čtenářům, jak určitý obecně známý právní problém řeší právo anglo-americké a jednak zpřístupnit české právo zahraničním právníkům, studentům a všem, kteří se o právo zajímají. </span></p> <p class="Text1" style="text-align: justify;"><span style="font-family: 'Times New Roman'; letter-spacing: 0.2pt;">Jak již je patrno ze samotného názvu tohoto čísla, Common Law Review se poprvé ve své historii zaměřuje výlučně na témata z oblasti soukromého práva. Jelikož smluvní či závazkové právo tvoří jak v anglosaské, tak kontinentální právní kultuře samotné základy soukromého práva, je důraz na tuto primární soukromoprávní kategorii zcela namístě. Perspektiva, pod jakou Common Law Review smluvní právo srovnává, zahrnuje jak obecné pojetí smluv a obligací, tak specifické otázky jednotlivých institutů závazkového práva. Vedle toho pokrývá též souvislosti, které zdánlivě se smluvním právem nesouvisejí, nicméně v praxi smlouvy významně ovlivňují.</span></p> <p class="Text1" style="text-align: justify;"><span style="font-family: 'Times New Roman'; letter-spacing: 0.2pt;">V neposlední řadě se toto <em>„Contract Law Review“</em> snaží postihnout některá aktuální témata českého a evropského soukromého práva.. Tím je například Římská úmluva o rozhodném právu pro občanské a obchodní závazky, která se stala v ČR účinnou v letošním roce a vnesla do českého práva i některé původem anglosaské normy. </span></p> <p class="Text1" style="text-align: justify;"><span style="font-family: 'Times New Roman'; letter-spacing: 0.1pt;">Věřím, že se Vám bude nové pojetí Common Law Review líbit a že v něm najdete zajímavé i prakticky užitečné myšlenky a postřehy.</span></p> <p class="Text1" style="text-align: justify;"><span style="font-family: 'Times New Roman';">Mgr. Ondřej Vondráček LL.M </span></p> 04.05.2012, 20:28 Lifting the Corporate Veil: Limited Liability of the Company Decision-Makers Undermined? Analysis of English,U.S., German, Czech and Polish Approach <p class="editor-page-number">21</p> <h1> 1. Introduction</h1> <p style="text-align: justify;">More than 100 years ago the UK’s House of Lords in the famous Salomon case1 established a maxim that a company is a separate legal entity distinct from its members. Thereby, it determined the direction of modern company law and the nature of private limited companies. Similar doctrines are incorporated in the statutory provisions of Continental countries. A separate legal personality and limited liability has aimed to induce investment, encourage trade and to be an incentive for entrepreneurs to start up new business even if it might involve commercial risk.</p> <p style="text-align: justify;">This article will fi rstly explain what is understood by the terms corporate veil and lift ing or piercing the corporate veil.2 Secondly, it will discuss several U.K. cases that are dealing with this issue. It will analyse how the doctrine of lift ing the corporate veil has developed over time. Thirdly, it will compare this doctrine with the approach accepted in the USA and under German law. Fourthly, it will discuss the Czech and Polish view. Then, it will deal with some economic implications of lift ing the corporate veil. Finally, it shall try to answer the question whether the doctrine of piercing the corporate veil undermines the principle of limited liability.</p> <h1>2. What is the Problem with the Corporate Veil?</h1> <h2>2.1 Legal Aspects</h2> <p style="text-align: justify;">Since a company is treated as a separate legal entity, the metaphor of “<em>corporate veil</em>” separating the members of the company from the corporate body has arisen. Although the principle of Salomon in the U.K. has never been doubted, under certain circumstances the courts may be poised to disregard this principle and “<em>lift the corporate veil</em>.”3 Nevertheless, the cases in which the courts have allowed the veil to be lift ed and disregard the separate entity principle are diffi cult to predict and no clear set of principles has emerged yet.4</p> <p style="text-align: justify;">From the creditors’ point of view, the consequence of the limited liability principle is that creditors’ claims are restricted to the company’s assets and cannot be asserted against the shareholders’ assets. On the other hand, shareholders benefi t from the limited liability principle because (i) once the business is successful, it is them who gain the profi t, and (ii) in the event that the company is wound up their liability would be limited only to the value of their unpaid shares or their guarantee;5 i.e. the satisfaction of unsecured creditors’ claims is endangered without shareholders being responsible.</p> <h2 style="text-align: justify;">2.2 Economic Justification</h2> <p style="text-align: justify;">Every transaction involves costs. In the ideal state they are kept at the lowest possible level. Th eir externalisation takes place when  The question is who should reimburse the costs (debts) incurred by the company.6 To achieve a maximum economic efficiency the costs should be borne by “<em>the cheapest risk avoider</em>”, i.e. the person who can most easily and cheaply prevent costs from occurring. In consequence, it should be optimal if costs are incurred by shareholders, i.e. the persons with the strongest voice in the company, rather than creditors who have little no infl uence over the investment costs of the company. However, the principle of limited liability causes externalisation of the costs incurred by the company, i.e. the person who generated the costs is not obliged to pay for them.7 Should the debts (costs) of the limited liability company exceed its assets, these costs will ultimately be borne by those creditors whose claims could not have been satisifed from the assets of the company at the moment of its dissolution. Th is transfer is justifi ed by the fact that under certain circumstances companies must disclose to the public the details of their fi nancial situation and the creditors check the latest in which fi nancial conditions the company is before concluding any contracts with it.</p> <h1 style="text-align: justify;">3. Lifting the Corporate Veil at Common Law</h1> <h2 style="text-align: justify;">3.1 Adams vs Cape Industries plc8</h2> <p style="text-align: justify;">In the landmark English Court of Appeal case <em>Adams v Cape</em> Industries plc the case law on Salomon was subject to a complete review. This case involved liability within a group of companies. The claimant, Adams, sought to ignore the separate legal personality of a parent (Cape) and its subsidiary company and to hold the parent liable for the obligations of the subsidiary. The court had to determine whether the defendant, a producer of asbestos, had presence in the United States and, thus, whether the Texan judgement could be enforced against them. It was held that “<em>the court is not free to disregard the principles of Salomon v A. Salomon &amp; Co Ltd merely because the justice so requires</em>.”9 This decision is crucial to the understanding of lift ing the corporate veil because the Court of</p> <p class="editor-page-number" style="text-align: right;">22</p> <p style="text-align: justify;">Appeal went through three possible justifi cations for piercing the veil: (i) “single economic unit”, (ii) agency, and (iii) “façade.”</p> <h2 style="text-align: justify;">3.2 The Agency Exception</h2> <p style="text-align: justify;">Agency is an apparently accepted exception to the separate entity principle and is sometimes viewed as the most common one.10 It was already decided in Salomon that if a company acts as an agent for another party the corporate veil can be lifted. However, the courts seem to be unwilling to determine that a principal/agent relationship exists, or imply it, especially when concerning an individual controlling shareholder. Yet, the courts are less reluctant to imply that a principal/agent relationship exists when the alleged agency is between a holding company and its subsidiary, probably because in these circumstances the management of the holding company may have a better opportunity to take advantage of the limited liability principle. Sometimes it is argued, however, that the concept of the agency is not a real exception to the separate entity principle.11 The parent company is bound by the acts of its agent automatically as long as those acts are within the scope of the agent’s authority. Under such circumstances the agency might be implied.</p> <p style="text-align: justify;">In <em>Adams v Cape</em> the Court of Appeal held that the veil of incorporation could in essence be pierced when there was an express agency agreement, for example, between the parent and the subsidiary company. In the absence of such an agreement, no agency relationship can be presumed. According to the facts of the case, the U.S. company rendered certain services to Cape Industries plc and even acted as its agent in relation to some specifi c transactions, but this was not suffi cient to constitute a general agency agreement. Consequently, though there is no presumption of an agency it can be implied, i.e. agency is not automatic but also not precluded.</p> <p style="text-align: justify;">The English Court of Appeal in <em>Ebb Vale Urban District Council v South Wales Traffic Area Licensing Authority</em>12 considered the relationship between the parent and 100 per cent owned subsidiary company. It was stated that under “<em>the ordinary rules of law a parent company and subsidiary company, even a hundred per cent subsidiary company, are distinct legal entities, and in the absence of a contract of agency between the two companies one cannot be said to be the agent of the other.” </em>According to Cohen LJ this was clearly established by <em>Salomon v Salomon and Co Ltd</em>.</p> <p style="text-align: justify;">To conclude, under <em>Adams v Cape International Ltd</em> there is a requirement that an express agency agreement between the parties needs to exist. In the absence of the express agreement the concept of agency will be very diffi cult to establish.13 Consequently, a creditor of an undercapitalised subsidiary is in a better position if he proves that an express agency agreement exists because the implied agency might not be possible to be proved. If the creditor is unable to prove the existence of an agency agreement he needs to support his claim with reference to another exception to the separate legal entity principle.</p> <h2 style="text-align: justify;">3.3 The Concept of the Single Economic Unit</h2> <p style="text-align: justify;">In <em>Adams v Cape</em> it was argued that for a group of companies the essential principle is that each company within a group is a separate legal entity. However, in certain circumstances, the court can ignore this principle and treat several companies as a single one.14 In <em>Adams v Cape</em> the court held that a group of companies may be treated as a single unit only where specifi c statutes15 or contractual provisions allow to do so. Otherwise the Salomon rule should apply.</p> <p style="text-align: justify;">In another English case <em>DHN Food Distributors Ltd v Tower Hamlets London Borough Council</em>16 the Court of Appeal, or more precisely Lord Denning MR, always keen on lift ing the corporate veil, treated a group of companies as a single economic entity and enabled compensation for compulsory purchase of land to be paid.<br />From this decision it had been said that there is “<em>but a short step</em>” to “<em>the proposition that the courts may disregard Salomon’s principle whenever it is just and equitable to do so</em>.”17 Such situations are nowadays considered as exceptional18 and the verdict in the <em>DHN</em> case has been subject to doubt several times since, e.g. in <em>Woolfson v Strathclyde Regional Council</em>19 and <em>Industrial Equity Limited and Others v Tower Hamlets</em>.20 In <em>Woolfson</em> the House of Lords not only distinguished the earlier decision of the Court of Appeal in DHN but also doubted whether the Court of Appeal “<em>properly applied the principle that it is appropriate to pierce the corporate veil only where special circumstances exist indicating … a mere façade concealing true facts</em>.”21</p> <p class="editor-page-number" style="text-align: right;">23</p> <h2>3.4 Façade or Sham</h2> <p style="text-align: justify;">In <em>Adams v Cape</em> Industries the court accepted the existence of one well-recognised situation where the corporate veil could be pierced – a situation where the corporate structure is a “<em>mere façade concealing the true facts</em>.”22 It was even held that one of the Cape companies could have been considered as falling into this category. According to Bowmer, “<em>the admission that separate legal personality could be ignored and the veil pierced on the grounds that the group structure was a ‘façade’ is far more interesting. Perhaps unfortunately, leave to appeal to the House of Lords was rejected by both the Court of Appeal and the House of Lords</em>.”23</p> <p style="text-align: justify;">In the abovementioned House of Lords case <em>Woolfson</em> the concept of façade was discussed. However, Lord Keith did not explain the meaning of this term. Whatever the precise meaning of this term for the courts applying24is, the House of Lords made it clear that the Salomon principle cannot be disregarded whenever justice or equity requires so.25</p> <p style="text-align: justify;"><em>Re Southard &amp; Co Ltd</em>26 concerned granting a winding-up order. The Templeman LJ’s analysis of the views of the creditor, though, is worth noticing. According to him in the situation of a subsidiary company that turns out to be the “<em>runt of the litter</em>” (undercapitalised) and becomes insolvent, the parent and/or other subsidiary companies may prosper without any liability for the debts of the insolvent company. Therefore, it is comprehensible that the unsecured creditors wish to examine the fi nances of the company and its relationship to the other members of the group to assure that any assets have leaked away.27</p> <p style="text-align: justify;">In another important case of <em>Ord v Belhaven Pubs Ltd</em> 28 the Court of Appeal held that holding company as a shareholder enjoy limited liability and it is not liable for the debts of the companies whose shares it owns, i.e. subsidiary companies.</p> <p style="text-align: justify;">It can be concluded that the issue of piercing a corporate veil in the U.K. is quite disputable. The way it is viewed by courts and commentators varies over time. The optimistic predictions are followed by the pessimistic ones. Recently, however, some commentators are quite positive with the development of this phenomenon. Sometimes there have been merely attempts to pierce to corporate veil29 but also in a number of recent cases the courts have declared to pierce the corporate veil.30</p> <h2 style="text-align: justify;">3.5 Current Position of English Courts</h2> <p style="text-align: justify;">With respect to the U.K. it is important to mention that the creditors are, inter alia, protected by numerous statutory provisions concerning the lift ing the corporate veil.31 Th e Parliament is always authorised to enact exceptions to the Salomon principle and has done so several times. The courts, therefore, have to accept that even though the principle of separate legal entity may cause injustice, unless the Parliament in its Act provides so, the court should not interfere.32 A crucial exception enacted by the Parliament in the U.K. is Section 213 of the 1986 Insolvency Act. Accordingly, the creditors are protected where the business of the company has been carried out to defraud them, and the courts on a winding-up are entitled to look behind the corporate veil in such a case.</p> <p style="text-align: justify;">To summarise English common law exceptions to the Salomon principle according to Hicks, it is fair to say that the courts probably will not lift the corporate veil in order to impose liability on a shareholder for the company’s debts. He also states that “<em>in rare instances the courts will look to the substance rather than the form to deny benefi ts of corporate status which they think should not be enjoyed.”33 </em>He goes on contemplating that it is diffi cult to predict when the courts will do so, however, the judges’ subjective perception of fairness or policy might be a useful guide.</p> <p style="text-align: justify;">It has also been presented that the notion that “<em>the judges are increasingly prepared to disregard the autonomous personality of companies to facilitate the legitimate interests and expectations of those who come in contact with them, is clearly ‘ overstatement’ of the position.</em>”34</p> <h2 style="text-align: justify;">3.6 U.S. Approach to the Doctrine of Piercing the Corporate Veil: Differences35</h2> <p style="text-align: justify;">The doctrine of lift ing the corporate veil (in the USA mostly under the name of “<em>piercing the corporate veil</em>” or “<em>disregard of legal entity</em>”) has its true origins in the American law 36 and – in contrast to Europe – it is considered there to be a normal part of the legal system. Whereas European judges, not excluding the English ones, rather carefully reach a conclusion to dislodge the separate legal entity of the company, their American colleagues hand down rulings in favour of creditors, apparently without much doubt. If one realizes that apart from Texas37 there are no statutory examples of restrictions regarding the institution of piercing the corporate veil, it remains apparent what a great deal of responsibility they shoulder.</p> <p style="text-align: justify;">The maxim that a company is a separate legal entity distinct from its members was established in the USA even earlier than in the UK in the case of <em>Bank of Augusta v. Earle</em> (1839).38 Attempts to disregard</p> <p class="editor-page-number" style="text-align: right;">24</p> <p style="text-align: justify;">the separate entity preserve a close link to equity. This may be the reason for which in the United States the piercing of the corporate veil has been equated to a lightning: “<em>it’s rare, severe and unprincipled</em>.”39 One can say that every factual state develops its own set of elements that should be taken into account. Traditional tests aim to prevent fraud and achieve equity.40</p> <p style="text-align: justify;">For the reason of clarity some authors have tried to provide a viable alternative to the rather changeable combination of facts and proposed using the term “<em>the totality of circumstances rule</em>”41. Notwithstanding how practical it seems in the debates, it remains still a blanket term and is just a better name of saying that the doctrine of piercing the veil is based on diff erent elements adjudicated ad casu. In fact, much is dependent on the judge and what she considers an equitable result. Consequently, the outcomes of similar cases may diverge.</p> <p style="text-align: justify;">The U.S. courts lift the company’s immunity in a variety of situations.42 The piercing concept does not come from the laws of the states or federal government but it is a judicial creation which varies from state to state. The scope of abuses relating to groups of companies is the most popular reason for which the courts disregard the separate entity principle. If a controlled company is organized as a mere tool in the hands of a parent enterprise and the separateness of the two corporations has ceased (instrumentality rule 43), one can assume that holding only the subsidiary corporation liable for any damages resulting from fraud or dishonesty of the parent company would result in injustice. Similar conclusion can be drawn under the alter ego doctrine which is also demonstrated by showing a blending  of identities between two corporations and thus, in practice, it is difficult to distinguish them.</p> <h1 style="text-align: justify;">4. Corporate Veil in Continental law.</h1> <h2 style="text-align: justify;">4.1. The German Approach: the Qualified Natural Holding</h2> <p style="text-align: justify;">German law is a model example of how the doctrine of piercing the corporate veil (in German: <em>Durchgriff</em> ) could be truly instilled in a Continental law system without causing any fragrant breach in its statute-based structure. In fact, German courts departed from accepted legal patterns without having a good statutory or even academic basis for doing so.44 It was only later that the German courts tried come up with an acceptable theoretical justifi cation.</p> <p style="text-align: justify;">Not every undue infl uence can cause the separate legal entity of a controlled company to be disregarded. The piercing of corporate veil was allowed only in the event of a qualifi ed natural holding (in German: <em>qualifi ziert faktischer Konzern</em>). Under the concept of the qualifi ed natural holding an abusing practice can give a reason for dislodging the corporate veil when a controlling company limited by shares allocates its economic activity to many dependent limited liability companies and runs them as a sole shareholder in a way that jeopardizes the fi nancial situation of these companies.45 This is especially dangerous for the creditors of these dependent companies. Th e courts and the scholars are unanimous in their opinion that piercing the corporate veil is desirable in such a situation; however, in order to impose liability certain requirements need to be satisfied among others existence of a factual, contract-like steering. 46</p> <h2 style="text-align: justify;">4.2 Lifting the Corporate Veil in the Czech Republic?</h2> <p style="text-align: justify;">The Czech limited liability companies guarantee their liabilities by their assets.47 The members of the private limited company are jointly and severally liable for the company obligations merely up to the unpaid portion of their investment contribution to the company as registered in the Commercial Registry.48 Th e members are not only liable for their unpaid investment contributions, but they are also jointly liable for the total sum of all unpaid contributions; a creditor of the company can, therefore, seek the due payment from any member of the company no matter whether the particular member has paid up his contribution or not. Once all of the investment contributions have been paid up, and information thereof is registered in the Commercial Registry, the members of the private limited company are not liable for the debts of the company.</p> <p style="text-align: justify;">Even though the members are not liable for company’s debts,under Czech law there are provisions that have particular application to groups of corporate entities which seek to make a controlling company of a group subject to certain obligations and liabilities vis-à-vis a controlled company. Th is issue is primarily covered in Section 66 and 66a of the Czech Commercial Code. Under these sections persons infl uencing the performance of the company in any material way (so-called shadow directors) shall be liable to the same extent as if they were members of its bodies. Furthermore, Section 66a requires disclosure of related party transactions, i.e.agreements and contracts between controlling and controlled persons.</p> <p style="text-align: justify;">Even though the limited liability principle in private limited company is widely accepted, there is a possibility that the courts could look behind the corporate veil and held the directors or other statutory bodies of the company liable for the debts of company without relevant statutory authorisation. For this purpose, the courts could apply the provisions of Czech Civil Code49 regulating the liability for damage. Section 415 of the Civil Code impose an obligation on every person to act in a way that does not cause damage to property and Section 420 creates a consequential liability for a a breach of any legal duty. Undoubtedly, the diminution of funds of a creditor whose loan to the controlled company has become unrecoverable due to the insolvency of such a company caused by the controlling person could be considered a damage to property. The legal duty breached would consist in the violation of Section 66a (8) of the Czech Commercial Code. The additional requirements for establishing a liability of the controlling company, i.e. the causality and culpability, would depend on the facts of the case.</p> <p class="editor-page-number" style="text-align: right;">25</p> <h2 style="text-align: justify;">4.3 Lifting the Corporate Veil in Poland?</h2> <p style="text-align: justify;">Polish lawmakers have been so far very much devoted to the traditional demarcation of the liability border between the company and its members. For this reason lift ing the corporate veil has not been established in the Polish legal system as such. Consequently, no court would dare to rely on this doctrine without an explicit statutory norm; this, however, makes the legal system open to abuse.50</p> <p style="text-align: justify;">Company directors are those who are in charge of the management of the company. Hence, it is considered just to hold them jointly and severally liable for any obligations of the company, provided that enforcement against the company proves to be ineff ective.51 Th e only situation when a company member who is not a company director would be held liable is in the case when she overstated the value of inkind contribution52 or received payment in violation of law or articles of association.53 She would then be jointly and severally liable with other company directors but only towards the company; their liability towards directors is, thus, merely indirect.</p> <h1 style="text-align: justify;">5. Conclusion</h1> <p style="text-align: justify;">The doctrine of piercing the corporate veil has its historical origins in equity law and is a creation of judge-made law systems. Equitable judicial approach to limited liability manifests itself in treating it not as an indefeasible right but rather as a privilege a company is accorded which might be withdrawn in case of alleged abuse. According to Griffi n54 lift ing the corporate veil is not a sword but a shield. Th efore, the separate legal entity principle cannot be considered a value per se. Nowadays diff erent forms of piercing the corporate veil exist also in a few Continental law systems (e.g. Germany); this proves an existence of a need both for a workable and pragmatic solution to the problem of formal separation of legal entities as well as for the introduction of the discretion demanding institution of lifting the corporate veil into statute-based legal systems. where reliance on equity as such is not admissible.</p> <p style="text-align: justify;"><em>Anna Farat is a student of Adam Mickiewicz’s University, Poznań, Poland and former student of Universität Bayreuth, Germany.</em></p> <p style="text-align: justify;"><em>Denis Michoň is a student of the Charles University Law School, Prague, and a former student of the Cardiff University Law School.</em></p> <p style="text-align: justify;"> </p> <p style="text-align: justify;"> </p> 04.05.2012, 20:21 The Relationship between a Parent Company and its Subsidiary: Does the Family Stick Together? A Comparison of U.S., English and Czech Rules on the Parent-Daughter Companies’ Relationships <p class="editor-page-number">9</p> <h1>1. Introduction</h1> <p style="text-align: justify;">There are many groups of companies all over the world today consisting of a number of parent companies and their subsidiaries. Mutual relations between the companies continue to draw a keen interest from a wide range of parties; to include direct participants in the relationship, judges, legal experts and legislators. In many respects this interest is explained by the large dynamic and the constantly developing nature of these relationships. This applies not only in common law jurisdictions but even in emerging markets such as the Czech Republic, which has been attracting a considerable proportion of foreign investments in recent years, and where many subsidiaries have been created. The topic of this article is intended to be provocative: does or should a subsidiary follow the wishes of its parent? The fact that this does not oft en happen in practice can be illustrated by some of past disputes between the CEO of Eurotel, the largest Czech mobile operator, and the CEO of Czech Telecom,its parent company. Czech Telecom was losing many clients, while Eurotel was gaining them, and perhaps, this fact was adding fuel</p> <p class="editor-page-number" style="text-align: right;">10</p> <p style="text-align: justify;">to the fire. The aim of this article is to analyze the legal side of the problem, namely, to what extent Czech company law differs from its English and U.S. counterparts on the issue of the duty of loyalty in parent-subsidiary relations. In pursuing this objective I first highlight the diff erent degrees of a subsidiary’s dependence on a group - to show whose interests are at stake. Following this, I address the question of whether the directors of a subsidiary have a duty of loyalty towards the parent company, and vice versa. This includes the question of whether an instruction of the parent company is binding on the directors of the subsidiary. Finally, the nature of the duty of loyalty of a director in the parent, serving simultaneously on the board of the subsidiary, will be reviewed.</p> <h1>2. Models of Control</h1> <p style="text-align: justify;">Practice shows that the multifarious group structure creates different types of confl icting situations among various stakeholders. In this regard, before the actual legal analysis starts, it is worth mentioning the models of control suggested by Eddy Wymeersch. He distinguishes between a 100% subsidiary, a 51% subsidiary, a publicly listed subsidiary, companies with a State interest, a subsidiary within a holding, and a subsidiary engaged in the same line of business as the parent. In the case of the 100% subsidiary, the interests of both subsidiary and parent are to a large degree parallel, while only the interest of the creditor may be harmed. In a 51% subsidiary, there is also the interest of the minority shareholders at stake. If a subsidiary is publicly listed, there may be an additional duty of the parent towards the markets. In a company with a State interest, either parent or subsidiary, public or political interests may also be at risk.<span class="editor-footnote">Wymeersch, E., Do we need a law on group of companies, in: <em>Capital Markets and Company Law</em>. Oxford University Press Inc.: New York, 2003, pg. 575–579.</span>  If a subsidiary is within a holding company, it is not only the minority shareholders, creditors and other stakeholders of the subsidiary that may be put at risk but also the stakeholders of all the other companies controlled by the same ultimate parent. In holding companies there is a tendency to manage the whole group, more or less, on an integrated basis. When a parent and its subsidiary are engaged in the same line of business, their interests inevitably collide and, thus, the interest of creditors or employees with stock options may also be at stake. As will be shown in other parts of the article below, U.S., English and Czech company law is, to a certain extent, aware of these diff erent group structures and confl icts, and sometimes defi nes the scope of the duty of loyalty with reference to them.</p> <h1>3. Duty of Loyalty of Directors of a Subsidiary towards the Parent Company</h1> <p style="text-align: justify;">Most of the legal systems today, including Czech, U.S. and English law, share a similar approach to subsidiaries, namely that the status of a subsidiary does not change the essence of the company as a separate legal entity, with its own rights, liabilities and assets. A group of undertakings does not possess a legal personality.<span class="editor-footnote">For English law, see <em>Salomon v A Salomon &amp; Co Ltd</em> [1897] AC 22, and following case law, such as <em>The Albazero</em> [1977] AC 774 at 807 per Roskill LJ, both cited in Davies, P.L. <em>Gower’s Principles of Modern Company Law.</em> 6th ed. Sweet &amp; Maxwell: London, 1997, pg. 165–166; for Czech law,see for example sections 66a and 106(2) of the Czech Commercial Code.</span> This principle is nicely illustrated by the words of Templeman L.J. in the English case of <em>Re Southard</em>: “<em>A parent company may spawn a number of subsidiary companies, all controlled directly or indirectly by the shareholders of the parent company. If one of the subsidiary companies, to change the metaphor, turns out to be the runt of the litter and declines into insolvency to the dismay of its creditors, the parent company and the subsidiary companies may prosper to the joy of the shareholders without any liability for the debts of the insolvent subsidiary.</em>”<span class="editor-footnote"><em>Re Southard &amp; Co Ltd.</em> [1979] 3 All E R. 556 at 565.</span></p> <p style="text-align: justify;">However, the parent companies often tend to force their subsidiaries to act in the interest of the parent or the whole group and contrary to the interest of the subsidiary or other interested third parties. The legal question remains of whether a director of the subsidiary should resist any instruction from its parent if such instruction is to the detriment of the subsidiary and in which interest the directors of a subsidiary serve in general.</p> <h2 style="text-align: justify;">3.1 U.S. Law: In the Interest of the Subsidiary with Exceptions<span class="editor-footnote">See the most recent review of the issue in relation to wholly owned subsidiaries in Ball, C.: Corporate Update: Duties of Subsidiary. Directors Run to Subsidiary, Not Parent. <em>New York Law Journal</em>. October 26, 2006, available at; and the thorough analysis in Gouvin, E.J. Resolving the subsidiary Director’s Dilemma. <em>Hastings Law Journal</em> (1996) 287–338.</span></h2> <p style="text-align: justify;">The starting point of U.S. corporate law has traditionally been that a director has to act in the best interest of the company itself and to its shareholders in their totality, but not in the interest of individual shareholders or other parties.<span class="editor-footnote"><em>Dodge v. Ford Motor Co.</em>, 170 N.W. 668 (Mich. 1919), cited in Gouvin, pg. 296.</span> However, the U.S. courts have gradually created certain exceptions to this general principle, such as for the relationship of a 100% subsidiary to its parent or for the situation of a subsidiary close to bankruptcy.</p> <p style="text-align: justify;">As to the first exception, the most important US authority is the <em>Anadarko</em> case in the Delaware Supreme Court.<span class="editor-footnote"><em>Re Anadarko Petroleum Corp. v. Panhandle Eastern Corp</em>., 545 A.2d 1171 (Del. 1988); most recently cited in <em>Re Trenwick America Litigation v. Ernst &amp;Young</em>, L.L.P., 906 A.2d. 168 (Del.Ch. 2006).</span> The court ruled that in the case of a wholly owned subsidiary, the directors of the subsidiary “<em>are obliged only to manage the affairs of the subsidiary in the best interests of the parent and its shareholders</em>.” The court refused the claim that after the parent had announced its intention to spin-off the subsidiary the directors were obliged to act in the interest of the prospective shareholder. The court added that directors of the parent do not owe duties to the wholly owned subsidiary. In this regard, Gouvin proposed that the only way to avoid damaging the interest of third parties of the subsidiary is for the courts to say that although directors of the parent are only required to act in the interest of the parent, the term parent should cover the entire group including the subsidiary.<span class="editor-footnote">Gouvin, pg. 316.</span> Despite this academic opinion, the courts leave it to third parties to secure their position through a contract, or in the case of fraud, the fraudulent conveyance statute may exceptionally step in.<span class="editor-footnote"><em>Re Trenwick</em>, fn. 6.</span></p> <p style="text-align: justify;">As to the second exception, the Court of Chancery of Delaware in the <em>Trenwick</em> case emphasized that “<em>the directors of a wholly-owned subsidiary owe a duty to the subsidiary not to take action benefi ting a parent corporation that they know will render the subsidiary unable to meet its legal obligations</em>.” Thus, Delaware law requires the “<em>directors of an insolvent corporation to consider, as fiduciaries, the interests of</em></p> <p class="editor-page-number" style="text-align: right;">11</p> <p style="text-align: justify;"><em>the corporation’s creditors who, by definition, are owed more than the corporation has the wallet to repay.</em>”<span class="editor-footnote"><em>Re Trenwick</em>, fn. 6, at 205, see also <em>Claybrook v. Morris (In re Scott Acquisition Corp.</em>) 344 B.R. 283 (Bankr. D. Del. 2006).</span> Thus, it seems that the director of a subsidiary is not obliged and even not allowed to follow the instruction of the parent if it is contrary to the interest of creditors. Although some courts have decided to follow a different course, applying the <em>Adanarko</em> case even in the bankruptcy context, this is rather an exception to the rule.<span class="editor-footnote"><em>Collins v. Kohlberg &amp; Co</em> <em>(In re Southwest Supermarkets, L.L.C.)</em> 344 B.R. 283 (Bankr. D. Ariz.2004).</span></p> <p style="text-align: justify;">Interestingly, it has been argued that insolvency does not change the primary object of the director’s duties – the company itself.<span class="editor-footnote">In<em> re Scott Acq. Corp</em>., 2006 WL 1731277 (Bankr. D. Del. June 23, 2006) cited in <em>Re Trenwick</em>,fn. 6., at 195.</span> Since there is no obligation to cease operations and to go into liquidation when a company is unable to pay its bills, the directors may continue conducting operations if they believe their business strategy can “<em>turn things around</em>” and benefi t the corporation and its creditors in the aft ermath. Even if they fail and their strategy results in continued insolvency, it does not give rise to a cause of action, as the directors are protected by the business judgment rule.<span class="editor-footnote"><em>Re Trenwick</em>, fn. 6.</span></p> <h2 style="text-align: justify;">3.2 English Law: No Group Interest</h2> <p style="text-align: justify;">Similarly to the United States, English company law has generally not endorsed the concept of group interest. A director of a solvent subsidiary is generally required to act in the best interest of the subsidiary, i.e. in the interests of subsidiaries’ shareholders in their totality.<span class="editor-footnote">Farrar, J.,H., Hannigan, B.M.,: <em>Farrar’s Company Law</em>. 4th Ed. Butterworth: London, 1998, pg. 381;Davies, fn. 2, pg. 163; <em>Kinsela v Russell Kinsela Pty Ltd</em> [1986] 4 ACLC 215 at 223.</span> As the High Court in the <em>Selangor United</em> case held, the directors of the company are liable if they do not act in the interests of their company but instead promote the success of the controlling shareholder by misapplying the company’s funds.<span class="editor-footnote"><em>Selangor United Rubber Estates Ltd. v Cradock</em> [1968] 1 WLR 1555 at 1577, 1614.</span> This has been recently codified into sections 170 and 172 of the Companies Act 2006, which should enter into force by October 2008: “<em>a director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefi t of its members as a whole</em>.”</p> <p style="text-align: justify;">This applies even vice-versa, as the parent is not obliged to act in the best interest of its subsidiary. In the <em>Nicholas</em> case the Court of Appeal held that when a holding company withholds funds from its subsidiary in order to survive, it does so for the sake of group interest,because without the parent company the subsidiary is doomed to perish. Such conduct could not be regarded as unfair.<span class="editor-footnote"><em>Nicholas v Soundcraft Electronics Ltd</em> [1993] BCLC 360. Cited in Griffin, S. <em>Company Law: Fundamental Principles.</em> 2nd Ed., Financial Times Pitman Publishing: Glasgow, 1996, pg. 19</span> In addition, in a contractual group of companies the law permits a parent company to give binding instructions to its subsidiary even if they are not in the interest of the subsidiary.<span class="editor-footnote">Sch 9 para 4(1) CA 1989.</span></p> <p style="text-align: justify;">Insolvency changes to some extent the priorities of interests, as in such cases - in the U.S. directors are to act in the interests of the creditors, which is regarded as acting in the interest of the insolvent company.<span class="editor-footnote"><em>Kinsela case,</em> fn. 13, at 230, cited in Mayson S., W., French D., Ryan Ch, L.: <em>Company Law</em>. 20th Ed. Oxford University Press, 2003, pg. 522.</span> In addition, it has been suggested that the regulation of wrongful trading under section 214 of the Insolvency Act may also impose a liability on the parent company for the debts of the subsidiary if such parent company constitutes a shadow director of the subsidiary.<span class="editor-footnote">Davies, fn. 2, pg. 152.</span> However, the English courts have not used this opportunity so far and Section 172(3) of the Companies Act 2006 left this question intentionally open: “[<em>the duty of loyalty] has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.</em>”<span class="editor-footnote">See Explanatory Notes to the Companies Act 2006, pg. 51, point 331. Available at: http: // (accessed on 18 January 2007).</span></p> <p style="text-align: justify;">To complete the picture, the statutory provisions as well as case law relating to group companies under English law has been described as being unsatisfactory and incoherent and the need for substantive reform is strongly felt. The Seventh EU Company Directive has just added to the complicatedness and incompleteness, and the draft Ninth EU Company Directive on Groups, based on the German approach to groups, has been criticized.<span class="editor-footnote">Farrar, fn. 15, pg. 536–537.</span></p> <h2 style="text-align: justify;">3.3 Czech law: Following the Unsatisfactory German Pattern</h2> <p style="text-align: justify;">The term “<em>duty of loyalty</em>” is not explicitly used in Czech law. Nevertheless, the principle can be abstracted from the Czech Commercial Code. The Czech Commercial Code partially incorporated the German regulation of group companies in 1996 so that the principles are to large extent similar.<span class="editor-footnote">Importantly, the Czech legislator extends the regulation not only to joint stock companies, but also to the other forms of companies.</span> The question of whom the director of a subsidiary has to serve depends on whether or not there is a controlling agreement concluded between a parent and subsidiary. If there is such an agreement, section 190b(2) of the Czech Commercial Code allows a parent to issue a binding instruction to the directors of the subsidiary even if such instruction is in the interest of the parent or any other company in the group. Therefore, the controlling agreement allows the sacrifice of the interest of a subsidiary for the benefit of the group. The directors of the subsidiary are obliged to follow such instruction even if it is to the detriment of the subsidiary, unless it is against the law. Some academics have indicated that there might be an additional limit on the duty to follow the instruction, to the extent that the subsidiary should remain as a going concern.<span class="editor-footnote">Černá, S. <em>Faktický Koncern, Ovládací Smlouva a Smlouva o Převodu Zisku.</em> Linde: Praha, 2002,pg.112.</span> Moreover, the Czech Commercial Code stipulates that if the subsidiary ends up with a loss at the end of the accounting period and a controlling agreement has been concluded, the parent has to cover the annual loss. This duty can be considered as being an instrument of protection for the controlled entity, its minority shareholders, creditors, and other involved parties.<span class="editor-footnote">Černá, fn. 22, pg. 148.</span></p> <p style="text-align: justify;">In practice, de facto groups, i.e. groups without controlling agreements, are much more frequent, in which case the director of a subsidiary has to act in the interest of the subsidiary. This principle</p> <p class="editor-page-number" style="text-align: right;">12</p> <p style="text-align: justify;">is based on the view that a director is in an analogical position to an agent and the controlling shareholder is not allowed to give a binding instruction to the subsidiary.<span class="editor-footnote">Section 66(2) and 194(4) of Czech Commercial Code.</span> However, there is a statutory exception to this: the parent is allowed, by using its influence, to cause a loss to the subsidiary, when it provides compensation for the resulting loss to the subsidiary by the end of the accounting period, or within a reasonable period agreed to by the parties.<span class="editor-footnote">Section 66a(8) of Czech Commercial Code.</span> If the compensation is not provided within the deadline, the parent is liable to the subsidiary for damages.<span class="editor-footnote">Section 66a(14) of Czech Commercial Code.</span> This being said, although it seems that the director of a subsidiary in such a situation may still be in breach of his or her duty of loyalty towards the subsidiary, he or she will be exculpated from the liability.</p> <p style="text-align: justify;">At first sight, the Czech law approach of endorsing the group interest seems to be closer to the reality of what happens, and is more comfortable for the subsidiary’s directors as well as the creditors - giving them clearer guidance. However, on closer examination, there are serious problems, which have been described by Prof. Immenga under German law. This statutory law of group companies does not work at the procedural level: it is extremely hard to prove a detriment caused to the subsidiary (leaving aside the question of conflicting expert opinions), the existence of a de facto control, as well as the issuance of an instruction by the parent. Furthermore, even though the auditors have to review the detriment, their independence is doubtful when they are appointed by the parent company.<span class="editor-footnote">Immenga, U.: The Law of Groups in the Federal Republic of Germany. In: Wymeersch, Eddy. <em>Group of Companies in the EEC</em>. Berlin: De Gruyter, 1993, pgs. 103 and 108–110.</span> Finally, it seems that clear recognition of the group interest in the situation of a wholly owned subsidiary, based on the <em>Anadarko</em> approach of the US courts, would be useful.</p> <h1 style="text-align: justify;">4. Pitfall of Dual Directorship</h1> <p style="text-align: justify;">There are many examples of the phenomenon of dual directorship in the real world, an example of which can be seen in Carlos Ghosn, a highly regarded manager, who runs both the Renault and Nissan groups. According to some authors, the reason for dual directors is that there is a limited pool of talented directors.<span class="editor-footnote">Klayman, E., Bagby, J., Ellis, N: <em>Irwin’s Business law: concepts, analysis, perspectives</em>. Burr Ridge: Irwin,1994, at pg. 890.</span> Although there are clear benefi ts of dual offi ce as an instrument of control of the subsidiary, it may put the dual director, in legal terms, at the “cross-roads” without knowing in which company interest he or she should act.</p> <h2 style="text-align: justify;">4.1 U.S. Law: The Doctrine of Corporate Opportunity</h2> <p style="text-align: justify;">It is permitted by U.S. corporate law for directors to run two similar businesses, without committing a breach of loyalty. However, the doctrine of corporate opportunity creates certain safeguards: a director cannot use his position or company assets to pursue his own,or a third party’s interest, and must exert all reasonable efforts to ensure the corporation is not deprived of an opportunity. Therefore, a director should fully disclose any potential conflict and avoid attending and voting at any board meeting in such a case.<span class="editor-footnote">Berchtold, J., <em>Dual directorship: The Perils of Serving Two Masters.</em> August 2003.                                                                                                 and cases cited there, such as <em>Guth v. Loft, Inc,</em> 5 A.2d 503 (Del. 1939).</span></p> <h2 style="text-align: justify;">4.2 English Law: Double Duty of Loyalty</h2> <p style="text-align: justify;">Similarly to U.S. law, dual directorship is not prohibited under English law and a person holding a dual offi ce owes duties of loyalty to both companies simultaneously. In <em>Scottish Co-op Wholesale Society v Meyer</em>,<span class="editor-footnote"><em>Scottish Co-op Wholesale Society v Meyer</em> [1959] AC 324, also cited in Mayson S., fn. 17,pg. 532.</span> the board of directors of a subsidiary partially consisted of a parent company’s directors. After certain frictions occurred between the parent and the subsidiary company, the dual directors followed the policy of the parent, which caused damage to the subsidiary. The dual directors were not held personally liable, as their position was a stalemate one, but the fact of breach of their duties gave ground for the oppressed minority shareholders to succeed in a suit.</p> <p style="text-align: justify;">The American corporate opportunity doctrine has pervaded the English jurisdiction and is strictly applied in the UK. Consequently, the guidelines for avoiding a breach of the confl ict of interest rule for dual directors introduced in the United States are equally applied under English law. However, as the <em>Framlington</em> case shows, the application of the corporate opportunity doctrine has its limits,because directors are not in breach of the conflict of interest rule even if they benefit from a corporate opportunity, provided that they do it independently, without detriment to the company’s own interests, so that the company can exploit its corporate opportunity.<span class="editor-footnote"><em>Framlington Group plc v Anderson</em> [1995] BCC 611, cited in Griffin, fn. 21, pg.19.</span></p> <h2 style="text-align: justify;">4.3 Czech Law: Only Solution – A Controlling Agreement</h2> <p style="text-align: justify;">The question of the dual office of a director within the same group as of yet has not been commented on. Although board members are generally prohibited from serving on the board of a second company when it is engaged in a similar business, this prohibition does not apply to groups (“<em>koncern</em>”).<span class="editor-footnote">Sections 136(1)(d) and 196 (1) (d) of the Czech Commercial Code.</span> It seems that the duty of loyalty can still be breached and, without the doctrine of corporate opportunity being endorsed, the only secure position for the dual director is when a controlling agreement is concluded between the subsidiary and the parent.</p> <h1 style="text-align: justify;">5. Conclusion</h1> <p style="text-align: justify;">In dealing with the issue of the duty of loyalty in parent-subsidiary relations, namely to what extent the director of a subsidiary is obliged to act in the interest of the parent, the approach of all three analyzed jurisdictions shares the same starting point, namely that a director of a subsidiary has to act in the best interest of the subsidiary. The duty of loyalty functions as a guarantee of the subsidiary’s independence. Whereas in contractual groups the group interest is clearly recognized in the concerned countries, namely in the U.K. and the Czech Republic, the application of the same doctrine in more frequent de facto groups seems to be problematic. While Czech law to a certain extent permits the group interest by stipulating sets of rules for de facto groups, English law does not recognize such a principle. The U.S. courts have created the group interest doctrine only in the case of wholly-owned subsidiaries, which seems to be a very useful tool, to be used even in the other two jurisdictions. Insolvency cases represent a</p> <p class="editor-page-number" style="text-align: right;">13</p> <p style="text-align: justify;">separate issue in group relationships – where along with an emphasis on the interests of the individual company, in order to pay off its creditors a parent company may assume liability for the debts of its subsidiary (which is an exception to the general rule that a holding company is not liable for the arrears of its subsidiaries). The duty of loyalty needs to be clearly refi ned in the case of dual directorships. Although it can serve as an instrument for controlling a subsidiary,in situations when the group interest is not recognized it may put the dual director into diffi culties. Th e major pitfall seems to be the U.S. doctrine of corporate opportunity that has been adopted even by the English courts. Although Czech law is silent on the doctrine, there is no reason why it should not work in the Czech Republic as well. Finally, while Czech company law chose the German statutory approach to group companies, the American and English largely leave the question of duty of loyalty for case law. Despite this different approach, none of the three jurisdictions seems to treat the issue as satisfactorily as could be desired.</p> <p style="text-align: justify;"><img src="images/mkukharchuk_company%20law.jpg" border="0" width="133" height="172" style="border: 0; float: left;" /> <em>Margarita Kukharchuk is a 3rd year student at the Charles University, Faculty of Law.</em></p> <p style="text-align: justify;"><em><br /></em></p> <p style="text-align: justify;"><em><br /></em></p> <p style="text-align: justify;"><em><br /></em></p> <p style="text-align: justify;"><em><br /></em></p> <p style="text-align: justify;"><em><br /></em></p> 04.05.2012, 20:11 Beer, Pubs, Competition, Damages <p class="editor-page-number">6</p> <h2>1. Introduction</h2> <p style="text-align: justify;">On 28 July 2006 the House of Lords gave its judgment in a well-known case <em>Inntrepreneur Pub Company and others v. Crehan</em>, <span class="editor-footnote">[2006] UKHL 38.</span> thus bringing to an end a long saga dating back to 1993. It reversed the Court of Appeal’s judgment from 21 May 2004, <span class="editor-footnote"><em>Bernard Crehan v Inntrepreneur Pub Company CPC</em> [2004] EWCA Civ 637.</span> which had gained fame as being the first judgment in the United Kingdom to award damages for a breach of EC competition law.<span class="editor-footnote">Either EC or UK competition law.</span>  The Court of Appeal’s decision followed the European Court of Justice’s (ECJ) ruling in Courage Ltd.v Crehan, <span class="editor-footnote">Case C-453/99, <em>Courage Ltd v Crehan</em> [2001] ECR I-6297, [2001] 5 CMLR 1058</span>  which set out the necessary conditions for enforcing the right to claim damages for a breach of EC competition law before national courts. <span class="editor-footnote">Concretely Articles 81 and 82 EC Treaty.</span>  The House of Lord’s ruling instead confirmed the High Court’s judgment, <span class="editor-footnote"><em>Crehan v. Inntrepreneur Pub Co</em> [2003] 27 EG 138.</span>  which had found no infringement of EC competition law to have taken place and therefore denied Mr. Crehan compensation for damage caused by a beer tie.</p> <h2>2. The Facts</h2> <p style="text-align: justify;">In 1991 the claimant Mr. Crehan, as innkeeper, concluded two pub leases with the defendant Inntrepreneur Pub Company, as landlord, (“Inntrepreneur”), which included a beer tie <span class="editor-footnote">I.e. exclusive purchase obligation.</span> requiring him to buy a minimum quantity of beer from Courage Ltd. (“Courage”) at its list prices. Th is turned to be disastrous for Mr. Crehan’s business,which was not able to compete with other public houses not tied to a brewery’s beer. Th e reason lay in the high prices he was obliged to pay in comparison with the prices charged to independent tenants. Th is ultimately led to situation when Mr. Crehan was not able to pay the rent and had to cease his business in September 1993. In the same year Courage sued Mr. Crehan for outstanding debts for beer delivery and Mr. Crehan counterclaimed with a claim for damages.Mr. Crehan alleged that his losses were caused by the tie agreement which was unlawful pursuant to the Article 81 of the EC Treaty. <span class="editor-footnote">This Article in its first paragraph states that (among other matters) agreements between undertakings, which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market shall be prohibited. Such agreements, are pursuant to second paragraph, automatically void. However, the third paragraph provides for an exception to the general prohibition in the first paragraph, e.g.on the basis of a contribution to the improvement of the production or distribution of goods or promotion of technical progress, provided the further criteria in the Article are met.</span></p> <h2>3. Before the European Commission</h2> <p style="text-align: justify;">Before Mr Crehan raised his claim, the terms of Inntrepreneur’s lease had been challenged by other tenants of Inntrepreneur’s. As a result,Inntrepreneur notifi ed the agreements to the European Commission (the „Commission“) as required under Regulation 17/<span class="editor-footnote">62Currently replaced by Regulation 1/2003.</span> in July 1992 and applied for negative clearance or a decision that the agreements fell within the beer supply block exemption, or an individual exemption under Article 81(3) of the EC Treaty. Afterwards there followed negotiations between Inntrepreneur and the Commission, which continued when Mr. Crehan launched his proceedings. Mr.Crehan and a large number of similar claimants agreed to their actions being informally stayed until the Commission’s decision.In July 1993 the Commission issued a notice expressing its intention to grant an exemption pursuant to Article 81(3) EC. This step met strong opposition from Inntrepreneur tenants, among others Mr. Crehan, forcing the Commission to review its position again.</p> <p style="text-align: justify;">During further negotiations Inntrepreneur introduced a new system of beer ties, of which it gave notifi cation by 1997. According to the Commission’s ‘comfort letter’ these new agreements infringed Article 81(1) of the EC Treaty, but could be exempted from the prohibition on the basis of Article 81(3) of the EC Treaty. This, however, did not cover the agreements notifi ed before 1997 (including Crehan’s agreement). With regard to these, the Commission suggested Inntrepreneur should withdraw its 1992 applications, which it did in October 1997. The Commission then issued a letter to the complainants, including Mr. Crehan, informing them about the proposed rejection of the applications. The Commission explained that aft er Inntrepreneur had withdrawn its application, the remaining question whether or not Article 81(1) of the EC Treaty is applicable,</p> <p class="editor-page-number" style="text-align: right;">7</p> <p style="text-align: justify;">is a question which the national court is in a position to decide. In the process of deciding, it may take into account certain factual and legal elements which the Commission had made public, e.g. general market description in its notices. The Commission also expressed the view that in the event of the national judge fi nding Article 81(1) of the EC Treaty to be applicable, he is in a position to determine the civil law eff ects resulting from Article 81(2) of the EC Treaty and also award compensation for loss suff ered as a consequence of the breach of Article 81.<span class="editor-footnote">See note 1 above, para 32.</span></p> <p style="text-align: justify;">On the other hand, the Commission issued several decisionsin relation to similar cases of pub leases notifi ed by other owners of tied houses, such as Whitbread or Bass. In those decisions the Commission concluded that Article 81(1) of the EC Treaty had been breached, however, it granted them an individual exemption. Crucial for the Commission’s conclusion that there had been an infringement of Article 81(1) of the EC Treaty was the fact that the Commission had found in these cases that the relevant beer market in the United Kingdom was foreclosed by such beer tie agreements (similar to that one of Mr. Crehan).<span class="editor-footnote">Ibid., para 34.</span> This fact had been used as one of the main grounds of defence by Crehan’s counsels.</p> <h2 style="text-align: justify;">4. Before the Courts</h2> <h3><br />4.1 The European Court of Justice</h3> <p style="text-align: justify;"><br />In 1998 Crehan’s proceedings continued before the British courts.The problem in contention was the existence of the English rule “<em>in pari delicto</em>,” which prevents a party to an illegal agreement from claiming damages against the other party. As a result, reference was<br />made to the ECJ with a question whether or not a party to a contract which infringes Article 81(1) of the EC Treaty, may rely on the breach of that provision before a national court to obtain relief from the other contracting party. The ECJ stated <span class="editor-footnote">See note 4 above. </span>that even a party to an illegal contract may rely on breach of Article 81(1) of the EC Treaty,highlighting that there should not be an absolute bar to being able to claim damages in such a case. However, this, according to ECJ, does not include the situation where a party to an agreement bears a ‘significant responsibility’ <span class="editor-footnote">The situation where the party to an agreement bears a significant responsibility for breach should be determined by national courts using criteria indicated by the Court, such as the economic and legal context, respective bargaining power and conduct of the two parties to the contract. </span>for the infringement.</p> <h3 style="text-align: justify;">4.2 The High Court</h3> <p style="text-align: justify;">In the decision of the High Court Park J found that, in spite of the guidance of the Commission, Inntrepreneur’s lease did not infringe Article 81(1) of the EC Treaty and therefore Mr. Crehan was not entitled to claim damages. He expressed it thus: “<em>I am not prepared to fi nd that the United Kingdom market was foreclosed to that extent simply because the Commission thought that it was and said so in its decision in Whitbread. I have made up my own mind on the basis of the extensive evidence which has been placed before me</em>…” Nevertheless, the judge went on to consider the issue of damages should the Court of Appeal overturn his conclusion.</p> <h3 style="text-align: justify;">4.3 The Court of Appeal</h3> <p style="text-align: justify;">The Court of Appeal found that the judge had not complied with Article 10 of the EC Treaty providing for the duty of sincere cooperation.<span class="editor-footnote"> Or the so-called “loyal cooperation” which requires Member States to take such measures so as to comply with their obligations under the EC Treaty or resulting from the action of EC institutions.It also requires Member States to facilitate the achievement of the EC tasks and to avoid measures which could jeopardise the attainment of the objectives of the EC Treaty. </span>It said that “<em>on the facts of the case, sincere co-operation required the judge not to entertain a submission that the view of the Commission in Whitbread had been wrong.</em>”  <span class="editor-footnote">See note 6 above, para 40. </span> The Court of Appeal argued that “<em>it is apparent from what the Commission said in its letter of 24 November 1997 [to the complainants], that it expected</em></p> <p style="text-align: justify;"><img src="images/beer pab_picture.jpg" border="0" alt="" width="372" height="407" /></p> <p style="text-align: justify;"><em>the English court to take into account its earlier conclusions not only in respect of Inntrepreneur but also in cases such as Whitbread, even though not fi nal decisions</em>.”<span class="editor-footnote"> [2004] Eu LR 693.</span> According to the Court of Appeal, the Commission’s view was that Article 81(1) of the EC Treaty applied to the Inntrepreneur leases throughout the period relevant to Mr. Crehan’s case. Th e Court stressed that it was not for the judge to second-guess the Commission, instead the Commission’s approach in respect of the applicability of Article 81(1) of the EC Treaty could be reviewed solely by the ECJ.<span class="editor-footnote">Or the Court of First Instance (CFI).</span> Therefore, the Court of Appeal found that the judge failed to comply with the duty of sincere cooperation and thereby erred in law. Th e Court of Appeal thus inferred that, in compliance with the Commission’s fi ndings relating to the relevant market, Article 81(1) of the EC Treaty had been breached and awarded damages to Mr. Crehan. When assessing the quantum of damages, the Court of Appeal came to a significantly smaller amount than had been previously calculated by Park J in the High Court. Nevertheless, the judgment of the Court of Appeal was generally welcomed as it represented the first decision by an English court where damages had been awarded for a breach of competition law.</p> <p class="editor-page-number" style="text-align: right;">8</p> <h3 style="text-align: justify;">4.4 The House of Lords</h3> <p style="text-align: justify;">The House of Lords in their judgment dealt with the issue of potential confl ict between a decision of the Commission and a decision of a national court as has been discussed by the ECJ in its two seminal rulings. In <em>Delimitis</em>Case <span class="editor-footnote">C-234/89, <em>Delimitis v Henninger Bräu AG</em> [1991] ECR I-935.</span> the ECJ envisaged that if the Commission decided that an agreement infringed Article 81(1) of the EC Treaty,a national court would be obliged to follow that decision and, if such a decision was pending, should stay its own proceedings until the Commission had made its decision.<span class="editor-footnote">See note 6 above, para 45.</span> In <em>Masterfoods</em><span class="editor-footnote">Case C-344/98, <em>Masterfoods Ltd v HB Ice Cream Ltd</em> [2000] ECR I – 11369. See Advocate General Cosmas speech where he argues that there could be no risk of conflict “<em>where the legal and factual context of the case being examined by the Commission is not completely identical to that before the national courts… A risk of conflict only arises when the binding authority which the decision of the national court has or will have conflicts with the grounds and operative part of the Commission’s decision.</em>”</span> the ECJ found that the Irish courts had to give priority to the decisions of the European institutions on the validity of the agreements, which they were being asked to enforce.<span class="editor-footnote">See note 6 above, para 55.</span></p> <p style="text-align: justify;">It was Lord Hoffman who gave the leading judgment in the House of Lords. He found that in the present case there was no confl ict arising between the decision of the EU Commission that the Whitbread agreements infringed Article 81 of the EC Treaty and the decision of the national court that the Inntrepreneur agreements did not.<span class="editor-footnote">Ibid., para 56</span> He further held that with respect to the interpretation of the current Article 16 of Council Regulation (EC) No 1/<span class="editor-footnote">2003Stating: when ‘national courts rule on agreements, decisions or practices under Article 81 or Article 82 EC which are already the subject of a Commission decision, they cannot take decisions running counter to the decision adopted by the Commission.’</span> reflecting the previous case law, “<em>a relevant confl ict exists only when the “agreements,decisions or practices” ruled on by the national court have been or are about to be the subject of a Commission decision. It does not apply to other agreements, decisions or practices in the same market</em> ”. Therefore,according to Lord Hoff man, the Commission stated the legal position accurately in its letter to Mr. Crehan when referring the case to the national court to decide whether or not Article 81(1) applied. As Lord Hoffman pointed out, the Commission did not think that the English court would be obliged as a matter of Community law to follow its view. Instead, Lord Hoffman considered some of the conclusions of the Court of Appeal as leading to the concept of “<em>being informally bound</em> ” which he found diffi cult to understand.<span class="editor-footnote">See note 6 above, para 66.</span> The Commission itself suggested Inntrepreneur to withdraw its earlier application regarding the old agreements and litigate the matter in England and the Court of Appeal confi rmed the judge’s decision that this did not involve any abuse of process.<span class="editor-footnote">Ibid, para 67.</span> The fact that Inntrepreneur should be deprived of its main defence by another decision of the Commission relating to a diff erent company was considered by Lord Hoff man as being the denial of a fair trial.<span class="editor-footnote">Ibid.</span></p> <p style="text-align: justify;">Moreover, the letter of the Commission to Mr. Crehan declaring no Community interest in the matter proves, according to Lord Hoffman, that the Commission did not find the need to have uniformity of decision on this point. Should it have been otherwise, the Commission could have given a decision regarding the applications in question, subject to an application for annulment, which would have bound inntrepreneur.<span class="editor-footnote">Ibid, para 68.</span> Instead, the Commission left the decision to the national court, which, in the opinion of Lord Hoff man, necessarily implies that the judge could decide it and while doing so, he respected the policy of the Commission rather than fl outed it.<span class="editor-footnote">Ibid.</span></p> <p style="text-align: justify;">Lord Hoffman further reasoned that: “[<em>W]hen there is no question of a confl ict of decisions in the sense which I have discussed, the decision of the Commission is simply evidence properly admissible before the English court which, given the expertise of the Commission,</em><br /><em>may well be regarded by that court as highly persuasive. As a matter of law, however, it is only part of the evidence which the court will take into account. If, upon an assessment of all the evidence, the judge comes to the conclusion that the view of the Commission was wrong, I do not see how, consistently with his judicial oath, he can say that as a matter of deference he proposes nevertheless to follow the Commission. Only a rule of law, in the nature of an issue estoppel which obliges him to do so, could produce such a result and the Court of Appeal accepted that there was no such rule</em>.”<span class="editor-footnote">Ibid., para 69.</span></p> <p style="text-align: justify;">Lord Hoffman concluded that the judge of the High Court was right in deciding for himself whether the conditions for breach of Article 81(1) of the EC Treaty were satisfi ed and the Court of Appeal was wrong to reverse his decision on the grounds that he should have followed the Commission.<span class="editor-footnote">Ibid., para 71.</span> According to Lord Bingham of Cornhill, another judge in House of Lords: “<em>Community law prohibits the making by national courts of decisions, which contradict decisions of Community institutions on the same subject matter between the same parties, and strongly discourages the making by national courts of decisions which may be inconsistent with decisions which may yet be made by Community institutions on the same subject matter between the same parties. But it does not… go the length of requiring national courts to accept the factual basis of a decision reached by a Community institution when considering an issue arising between diff erent parties in respect of a different subject matter…”</em><span class="editor-footnote">Ibid., para 11.</span><em> “The judge had either to accept the Commission’s assessment, which (unless required) would have been an abdication of the judicial function, or form his own opinion, giving such weight to the Commission’s assessment as in his judgment the evidence merited. He chose the latter course, and save on one limited point (on which it regarded its view as tenable) the Court of Appeal did not criticise his findings. Its diff erence was one of approach</em>…”<span class="editor-footnote">Ibid., para 12.</span></p> <p style="text-align: justify;">The House of Lords therefore allowed the appeal of Inntrepreneur against the decision of the Court of Appeal and confi rmed that the High Court’s ruling that there had been no infringement of Article 81 must stand. Th e House of Lords declined to hear argument on the facts, as the appeal was limited and the Court of Appeal had not suggested that if the judge had been free to decide the case for himself, his conclusions could not have been supported.<span class="editor-footnote">Ibid., para 72.</span> </p> <p class="editor-page-number" style="text-align: right;">9</p> <h2 style="text-align: justify;">5. Criticism</h2> <p style="text-align: justify;">The House of Lords’ decision unfortunately has not contributed to the desired clarifi cation of conditions required to claim damages for a breach of EC competition law in the United Kingdom. The issue has been resolved merely on a procedural basis, in respect of the relationship between the European Commission and the English courts. The House of Lords highlighted the independence of the English courts and their freedom to decide the matter before them according to the evidence produced, regardless of the fact that the EU Commission might have reached different conclusions in similar cases on the relevant market. Th e House of Lords thus refused to accept the ‘unlimited’ binding authority of any of the Commission’s fi ndings. Yet decisions or notices of the EU Commission can be used by applicants as helpful proof of their statements regarding breach of EC competition law. As it has been pointed out by Levitt, this is a result of the judgment of the House of Lords that “<em>at last so far as England and Wales are concerned, Article 16(1) of Regulation 1/2003 </em><span class="editor-footnote">See note 21 above.</span><em> is to be interpreted strictly. The mere fact that a prior Commission decision may have related to the same factual matrix, including conditions of competition in the relevant market, as that under consideration in the subsequent national case does not bind the national court to accept the Commission’s findings.”</em><span class="editor-footnote"><em>M. Levitt, Inntrepreneur v Crehan</em> (2006) 10 Competition Law Insight 5.</span><em> Instead, as Rayner remarks, “domestic courts need only give priority to the decisions of European institutions where the parties before the UK court were addressees of (or specifically named in) the relevant European Commission decision.</em>”<span class="editor-footnote">J. Rayner, <em>News – Company + Commercial: UK cases do not necessarily fall under EU competition law, Law Lords rule</em> (2006) 30 Law Society Gazette 103.</span> The position of the House of Lords, however, does not have to represent the opinion of national courts in the other Member States.</p> <h2 style="text-align: justify;">6. Conclusion</h2> <p style="text-align: justify;">With respect to potential claimants for damages for a breach of EC competition law, the judgment of the House of Lords may well serve as a further disincentive to pursuing such actions. As was indicated at the beginning of this article, the judgment of the Court of Appeal in the Crehan case was the first decision of an English court awarding damages for a breach of either EC or UK competition law and it was quashed by the House of Lords. It, thus, shows how problematic it can be for an ordinary claimant to enforce the provisions of EC competition law before domestic courts and obtain damages in this sphere. Such fact runs counter to an initiative launched by the EU Commission in its Green Paper on Damages Actions for Breach of the EC Antitrust Rules.<span class="editor-footnote">COM (2005) 672 final.</span> Th is paper emphasizes the importance of enhancing private enforcement of EC competition law in Europe and proposes the removal of obstacles in Member States to successful damages claims. One of the main obstacles for such claims, discussed in the Green Paper, is the burden of proof and lack of evidence available to claimants for proving the infringement of EC competition law. Th e Crehan case can thus be cited as a further example of why legislative reform at the EU level of current conditions for private actions for damages for breach of EC competition law in Member States would be desirable.</p> <p style="text-align: justify;"><em><img src="images/homolova.jpg" border="0" width="147" height="197" style="border: 0; float: left;" />Mgr. Irena Homolová, LL.M. graduated from the Faculty of Law, Charles University in Prague in 2005. She also holds a Diploma in Legal Studies and Master of Laws degree in European Legal Studies from Cardiff University, Cardiff Law School. Currently she works as a junior lawyer in corporate practice of Cliff ord Chance LLP in Prague.</em></p> <p style="text-align: justify;"><em><br /></em></p> <p style="text-align: justify;"><em><br /></em></p> <p style="text-align: justify;"> </p> 02.05.2012, 17:47 UNITED WE STAND, DIVIDED WE FALL: THE EMPLOYEES' RIGHTS AND PARTICIPATION UNDER THE CROSS-BORDER MERGER DIRECTIVE <p class="editor-page-number">45</p> <h2>1. Introduction</h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The Merger Directive 2005/56/EC (the "Directive")<span class="editor-footnote">OJ No L 310/01 of 25 November 2005. The legal basis for the directive was Art. 44 EC Treaty.</span>on cross-border mergers of limited liability companies (LLCs) was enacted to enable cross-border mergers of LLCs formed in accordance with the law of a Member State. The Directive applies to LLCs, which have their registered office, central administration, or principal place of business within the European Union, and are subject to the laws of two different Member States.<span class="editor-footnote">Heuschmid, J. FAQ on the cross-border mergers directive (2005/56/EC), 2006, p. 2. Available at:</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The judgment of the ECJ in the Sevic Systems case<span class="editor-footnote">Case C-411/03, SEVIC Systems AG [2005] ECR I-10805.</span> from the same year confirmed that the freedom of companies of different Member States to merge across the EU is enshrined in the freedom of establishment deriving from Articles 43 and 48 of the EC Treaty.<span class="editor-footnote">Heuschmid, J., op.cit., note 2, p. 2. and Makowicz, B. Transgraniczne połączenia spółek kapitałowych (dyrektywa Nr 2005/56/WE i wyrok ETS w sprawie SEVIC) - analiza prawa wspólnotowego Monitor Prawniczy No. 16/2006, p. 869-872. </span>However, the actual content of this freedom may differ among the Member States, depending on their respective national labor laws.<span class="editor-footnote">According to some commentators, the issue of employee participation was the most troublesome when passing the Directive since 1972 and especially in 1985. First, the Societas Europaea Directive unblocked the topic for further development. Makowicz, B., ibid., pp. 870 to 875 and Pannier, M. The EU Cross-Border Merger Directive — A New Dimension for Employee Participation and Company Restructuring [2005] 16 European Business Law Review, Number 6, pp. 1424-1442, p.1424.</span> The higher the protection offered by national law, the greater the employee involvement in cross-border mergers (and the lower the degree of freedom given to the merging companies). A contrario, the lower the protection, the lower the employee involvement.<span class="editor-footnote">This has been observed especially by the German trade union workers as the German law offers them the highest protection among the national laws within the EU. For further details see: Borthwick, F. Cross-Border Mergers Directive Adopted, 2006. Available at: </span>This article focuses on how the employees' rights and participation rights are protected by the Directive.</p> <p> </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY">2. Background to the Directive</h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The Directive was enacted to facilitate or enable cross-border mergers of LLCs, formed in accordance with the law of a Member State. Furthermore, the Directive only applies to LLCs which have their registered office, central administration, or principal place of business within the EU, and are subject to the laws of two different Member States.<span class="editor-footnote">Article 1 of the Directive.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The Directive deals with employees' participation rights and contains relatively standardized (albeit not fully harmonized) rules on the applicability of the national law at issue. As it will be indicated below, this is done by way of reference to the wording of the Societas Europaea Directive ("SE Directive").<span class="editor-footnote">Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European company with regard to the involvement of employees (OJ No L 294/22 of 10.11.2001.) </span>Despite the effort for certain standardization, the Member States' internal labor law rules still significantly differ. In 18 Member States, the participation rights are of mandatory character<span class="editor-footnote">Nonetheless, the degree of participation differs. For example, Czech corporate law allows for 1/3 of the members of supervisory boards of state-owned as well as privately owned joint stock companies to be appointed by employees, whereas Polish law allows for 2/5 of the members of the supervisory board and for one member of management board in state owned companies to be appointed by employees. For more detailed evaluation: Pannier M., op.cit., note 5, p.2.</span> (e.g. Poland and the Czech Republic<span class="editor-footnote">Czech corporate law is largely based on the German/Austrian model, the so-called two-tier system which involves both board and a separate supervisory board in the decision-making process. The employees are entitled to appoint representatives to supervisory boards in both state-owned and private joint stock companies. Kluge N. and Stollt, M. Worker participation at board level in the new EU member states: Overview and brief country reports. In: Kluge, N. and Stollt, M. The European Company - Prospects for worker board-level participation in the enlarged EU. Brussels: 2006, p. 34.</span> ). Also the new Member States, Romania and Bulgaria, treat these rights as obligatory in most situations<span class="editor-footnote">Ribarova E. Implementing the acquis communautaire - information and consultation rights in Bulgaria [2005] South East Europe Review, 1/2005, pp. 117-122 and information available at </span>. In seven Member States, they are optional only (e.g. the United Kingdom). </p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">Furthermore, the "conflict of law" rules under the Directive try to provide a solution to the conflicting national laws on the employees' participation, while reconciling divergence between different monistic and the dualistic systems of company's management under national corporate laws within the EU. On the one hand, there is a monistic system of management, also referred to as one-tier management system (such as in Sweden or in the UK), with a single joint management and controlling body. The employees' representatives are provided usually with one or two seats in a board of directors. Sometimes they are also given seats in certain committees (e.g. the audit committee). However, they never have representatives among the executive directors. On the other hand, in two-tier system (dualistic with separate managing and controlling bodies, such as the German system), employees are given seats on supervisory boards (usually one-third of all members and sometimes up to one-half, with a shareholder as a president with a deciding vote) and sometimes on management boards as workers' directors.<span class="editor-footnote">See in Stefanicki, R. Cross-border mergers of limited liability companies in accordance with directive 2005/56 EC [2006] REJENT (Notary) 5(181) May 2006, p.155. </span>In this respect, the Directive operates as EU private international law in the way of determining the law of a Member State which should apply to a merger containing cross-border (i.e. foreign) element and having at the same time an intra-Community character.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">At least from the EU Commission's point of view, the most pressing consideration for the adoption of this Directive appeared to have been the strong demand from the business sector to make it easier for European companies to cooperate and restructure themselves across borders. As a result, it should make the EU more competitive and enable businesses to further profit from the benefits of the Single Market (as aimed by so called Lisbon strategy of the EU from 2000).</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The deadline for implementation of the Directive passed on 15 December 2007. In this regard, for example, in Poland the Directive was implemented by amendment of the Commercial Code from 25 April 2008 which became effective 20 June 2008. Nonetheless, some obstacles to freedom of establishment will be observed in this article, mostly in terms of how easy it is to complete a cross-border merger.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">To illustrate the problem better, the UK had declared that UK law that would not constitute any barriers for the companies to build up as two-tier structures.H<span class="editor-footnote">ans Böckler Foundation / European Trade Union Institute (ed.) Workers' participation at board level in the EU- 15 countries.Reports on the national systems and practices. 2004, pp. 131-133. </span>This may mean that in some cases, provisions of the UK company law may not differ that much from the quite strict Polish company law where, however, board-level representation of employees is legally required only in state-owned companies.<span class="editor-footnote">Kluge N., Stollt M. (eds), op. cit., note 10, p. 42.</span> However, that is only a hypothetical calculation as no investors would want to take on more responsibilities than they have to. Moreover, Polish legislation foresees a two-tier structure for</p> <p class="editor-page-number" style="margin-bottom: 0cm;" align="JUSTIFY">46</p> <p style="margin-bottom: 0cm;" align="JUSTIFY">joint-stock companies, whereas limited liability companies are only required to establish a supervisory body if their registered capital exceeds PLN 500,000 and the number of shareholders is greater than 25. Furthermore, the forms of employee involvement at board level are much stronger in the public sector, as opposed to the private capital, mostly due to the privatization and capitalization processes.<span class="editor-footnote">More information at:</span></p> <p> </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY">3. Participation of Employees <span class="editor-footnote">As defined in Art. 2 (k) of the SE Directive.</span></h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">Participation of employees means the influence of employee representatives on the affairs of a company by way of electing and/or appointing, or at least recommending and/or opposing the appointment of members of the company's supervisory or administrative organ. The issue is regulated by Art. 16 of the Directive, which repeatedly refers to the rules under the SE Directive and Regulation 2157/2001/EC.<span class="editor-footnote">Council Regulation 2157/2001/EC of 8th October 2001 on the Statute for a European company (OJ L 294 10.11.2001).</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The basic rule is that the company resulting from the cross-border merger shall be subject to the rules concerning employee participation of the country in which it has its registered office. In my view, this provision allows for the most reasonable, future oriented solution as the company resulting from the cross-border merger starts functioning pursuant to the rules of its own legal environment. However, there are three important exceptions to this basic rule, which make the process quite complicated. If any of the exceptions apply, existing employee participation rights of the law of another merging company will be applicable to the employee participation. This would be so where: </p> <blockquote style="margin-bottom: 0cm;">a) at least one of the merging companies has, in the 6 months prior to the publication of the draft terms of the merger, an average number of employees that exceeds 500 and is operating under an employee participation system; or </blockquote> <blockquote style="margin-bottom: 0cm;">b) the national law of the Member State in which the company resulting from the cross-border merger has its registered office does not provide at least the same level of employee participation as operated in one of the merging companies (Art. 16(2)(a)) of the Directive); or</blockquote> <blockquote style="margin-bottom: 0cm;">c) the national law of the Member State in which the company resulting from the cross-border merger has its registered office does not provide the same entitlement to exercise participation rights for employees of establishments in other Member States as is enjoyed by those employees employed in the state in which the merged company has its registered office (Art. 16(2)(b)) of the Directive).</blockquote> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">This "social" approach behind these exceptions generates relatively high employee protection.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">Furthermore, the Directive requires negotiations between the management and the employees' representatives of the merging companies in a so-called Special Negotiating Body on the participation of employees ("SNB"). If parties fail to reach an agreement on employee participation within a given time limit or the negotiations are terminated (Art. 16(4)(b)), the above basic rule will apply (i.e. the employee participation of the merged company will be governed by the substantive laws of the country in which the merged company has its registered office). However, when the above basic rule limits the proportion of employee representatives, that limitation may never result in a proportion lower than one-third of employee representatives in the administrative organ of the company. This makes the whole process of cross-border mergers costly and time-consuming, without giving any other practical effect than the one prescribed by the national law. To avoid it, relevant organs of the merging companies have the right to choose without any prior negotiations to be directly subject to the standard rules laid down by the national law of the merged company's registered office (Art. 16(4)(a)).<span class="editor-footnote">This provision goes back to a UK proposal and is meant to accelerate the whole procedure. Moreover, there is the possibility for Member States in the case of a merger in which the standard rules are applied to limit the number of employee representatives on the board, if the country where the registered office is located provides the option of a one-tier board system in its company law and the company resulting from the merger applies this option (Art. 16(4)(c)). However, if one of the merging companies had more than 1/3 employee participation, the limitation may not result in a proportion of employee representatives lower than 1/3. It must be stressed that this limitation applies only in the case of a merger between a dualistic and a monistic company in a country which provides only a monistic system (i.e. the merger of a German company into a Swedish company). This differs from the provisions of the SE Directive. For further details: Heuschmid, J., op.cit., note 2, p. 6 and Pannier, M., op.cit., note 5, pp. 12-13.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">Lastly, the right of continuation of participation rights in the case of subsequent domestic mergers exists for a period of three years for the merged company, which shall be obliged to take measures to ensure that participation rights are protected if that kind of situation should occur. That, of cour-se, constitutes another burden to be taken by the players because within that period, not much re structuring can be achieved without applying the protective employee participation rules of the Directive. </p> <p> </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY">4. The Special Negotiating Body</h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">If any of the three exceptions applies, the participation of the employees in the merged company and their involvement in the exercise of such rights shall be regulated in accordance with the provision of the SE Directive (Art. 16(3) of the Directive). In this regard, the Special Negotiating Body ("SNB") must be set up for negotiations between employees and the managing organ of the merged company. The SNB represents the employees in order to reach a written agreement on employee participation in the merged company. The SNB is created after the companies' managements have announced their plans to merge. The SNB can request experts of its choice to assist with the work and thereby increase its own costs. In this context, the Directive explicitly mentions the representatives of community-level organizations of trade unions. It is up to the Member States to define how their SNB members are elected or appointed.<span class="editor-footnote">Seats in the SNB are allocated proportionally among the Member States in which the involved companies have employees - for every ten percent (or a fraction thereof) of the total number of employees of the companies involved in the merger, the country has the right to send one member to the Body. Thereby, the countries concerned will each have at least one representative, and moreover, there could be additional seats (but not more than 20% of the total number) to ensure that all involved companies are represented in the SNB.</span> Furthermore, the Member States may provide that representatives of trade unions are allowed to become SNB members, even if they are not employees themselves. It should be pointed out that in the UK, it is most probable that, in accordance with their traditions and practices, trade unions will in fact be taking over these duties, as long as there is a trade union at all.<span class="editor-footnote">Hans Böckler Foundation / European Trade Union Institute (ed.), op. cit., note 13, p. 128.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The last word regarding employee involvement (Art. 9(2)) is given at the general shareholders' meeting of each of the companies and it could, for example, reserve the right to make implementation of the cross-border merger conditional upon its ratification of the agreement on employee participation. It seems that most of the companies would seek that to protect themselves from unpredicted and far-reaching outcomes.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">Of course, the costs of the SNB are covered by the companies involved. Member States have the right to limit funding to the costs of one expert with regard to the SNB's right to call in experts to assist with its work (Art. 16(3)(a) and Art. 3(7)). But is it really sufficient to reduce the costs of the whole process? These will still arise from the lawyer's fees, meetings, transportation (NB cross-border) and the time spent.</p> <p> </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY">5. The Negotiations</h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The SNB and the competent organs of the companies involved conclude an agreement on the participation of employees in the merged company according to Art. 4 SE Directive. When it comes to time limits, negotiations are expected to start just after the companies embark their plans to merge. They may last for up to six months and can be extended to a year after the establishment of the SNB on the condition that both parties agree (Art. 16(3)(c)</p> <p class="editor-page-number" style="margin-bottom: 0cm;" align="JUSTIFY">47</p> <p style="margin-bottom: 0cm;" align="JUSTIFY">and Art. 5 SE Directive). According to Art. 16(4)(b), if no decision has been taken within that time frame, the standard rules have to be applied. It means that one whole year from commencement of the plan can be wasted on unproductive negotiations, making the whole merger no longer economically profitable.<span class="editor-footnote">As it is true that the companies choose to merge in order to develop more rapidly than with the normal investment process in act.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">In any case, they are mandatorily used when at least one-third<span class="editor-footnote">This constitutes a difference between the Merger Directive and the SE Directive as the threshold for the application of the standard rules in the SE Directive (Art. 7(2)(b) applies when at least 25% of the employees of the companies concerned had been covered by co-determination rules before the foundation of the SE. This threshold has been raised in the Directive to one-third (33.33%) in Art. 16(3)(e) by the so called "Spanish clause".</span> of the employees have previously had participation rights (Art. 16(3)(e) and Art. 7(2)(b) SE Directive). When this threshold is not met, the SNB can decide to apply this procedure anyway if a system of participation existed in at least one of the involved companies before the merger according to the same provisions.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">On the other hand, the parties may decide to apply the standard rules on a voluntary basis. Moreover, Member States have the right to "opt out" with regard to the application of the standard rules on participation (Art. 16(3)(e), Art. 7(3) SE Directive and Art. 12(3) SE Regulation). In such a case, unless an agreement on participation has been reached, or none of the companies has previously had participation, the company cannot be registered in that country.<span class="editor-footnote">Heuschmid, J., op.cit., note 2, p. 5 and Pannier, M., op.cit., note 5, p. 17. It is the opt-out procedure also called Nice compromise. </span>This does not allow for much discretion in the companies' choice. </p> <p> </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY">6. The Standard Rules</h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The standard rules regulate the participation process in the three cases mentioned above. The Member States must lay down standard rules which are in line with the standard provisions defined in the Directive. They are the highest proportion rules.<span class="editor-footnote">Pannier, M., op.cit., note 5, p. 17.</span> Employees are entitled to elect or appoint a number of board members that is equal to the highest proportion existing before the merger in one of the involved companies.<span class="editor-footnote">According to the standard rules laid down in Art. 16(3)(h) and Annex Part 3(b) SE Directive.</span> In contrast to the SE Directive, where it is explicitly regulated, the Member States under the Directive are free to determine the allocation of the seats within the administrative or supervisory board. </p> <p> </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY">7. Majorities in the Decision-Making</h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">In principle, the partners have autonomy in creating the content of the agreement. And in general, the SNB adopts its decisions, as the one concerning the agreement, by an absolute majority of its members <span class="editor-footnote">Absolute majority - more than half of all the members, including those absent and those present but not voting, must vote in favor of a proposition in order for the proposition to be passed.</span> (which must also represent the majority of the employees) where each member has one vote (Art. 16 (3)(a) and Art. 3(4) SE Directive). However, if the decision would lead to a reduction of participation rights,<span class="editor-footnote">It means, according to Art. 16(iii)(a) and Art. 3(iv) SE Directive, a proportion of board members which is lower than the highest proportion existing within one of the participating companies.</span> a qualified (two-third) majority is required, making this scenario nearly impossible to occur. Moreover, the votes must come from at least two different countries. This stringent requirement is needed only when participation covers at least 25% of the employees of the involved companies.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">Moreover, for the SNB's decision to rely on the participation rules in force in the Member State in which the registered office of the merged company is situated, a special majority of two-third of its members representing at least two-third of the employees in at least two different Member States is necessary (Art. 16 (4)(b)). Note that in this case, standard rules will not apply. Again, the threshold is hard meet in practice.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY">8. Protection Through Information</h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">In addition to the board-level participation rights for employees, there are some special information rights provided. As a prerequisite to achieve a cross-border merger,<span class="editor-footnote">Miller Canfield (ed). Cross-Border Mergers of Limited Liability Companies. Polish Law Review, Fall 2006, p. 3. Available at </span>management of each of the merging companies must draw up a common draft plan on the cross-border merger revealing their business aims. The minimum content of such plan is specified in the Directive<span class="editor-footnote">See Art. 5 of the Directive. For the purposes of this article, only the likely impact the merger will have on the level of employment is relevant. Others are outlined in: Soyez V. Expertise: EC Company Law. Cross-border mergers directive adopted. Crowell &amp; Moring: 2005, p. 3. Available at:</span> (such content is wider than for internal mergers in the Third Directive<span class="editor-footnote">Third Council Directive 78/855/EEC of 9 October 1978 based on Article 54(3)(g) of the Treaty concerning mergers of public limited liability companies (OJ L 295, 20.10.1978).</span>) and this draft must include information on the likely repercussions of the cross-border merger for employment (Art. 5(d)). For those obligations to be fulfilled, a shareholders meeting of each merging company shall be held, and, one month before the meeting at the latest, the formalities of publication of the common draft terms and the drawing up of management and expert reports must be performed.<span class="editor-footnote">However, holding a general meeting of the acquiring company is not mandatory if specific conditions are met (identical to those set forth in the Third Directive). </span>The common draft terms must be identical in each company and published in each Member State concerned.<span class="editor-footnote">Noble &amp; Scheidecker's Publications, European construction: a bridge for cross-border mergers, p. 4. See also Miller Canfield (ed), op. cit., note 28, p. 3.</span> After the accomplishment of the aforementioned, the approved common draft terms must then be handed over to the competent authority of the Member State, in which the company resulting from the merger is incorporated.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">Moreover, the management of each of the merging companies must prepare a report, intended for the shareholders and employees' representatives,<span class="editor-footnote">Underlined in Miller Canfield (ed), op. cit., note 28, p. 3-4.</span> explaining and justifying the legal and economic aspects of the cross-border merger<span class="editor-footnote">Again, including the implications of the cross-border merger for both the creditors and the employees (Art. 7 (1)).</span> which is actually doubling the common draft terms. This report must be made available to the employees or their representatives no later than one month before the general meeting which approves the merger (Art. 7 (2)). It forces the management to take into account the employment consequences of the merger at a very early stage.<span class="editor-footnote">Heuschmid, J., op.cit., note 2, p. 9.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">In addition,<span class="editor-footnote">The procedure described underneath may seem complicated, however, Art. 15 provides for a simplified procedure in relation to the takeover of an enterprise by its parent company (provided that the parent company holds at least 90% of - but not all - securities or shares entitled to vote in the target company). For more information see: Makowicz, B., op.cit., note 4, p. 873.</span> an independent expert's report (with a similar minimum content) shall be drawn up and made available <span class="editor-footnote">Miller Canfield (ed), op. cit., note 28, p. 4.</span>(pursuant to Article 8 of the Directive, the terms of a cross-border merger are subject to examinationT<span class="editor-footnote">he merging companies may decide whether independent experts should provide separate reports for each company's shareholders, or whether a single comprehensive written report will be sufficient.</span>). It can be the same for all companies concerned and may be waived upon the unanimous decision of the shareholders of all merging companies.<span class="editor-footnote">Noble &amp; Scheidecker, op.cit., note 32, p. 4.</span> Furthermore, the employees' representatives have the right to prepare their opinion which is appended to the report of the management if national law provides such a right (Art. 7(2)).<span class="editor-footnote">This provision is borrowed from the Takeover Directive (Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on takeover bids (OJ L 142 of 30/04/2004). </span>That may lead to as many as four documents being issued on the same topic.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">These procedures are introduced in accordance with the general rule expressed in all of those provisions: "protection through information".<span class="editor-footnote">Makowicz, B., op.cit., note 4, p. 873.</span> Nevertheless, such an amount of information to be revealed to so many people creates the risk of making the whole merger too public and inducing competitors to take advantage of it. What is more, no prejudice shall be</p> <p class="editor-page-number" style="margin-bottom: 0cm;" align="JUSTIFY">48</p> <p style="margin-bottom: 0cm;" align="JUSTIFY">granted for the rights arising under the Directive in relation to the Works Council Directive (94/45/EC).<span class="editor-footnote">Council Directive 94/45/EC of 22 September 1994 on the establishment of a European Works Council or a procedure in Community-scale undertakings and Community-scale groups of undertakings for the purposes of informing and consulting employees (OJ L 254, 30.9.1994, p. 64-72)</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">Finally, as one of the consequences of the cross-border merger, the rights and obligations of the merging companies arising from contracts of employment or employment relationships shall be transferred to the merged company and granted thereof (Art. 14 (4)),<span class="editor-footnote">Noble &amp; Scheidecker, op.cit., note 32, p. 4.</span> as well as rights related to old age and invalidity or survivor's benefits.<span class="editor-footnote">Soyez, V., op. cit., note 29, p. 2.</span> In addition, the Directive on the transfer of an undertaking <span class="editor-footnote">Council Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses (OJ L 82/16 of 22.3.2001).</span> shall apply. Thus, usually nothing will change with respect to individual employment contracts, as long as the employee remains at the same establishment of the company in a particular Member State (see Art. 6 of the Convention on the law applicable to contractual obligations <span class="editor-footnote">Signed in Rome on 19 June 1980 (OJ C 27 of 26.01.1998).</span>). Depending on the individual circumstances, the law applicable to the individual employment contract could change if the employee is transferred to a different Member State.<span class="editor-footnote">Heuschmid, J., op.cit., note 2, p. 10.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">Last, but not least, following the merger, the company resulting from the merger must continue to observe the terms and conditions laid down in any collective agreement on the same terms as those which previously applied until the date of termination or expiration of the collective agreement, or the entry into force or effect of another collective agreement. The period may be limited by Member States, but not to less than one year under some restrictions (Art. 3(3) of Directive 2001/23/EC).</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY">9. Two Examples to Explain the Rules<span class="editor-footnote">Examples are taken from Heuschmid, J., op.cit., note 2, pp. 7-8.</span></h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">Example A: A Czech company (with one-third participation in the supervisory board) merges with a UK company (with no participation) and the registered office of the company will be in the Czech Republic. The Czech company employed more than one-third of the employees of the involved companies prior to the merger.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY">In that case the SE procedure must be initiated (Art. 16(2)(b)). A possible exception is when the relevant organs of the merging companies decide to adopt the standard rules without any prior negotiations. If the parties cannot reach an agreement, the standard rules will apply automatically and the company will have one-third participation in its supervisory board.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">Example B: A Polish company with more than 2000 employees (with a 50% participation in the supervisory board) merges with a UK company (with no participation). The Polish company employed 25% of the employees before the merger and the registered office of the company will be in Poland.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The outcome is also that the SE procedure must be initiated according to the same rules. The same exception is possible. However, if the parties cannot reach an agreement, the SE standard rules will not apply automatically because the one-third threshold has not been reached. If there is no SNB decision to apply the standard rules, there are good reasons to apply the Polish company law (Art. 16 (1)). </p> <p> </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY">10. Conclusion</h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">EU law tries to promote mobility of companies within the EU.<span class="editor-footnote">Noble &amp; Scheidecker, op.cit., note 32, p. 4.</span> The European Parliament and the Council adopted the Directive with the aim of facilitating the reduction of obstacles caused by differences in national laws, while maintaining employee participation rights.<span class="editor-footnote">From the General Report on the Activities of the European Union 2005 (published annually by the Commission as required by Article 212 of the EC Treaty). </span>Nevertheless, although the Directive had to be transposed into national law by 15 December 2007 (Art. 19(1)), the actual effect of its provisions has not yet been seen in actual cases.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">To summarize, one of the controversial issues during the adoption process was the provision on employee participation. Because the systems in force in Member States differ (e.g. some countries have one-tier and some have two-tier systems) and especially in case of mergers reducing employee participation, the Directive provides that rules of the national law applicable to the merger-created company shall prevail. In short, the whole process is based on the three-stage procedure on the settlement of the participation issue: from the operation of national rules, through the agreement reached by the SNB, to the standard rules. Taking into account the limited legal protection in the UK (i.e. concerning only the right of workers to information and consultation, mainly limited to questioning<span class="editor-footnote">Kluge N., Stollt M. (eds), op. cit., note 10, p. 31.</span> ), the rationale behind this approach is to grant the employees the same (or better) standard of participation that derives from the respective national law, so that they do not suffer in any way from the merger <span class="editor-footnote">Makowicz, B., op.cit., note 4, p. 876.</span> and so that companies cannot escape the employee participation rules.<span class="editor-footnote">Pannier, M., op.cit., note 5, pp. 1 and 12.</span> It is a fundamental principle, the so-called 'before and after principle' for the protection and preservation. This principle allows for the cross-border mergers which would otherwise be restricted by the national laws (as used to be the case e.g. in Sweden and in Finland) fear of allowing the other countries' rules to govern such delicate and socially important matters. Harmonization through the Directive maintains the balance of the rights of participation, although the liberal laws of the UK have made many reservations stating that "it is not in the culture of UK enterprise" to have employee representatives on the management board.<span class="editor-footnote">Hans Böckler Foundation / European Trade Union Institute (ed.), op. cit., note 13, p. 131.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The Directive should, in particular, meet the needs of small and medium size entities wishing to operate in several Member States/several systems, but not in the whole of Europe and therefore not intending to acquire the status of a European Company.<span class="editor-footnote">Noble &amp; Scheidecker, op.cit., note 32, p. 5. This view is shared by Soyez, V., op. cit, note 29, p. 1.</span> Meeting the rules concerning participation rights would constitute a severe obstacle for cross-border mergers of big enterprises. Some argue that the Directive provides a fairly advantageous method to restructure one or more SMEs wishing to accumulate their potential strength in order to compete on the Internal Market. <span class="editor-footnote">Miller Canfield (ed), op. cit., note 28, p. 5.</span>However, the respective provisions of the Directive are not going too far in resolving the real problems of differences in law, but are truly complicating the decisionmaking process of the whole cross-border merger. </p> <p> </p> <p><img src="images/zuzanna karas.bmp" border="0" alt="" /></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><em>Zuzanna Karas graduated in Law at the University of Wroclaw, Poland and is a student of Banking and Finance at the Wroclaw School of Economics. She was awarded a Diploma in English and European Law by University of Cambridge, was an exchange student at the University of Lapland, Finland in 2005/6 (where she continues with a PhD degree in Law and Economics), at Warsaw University in 2007, both in Law, and was at the San Diego State University with Economics and International Business majors. She worked for Ernst&amp;Young Poland, the European Investment Bank in Luxembourg and at Linklaters, Warsaw (Banking Department). Currently she is a trainee at European Central Bank.</em></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><em><br /></em></p> 29.04.2012, 13:42 AMPUTARE PROLIXITAS LITIUM. THE NEW ITALIAN RULES FOR PROCEDURE IN CORPORATE MATTERS <p> </p> <h2><br />1. Introduction</h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The purpose of this paper is to discuss the Italian procedural rules on corporate matters set forth by Legislative Decree No. 5 of 17 January 2003, as subsequently amended and partially repealed, (the "Decree").<span class="editor-footnote">In Italian, Decreto Legislativo 17 gennaio 2003 n. 5. Available at: </span>After a brief overview of the civil proceedings situation in the Italian courts, this paper discusses certain changes that the Decree introduced to the Italian Civil Procedure, focusing on the pre-trial phase, and presents some critical evaluations and comparative remarks.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY">2. Background: Civil Proceedings in Italy</h2> <h2 style="margin-bottom: 0cm;" align="JUSTIFY"> </h2> <p style="margin-bottom: 0cm;" align="JUSTIFY">Under Italian law, the Code of Civil Procedure generally governs proceedings in civil law matters. The Code of Civil Procedure, a code promulgated in 1940 and amended several times until 2007,<span class="editor-footnote">It may be interesting to note that the Italian legal system has no commercial code. Under Italian law, substantive corporate and business legal matters are generally governed by the civil code (which is different from other continental legal systems such as Germany or the Czech Republic). </span>is a compilation of rules designed to regulate all procedural stages of the majority of civil cases. The most notable exceptions are labor law and bankruptcy related issues, which are controlled by separate rules.<span class="editor-footnote">In practice, one code of civil procedure does not mean that a single set of procedural rules always apply. Special procedure rules are applicable to a vast range of matters such as tax cases, water regulations, intellectual property, divorce and juvenile matters. Each of such groups of rules are seen by Italian legal scholars and professionals as distinct "proceedings" (in Italian, procedimenti) or "rites" (in Italian, riti), even if in some cases the differences may be minor.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY">It is worth mentioning that in the years past the Italian justice system has gained a poor reputation as a result of the lengthy duration of its trials. According to the Prosecutor General of the Republic at the Supreme Court of Cassation in the 2005 report on the Administration of Italian Justice, the average duration of a trial before a general court (in Italian, tribunale) amounted to 888 days.F<span class="editor-footnote">avara, Francesco. Relazione Sull'Amministrazione della Giustizia Nell'Anno 2004. Corte Suprema di Cassazione: 11 January 2005. Available at: </span>Excessive length of trials is particularly problematic in corporate disputes, where "economic interests cannot wait".<span class="editor-footnote">Reynolds, A. C. Dimensions of Justice in Italy: a Practical Review [2003] Global Jurist Advances Vol. 3, Issue 2, Article 1, p. 13. Available at:</span></p> <p style="text-align: justify;">In 2005, the Council of Europe adopted a resolution urging the Italian authorities to take effective steps to fulfill their obligation "to secure the right to a fair trial within a reasonable time to all persons under Italy's jurisdiction".<span class="editor-footnote">Committee of Ministers of the Council of Europe. Interim Resolution ResDH(2005)114E concerning the judgments of the European Court of Human Rights and decisions by the Committee of Ministers in 2183 cases against Italy relating to the excessive length of judicial proceedings (948th meeting of the Ministers' Deputies). 30 November 2005.</span></p> <p style="text-align: justify;">Not surprisingly, legal professionals and scholars unanimously support reform to the civil procedure aimed at abating the duration of the process. Nevertheless, there exists no broad consensus on how this reformation should be carried out.</p> <p style="text-align: justify;">While the promulgation of the Decree may be seen as the Italian lawmakers' reaction to this dismal situation, the Decree was also part of a larger project aiming at the reformation of Italian corporate law. The Government played a prominent role in this reformation, since the project was carried out in legislative decree form. Under Italian law, a legislative decree stands as a very peculiar form of statute. Normally the Parliament discusses and passes statutes, however, in some circumstances the Government is empowered to draft statutory instruments which the Parliament has not discussed. For instance, this may occur when an emergency situation requires fast promulgation of new laws. The Parliament may also approve the principle criteria of new legislation and simultaneously grant the Government the authority to draft a decree implementing such criteria. The decree is then formally promulgated by the President of the Republic. In this case, the Government acts as lawmaker under a statutory delegation of the Parliament and the enacted instrument bears the name of legislative decree.</p> <p style="text-align: justify;">Through Act No. 366 of 3 October 2001, the Parliament delegated powers enabling the Government to draft new legislation setting forth the following: (a) new substantive rules for certain types of companies (in particular joint-stock companies and cooperatives), and (b) a reformation of civil procedure in corporate matters aimed to accelerate the trial. The Act contained broad guidelines the Government's drafters must follow.</p> <p style="text-align: justify;">Regarding the objective under (a), new substantive legislation was promulgated through Legislative Decree No. 6 of 17 January 2003, which brought about significant changes in Italian company law.</p> <p style="text-align: justify;">Regarding the objective under (b), the Government could have accelerated the trials by adding special statutory rules for corporate proceedings in Code of Civil Procedure. However, the Government opted to introduce a short Decree. In Italian legal parlance, this is referred to as an extra codicem amendment because it is a statute which does not formally amend any provision of the Code and yet is seen as an amendment of the procedural law itself. Whereas a Code of Civil Procedure is designed to apply to all civil law cases, an extra codicem amendment creates a set of new rules and declares that they apply to a particular matter, such as disputes over residential leases. The provisions of the Code remain unchanged and no reference to the Decree is made within the Code, which remains applicable in all situations where extra codicem amendments are silent.</p> <p style="text-align: justify;">A similar approach has already been used for many modifications of Italian procedural and substantive law. Some scholars interpret this circumvention of the code provisions, when creating new legislation, as diminishing the importance of the codes.<span class="editor-footnote">Alpa, Guido and Zeno-Zencovich, Vincenzo. Italian Private Law. New York: Routledge-Cavendish, 2007, p. 4.</span></p> <p>  </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY">3. Disputes Covered by the Decree and New Design of the Introductory Stage</h2> <h2 style="margin-bottom: 0cm;" align="JUSTIFY"> </h2> <p style="margin-bottom: 0cm;" align="JUSTIFY">The Decree's rules apply to a wide range of disputes related to corporate and business law. These disputes primarily include general corporate matters such as the termination of a shareholder's position in a company; liability of directors, members of a supervisory board, liquidators of a company or cooperative; and contractual and extra-contractual liability of auditors. Furthermore, the Decree applies to disputes related to the assignment or transfer of shares, shareholders' agreements and cooperation agreements involving controlled companies, as well as to claims related to the intermediation of securities. Currently, the Italian Parliament is discussing the extension of the Decree rules to certain unfair competition and intellectual property disputes.<span class="editor-footnote">Draft Act No 1609, approved by the Italian Senate on 16 January 2008.</span></p> <p> The most important change the Decree introduced pertains to the introductory stage, a term used to designate a sequence of pre-trial activities.</p> <p style="text-align: justify;">In order to grasp the novelty of the rules established under the Decree, one must bear in mind the usual progress of a case under the rules of the Code of Civil Procedure, focusing in particular on the introductory stage. Ideally, the purpose of this stage is to define the subject-matter of the dispute. In practice, it usually consists of a sequence of hearings where parties develop their defenses, counter-claims, requesting joinders and deadlines for the amendment of their claims. This is all done under the supervision of the judge. The introductory stage continues until the subject-matter of the proceedings is defined. The merits of the parties' positions are not discussed. In this stage, the role of the court is mostly minor or passive; the entire stage might be compared to a card game where players are not required to play all of their cards at once. An example can be made with regard to the first hearing (in Italian, udienza di prima comparizione).<span class="editor-footnote">Since March 2006, udienza di prima comparizione e trattazione, as per Law Decree No 35/2005, which has introduced a major reform of the Code of Civil Procedure.</span> In this hearing, until March 2006 the judge was essentially required to verify if the proceeding had been duly introduced and to seek an amicable settlement of the dispute, if it is requested by both parties.</p> <p style="text-align: justify;">Nonetheless, neither party is required to appear at such hearing. Under Clause 181 of the Code of Civil Procedure, if both parties fail to appear at the introductory hearing, the judge may only direct for an adjournment. An adjournment may mean that the trial is postponed by three to nine months. Furthermore, the judge is authorized to schedule the activities of the parties. For instance, under Clause 183 of the Code of Civil Procedure, the judge may grant the parties a thirty-day term so that they may amend or qualify their claims and thirty additional days for further responses. This results in a sixty-day prolongation of the introductory stage. Ultimately, this design may negatively impact the expeditious settlement of the subject-matter.</p> <p style="text-align: justify;">For the corporate matters, Italian lawmakers have purported to minimize the involvement of the court during the introductory stage, leaving the choice to abbreviate or to prolong it to the parties' autonomy. In doing so, parties may take into account the complexity of the dispute and procedural strategies.</p> <p style="text-align: justify;">Under the Decree, the plaintiff and the defendant are required to specify their claims and defenses through direct exchange of pleadings. The first hearing familiar from the Code of Civil Procedure has been abolished. Practically, this means that parties carry out the entire introductory stage outside the court with little or no involvement of the judge appointed to the case. Direct trading of answers between the parties replaces the sequence of hearings; when answering, each party may impose a deadline to respond upon the counterparty. However, such a deadline may not be less than the number of days provided by law, which is a minimum of thirty days. If the defendant fails to specify such a deadline or if the deadline is not sufficiently clear, the term is deemed to be thirty days. The plaintiff may then serve a response to the defendant and simultaneously set a new deadline for further response from the defendant. At this stage, the defendant may elect either to motion the court to designate a date for a hearing or to serve a further response upon the plaintiff. The parties may proceed in this manner for an additional eighty days. If either party chooses to motion for a hearing, it will move the case before the court (so-called apud iudicem stage).</p> <p style="text-align: justify;"> </p> <h2 style="text-align: justify;">4. Proceedings in Absentia</h2> <p style="text-align: justify;"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The second prominent change the Decree brought about were new rules for certain in absentia proceedings (called "default judgments" under US law). However, as discussed in the next paragraph, the Italian Constitutional Court has recently quashed these new rules.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY">It is important to note that the defendant's absence does not change the progress of the case under the Italian civil procedure. Normally, a plaintiff does not benefit from defendant's absence. A case is normally conducted through all its stages (i.e. introductory, evidence-taking and decision-making) until the court issues the judgment. The absence of the defendant may be judicially declared; in this case, while the plaintiff is not released from the burden of proof, the court may consider the evidence brought in the context of the defendant's failure to appear. In practice, this may drive the court to give judgment to the plaintiff without requiring additional evidence of the claim.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY">Italian scholars usually make two arguments in order to defend this arrangement. First, the arrangement ensures fairness since a plaintiff still has to furnish sufficient evidence of his or her claim. Second, it allows the case to be discussed even without the defendant, which prevents his or her intentional absence from inhibiting the proceeding. This approach reflects the view that a fair process requires both parties to be present and that normally no process should be introduced if one party is missing.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The Decree sharply departs from this arrangement. Pursuant to Clause 13.2 of the Decree, plaintiff's claims are deemed not to be "challenged" if the proceedings take place in absentia of the defendant or if the defendant has not responded in a timely manner to the plaintiff's claim. The court shall then immediately adjudicate on the matter, assuming that the plaintiff's claim has been admitted (ficta confessio). In practice, this means that the plaintiff is released from the duty to prove his or her claim if the defendant has involuntarily failed to appear or if the defendant has failed to meet the deadline which the Decree provides for the filing of an answer.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY">This rule is not unfamiliar to the common law world where procedure generally disfavours a party which fails to appear at the trial. For instance, under the Texas Rules of Civil Procedure, when the defendant does not file an answer or appear at a hearing, such a failure represents an admission to all facts set forth in the plaintiff's petition. <span class="editor-footnote">Morgan v. Compugraphic Corp., 675 S.W.2d 729, 732 (Tex. 1984); Jackson v. Gutierrez, 77 S.W.3d 898, 901.See Pendery, J. F., McCaskill, S. M. and Casada, H. A. Dealing with Default Judgments [2003] St. Mary's Law Journal Vol. 35, Part 1, pp. 1 -92, p. 3. </span>Under the Federal Rules of Civil Procedure, a default judgment may be granted any time after an entry of default (i.e. an interlocutory order certifying that process was properly served and no response was filed) has been obtained.<span class="editor-footnote">Federal Rules of Civil Procedure, 55. See Glist, A. O. Enforcing Courtesy: Default Judgments and the Civility Movement [2000] Fordham Law Review Vol. 69, Issue 2, pp. 757-785, p. 761.</span> In some jurisdictions, Civil Codes provide more relaxed standards to try to mitigate the strictness of such procedural rules.<span class="editor-footnote">Glist, A. O., ibid, p. 761.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY">5. Reactions to the Decree and Further Developments</h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">Italian judges and scholars received the Decree with varied response. While almost no empirical research has been conducted as to whether the new rules have actually abated the duration of the proceedings, the discussion has focused on the design and the purpose of the reform introduced by the Decree. Some commentators positively remarked that the new introductory stage exalts the role and accountability of attorneys. According to this viewpoint, the new rules also function to restore the authority of the judiciary as courts can now work on the dispute only when the case is really ready to be litigated.<span class="editor-footnote">Sassani, Bruno (ed.) La riforma del diritto societario. Il processo. Turin: Giappichelli, 2003, p. 108.</span> Other commentators have pointed to the risks connected with the new introductory stage. According to them, the new rules amount to a procedural "privatization" that might favor the best lawyer rather than the right litigant.<span class="editor-footnote">Querzola, Lea. Il convegno nazionale su 'Esperienze e prospettive della giustizia italiana' [2003] Rivista Trimestrale di Diritto Processuale Civile, Vol 57, Issue 1, p. 361-366. </span>According to some authors, such "privatization" does not accord with the recent reforms of civil procedures taking place in common law countries such as the US and UK, where the case management powers of the courts have been expanded, especially in the pre-trial stage.<span class="editor-footnote">Bencini, Riccardo. Riflessioni sulla fase introduttiva del processo societario: esigenza di celerita e tutela del diritto di difesa. Il Diritto Commerciale D'Oggi April 2005. Available at:</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY">6. Decree and Constitutional Ramifications</h2> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The Italian Constitutional Court has recently found that certain provisions of the Decree on in absentia proceedings violate the Italian Constitution.<span class="editor-footnote">Judgment No 340 of 8 October 2007. Available at:;bVar=true&amp;TrmD=&amp; </span><span class="editor-footnote">TrmDF=&amp;TrmDD=&amp;TrmM=&amp;iPagEl=1&amp;iPag=1.</span> After the Italian Parliament enacted the Decree under the statute of delegation, the Court found that the Government exceeded the scope of its powers deriving from the delegation. This amounts to a violation of Article 76 of the Italian Constitution which requires the Government to comply with the "principles and criteria of guidance" set forth in the statute of delegation.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY">As a result, Italian courts cannot apply the impugned provisions of the Decree. So the rules of the Code of Civil Procedure would again control in absentia proceedings in corporate matters. Thus, when the proceedings regard corporate matters, the absence of the defendant does not change the progress of the case and the plaintiff is not thereby released from the generally applicable duty to furnish appropriate evidence of the claim.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY">7. Conclusion</h2> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY">The rules provided for by the Decree have brought about significant changes in Italian civil procedure. They have introduced new rules for litigation of corporate matters. The extent of deviation from the arrangements set forth in the Code of Civil Procedure is remarkable in some cases. For example, with respect to the introductory stage of the proceedings, the new rules enable greater autonomy of litigants who may adjust the schedule of the pre-trial activities according to their strategies, with no involvement of the court. Another radical change is a rule on in absentia proceedings which stipulates that a failure to appear or a late defendant's response give the plaintiff a chance to win the case without proving his or her claim. This change brought the Italian civil procedure closer to common law arrangements, which strongly disfavor defendants who fail to appear or respond. However, as a result of the recent ruling of the Italian Constitutional Court, certain provisions of the Decree on in absentia proceedings have been abolished as violating the Italian Constitution.</p> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <p> <img src="images/massimiliano pastore.bmp" border="0" alt="" /></p> <p style="margin-bottom: 0cm; text-align: justify;" align="JUSTIFY"><em>Massimiliano Pastore is an Italian qualified attorney-at-law. He has been training in both the Italian and Czech jurisdiction. In 2006 he received a M.A. degree in East European Studies from the Freie Universitaet of Berlin.</em></p> <p style="text-align: justify;"> </p> <p style="margin-bottom: 0cm;"> </p> <p> </p> 29.04.2012, 13:40 IN SEARCH OF A SAFE AND FRIENDLY HARBOUR: CHOICE OF LAW IN INTERNATIONAL COMMERCIAL TRANSACTIONS - WHY PARTIES CHOOSE ENGLISH LAW AND NOT CZECH <p class="editor-page-number" style="margin-bottom: 0cm;" lang="cs-CZ" align="JUSTIFY">29</p> <h2 style="margin-bottom: 0cm;" lang="cs-CZ" align="JUSTIFY">1. Introduction</h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">Almost by definition, in every international commercial transaction there exist numerous connecting factors that may suggest that the transaction should be subject to a number of legal regimes. This potential applicability of various legal systems introduces a significant element of uncertainty as to the validity, enforceability and interpretation of the legal documents which constitute or give effect to such transactions, as well as to the rights and obligations of the parties. To overcome these difficulties, the parties usually tend to agree on a single system of law that would govern as many aspects of the transaction as possible and on a jurisdiction </span></p> <p class="editor-page-number" style="margin-bottom: 0cm;" align="JUSTIFY">30</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">on that would, if necessary, enforce such choice of law to the greatest possible extent.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">It is an undisputed commercial reality that there are two major systems of law which govern international financial transactions in practice: English law and, to a lesser extent, New York law.<span class="editor-footnote">Tennekoon R.C. The Law and Regulation of International Finance. Tottel Publishing Ltd: 2006, p. 17.</span> The purpose of this article is (a) to outline the primary objectives of parties to international commercial transactions when choosing applicable law and jurisdiction, (b) to examine to what extent Czech and English law meet some of these objectives with the emphasis on the respective domestic contract law and conflict of laws doctrines as well as on the effect of international harmonization through conventions, and (c) to consider how close Czech law comes to English law in meeting these objectives, and whether and to what extent the choice of Czech law as governing law for these transactions increases legal uncertainty.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ"><br /></span></p> <h2> 2. Factors which Matter — Legal and Commercial</h2> <p> </p> <p style="text-align: justify;"><span lang="cs-CZ">One of the principal goals of the choice of law and choice of jurisdiction clauses is to exclude as far as possible the applicability of other systems of law with which the transaction may have some connection. In other words, firm control of a transaction by the rules of the chosen law helps to create a legal environment that is, by virtue of its increased certainty, more favorable to international commercial transactions. In this respect, it is necessary to point out that not every legal system and not every court is capable of shielding the transaction from the adverse influences of other legal systems with the same effectiveness.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">However, there are numerous other factors which the parties should take into account when deciding which law should govern their transaction. It must be remembered that parties to international commercial transactions are likely to be large corporate entities supported by teams of qualified lawyers, so any allegations of inequality of bargaining power are out of the question. The contractual or other relevant documentation usually contains a detailed account of each party's rights and obligations so that there are usually hardly any gaps that would need to be filled by the statutory provisions of the governing law. As a result, an ideal legal system for such parties is one that gives them maximum freedom to adjust their mutual rights and obligations in accordance with their special commercial needs and wishes, and one which provides for speedy and effective enforcement of the same. Conversely, any interference by local courts with the wording of the transaction on the grounds of "materiality", "fairness", "reasonableness", "justice" or "lack of fault" or similar, that might change the content of what the parties have expressly agreed to, is generally undesirable. In other words, court opinions on what is just and reasonable should never substitute the will of the parties expressed in the contract, as, from the perspective of an international business entity, the introduction of court discretion into the private relationship of the parties inevitably also introduces greater uncertainty and reduces predictability. Again, the scale of such judicial interference may considerably differ from one legal system to another.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">Other issues that will need to be considered when choosing the legal system suitable for a given transaction would be, for example, (i) whether a particular system will permit that system of law to be chosen to govern a transaction with which it has little or no connection, (ii) conceptual sophistication of the system and the capability of its courts to deal with business disputes with an international dimension, (iii) language in which the system operates, and (iv) whether the international commercial community is sufficiently familiar with the system, etc.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ"><br /></span></p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">3. Subsequent Illegality of Performance </span></h2> <p><span lang="cs-CZ"><br /></span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">Generally Since the decision of the Court of Appeal in Kleinwort Sons &amp; Co v. Ungarische Baumwolle Industrie Akt,<span class="editor-footnote">[1939] 2 KB 678.</span> English common law holds a firm position that even if a contract governed by English law would result in the violation of the law of a country in which a party to a contract was incorporated (or resident) because of a change in that law after the contract was entered into, the contract must be performed according to its terms.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ"><img src="images/us law.bmp" border="0" alt="" /></span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">Exceptions to this rule are very narrow. They basically cover situations where the parties' choice of English law as the governing law of the contract was made in a clear endeavour to legalize an act that would have been illegal under the otherwise applicable foreign law, or where particular performance became illegal under the laws of the place where the performance necessarily had to be made.</span><span class="editor-footnote">See e.g. Regazzoni v. K C Sethia (1944) Ltd [1958] AC 301, HL, Kahler v. Midland Bank Ltd [1950] AC 24, HL, and Libyan Arab Foreign Bank v Bankers Trust Co [1988] 1 Lloyd's Rep 259.</span> Only in such cases will English courts give effect to foreign mandatory rules over the governing law.</p> <p style="text-align: justify;"><span lang="cs-CZ">Contrary to the English approach, Czech law generally treats the question of subsequent illegality of contractual performance under foreign law as the so called "impossibility to perform" (i.e., as an objective barrier), which justifies non-performance of a contract.</span><span class="editor-footnote">Section 575 (1) of the Czech Civil Code provides as follows: "Should the performance become impossible, the debtor's obligation to perform shall cease to exist." This may be described as the Czech equivalent of the English doctrine of frustration, albeit the scope of the doctrine under Czech law is much broader.</span> It is universally accepted in Czech law that moratoria, exchange controls, and any other rules or regulations imposed after the transaction has been entered into, which make the performance of such transaction illegal, create the so called "legal impossibility" to perform.<span class="editor-footnote">Section 352 (2) of the Czech Commercial Code provides as follows: "An obligation becomes non-performable if statutory provisions which were issued after conclusion of the contract, and which have an unlimited duration, prohibit such conduct as the debtor is bound to perform under the contract, or which stipulate that an official licence (permission) is required, but such licence was not granted to the debtor, although he duly made efforts to obtain it."</span> If such impossibility to perform arose independently of any acts or omissions of the parties, the only remedy would be the surrender of unjustified enrichment which a party to the transaction might have obtained under the contract. However, if the party to the transaction itself caused or created the impossibility to perform (e.g., if a sovereign state subsequently introduced a prohibitive law frustrating the performance of the transaction), such party shall not only surrender the unjustified enrichment obtained from the invalid transaction, but is also liable for any damage caused as a result thereof.<span class="editor-footnote">Knappová, M. and Švestka, J. Občanské právo hmotné. Svazek II. ASPI Publishing: 2002, p. 162.</span> Thus, it is possible to conclude that even though the protection against prohibitive measures imposed after the transaction has been entered into is much weaker under Czech law than under English law, the party that is adversely affected by such measures is not usually left without a legal recourse, even if sometimes only in the form of a claim of unjust enrichment.</p> <p class="editor-page-number" style="text-align: right;">31 </p> <h2 style="text-align: justify;">4. Foreign Exchange Control Regulations and Moratoria (Art VIII (2) (b) of the International Monetary Fund Agreement)</h2> <p style="text-align: justify;"> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">The question of subsequent illegality must also be raised in the context of Art VIII (2) (b) of the International Monetary Fund Agreement, which provides that: "[e]xchange contracts which involve the currency of any member and which are contrary to the exchange control regulations of any member maintained or imposed consistently with this agreement shall be unenforceable in the territories of any member." The International Monetary Fund Agreement was adopted both by the United Kingdom and the Czech Republic as part of their domestic laws.</span><span class="editor-footnote">See the Bretton Woods Agreement in Council 1946 SR &amp; Q 1946/36 for the UK and the Notification of Ministry of Foreign Affairs No. 500/1992 Coll. for the Czech Republic.</span>However, by means of an ingenious interpretation of the cited provision summarized below, English courts managed to deprive it of much of its harmful effect as a ground for interference of foreign legal systems into transactions governed by English law.</p> <p style="text-align: justify;"><span lang="cs-CZ">In Wilson Smithett and Cope Ltd v. Terruzzi,<span class="editor-footnote">[1976] QB 683 at 703.</span> the Court of Appeals decided that the term "exchange contracts" shall be construed narrowly (i.e., as a contract to exchange the currency of one country for the currency of another country). This view was later affirmed by the House of Lords in United City Merchants (Investments) Ltd v. Royal Bank of Canada.<span class="editor-footnote">[1983] 1 AC 168 at 188 per Lord Diplock.</span> Thus, as far as English courts are concerned, a loan agreement or the agreements giving effect to an international bond issue and the bond instruments themselves are not "exchange contracts" for the purposes of Art VIII (2) (b).</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">The meaning of the phrase "which involve the currency of any member" seems to be also very narrow. While there seems to exist no direct English authority on this point, it is submitted that an English court would follow the analysis contained in the United States (U.S.) case of Weston Banking v. Turkaye Garanti Bankasi.<span class="editor-footnote">446 NE 2D 1195 (NY 1982).</span> Thus, Art VIII (2) (b) would only be applicable where payment or transfer is required in the currency of the member state imposing the exchange control regulations. This obviously frustrates the principal aim of most such regulations, which is to prevent the uncontrolled flow of foreign currencies out of the country.</span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">Furthermore, although there seems to be no English case law on the matter, it is assumed that English courts would follow the US decisions stating a general rule that no international financial transaction can be rendered unenforceable by an intervening exchange control regulation,<span class="editor-footnote">Libra Bank Ltd v. Banco Nacional de Costa Rica 570 F Supp 870 (SDNY, 1983).</span> and that in order to show that the regulation has been "maintained or imposed consistently with [the IMF] agreement," the relevant member state would have to show that it has obtained a prior IMF approval for such legislation, which is almost never the case in practice.<span class="editor-footnote">Callejo v Bancomer SA 764 F 2d 1101 (5th Circ 1985).</span> It is reasonable to expect that the Czech courts would construe the term "exchange contracts" much more widely than the English or US courts (i.e., in accordance with the position of the courts in other continental jurisdictions including France, Germany and Italy).<span class="editor-footnote">See Mann F. A. Mann on Legal Aspects of Money. 6th Ed. Oxford University Press: 2005, chapter 15.</span> The Czech implementation of the text of Art VIII (2) (b) uses the term "devizové kontrakty", which literally means any contracts involving a foreign currency, rather than just the contracts to exchange the currency of one country for the currency of another country. Although there is a lack of case law dealing with these questions, there is generally no reason to expect any fierce resistance from Czech courts and arbitral tribunals against full application of Art VIII (2) (b).</span><span class="editor-footnote">See e.g. Pauknerová, M. Tzv. nutně použitelné normy před rozhodčím soudem při HK ČR a AK ČR [1996] Právní praxe v podnikání No. 7-8,  p. 16.</span></p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ"><br /></span></h2> <h2 style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">5. Application of Foreign Mandatory Rules (Art 7 (1) of the Rome Convention)</span></h2> <p><span lang="cs-CZ"><br /></span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">Article 7 (1) of the Rome Convention on the Law Applicable to Contractual Obligations (hereinafter the Rome Convention) provides that:</span></p> <blockquote style="text-align: justify;"><span lang="cs-CZ"> [w]hen applying under [the Rome] Convention the law of a country, effect may be given to the mandatory rules of the law of another country with which the situation has a close connection, if and in so far as, under the law of the latter country, those rules must be applied whatever the law applicable to the contract.</span></blockquote> <p style="margin-bottom: 0cm; text-align: justify;" align="JUSTIFY"><span lang="cs-CZ"><br /></span></p> <p style="margin-bottom: 0cm; text-align: justify;" align="JUSTIFY"><span lang="cs-CZ">While the Rome Convention generally favors freedom of choice of law,<span class="editor-footnote">See Art. 3(1) of the Rome Convention</span> this provision literally encourages the courts of the signatory states to ignore it and to apply mandatory rules of other systems of law when deemed appropriate. Such undermining of the principle of party autonomy, together with the creation of uncertainty as to which rule would eventually apply to a contract governed by English law, was considered unacceptable in the UK. Accordingly, the UK made use of its right under the Rome Convention to opt out of the provision.<span class="editor-footnote">Article 22 (1) of the Rome Convention provides as follows: "Any Contracting State may, at the time of signature, ratification, acceptance or approval, reserve the right not to apply: (a) the provisions of Article 7 (1)…". </span>Article 7 (1) therefore does not have the force of law in the UK.<span class="editor-footnote">See the Contracts (Applicable Law) Act 1990.</span></span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">Unlike the UK, the Czech Republic did not exclude the applicability of Article 7(1). This obviously creates space for application of mandatory provisions of a law system other than the chosen law (i.e., the Czech law). In addition to the possibility of applying mandatory rules of a different law system than the proper law of the transaction by virtue of Article 7(1) of the Rome Convention, there exists a decision of the Czech Arbitration Court which clearly shows Czech arbitrators' willingness to give effect to foreign mandatory rules even in the absence of a specific statutory authorisation in this respect:</span></p> <blockquote style="text-align: justify;"><span lang="cs-CZ">The arbitrators do not a priori refuse to give regard</span><span lang="cs-CZ"> to such mandatory rules of a foreign country, the law of which does not govern the relationship in question. Czech law does not expressly regulate the question of application of such rules. However, it is possible to examine the current state of development of legal theory and practice with regard to this issue by means of comparing other legal rules, even if these are not binding for the Czech Republic.</span></blockquote> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ"><br /></span></p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">Here the Arbitration Court referred inter alia to the provisions of Article 7(1) of the Rome Convention, which was not a part of Czech law at that time.</span><span class="editor-footnote">See e.g. Rozehnalová, N. Rozhodčí řízení v. obchodním styku. Právo rozhodné v. řízení před mezinárodními rozhodci. ASPI Publishing, 2002, p. 140.</span> Thus, even in the absence of relevant case law from national courts, it is possible to conclude that when deciding on the issue of application of mandatory rules of a foreign state or country in a transaction governed by the Czech law, Czech courts would probably use criteria similar to those contained in Article 7(1) of the Rome Convention, even if the convention did not apply to the transaction in question.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ"><br /></span></p> <h2 style="margin-bottom: 0cm;" lang="cs-CZ" align="JUSTIFY">6. Scope of Interference of National Courts</h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">For a long time, English law has been famous for its strict approach to contractual breaches in the pursuit of certainty, result predictability, and avoidance of lengthy litigation. Under English law, where the parties to a commercial transaction have expressed their rights and obligations by the use of clearly drafted clauses, effect will be given to the plain and ordinary meaning of the words used. English courts cannot read into commercial or contractual agreements additional clauses which would make the agreements "fair" and "reasonable", but only those, which are absolutely necessary.<span class="editor-footnote">Liverpool City Council v Irwin [1977] AC 239.</span> A court would be allowed to imply a term into a contract when the contract or transaction would otherwise lack business efficacy. </span><span class="editor-footnote">See The Moorcock (1889) 14 P.D. 64, Shell UK Ltd v. Lostock Garages Ltd [1976] 1 WLR 1187 or Luxor (Eastbourne) Ltd. V. Cooper [1941] AC 108.</span> Although one has to admit that the strictness of the English</p> <p class="editor-page-number" style="margin-bottom: 0cm;" align="JUSTIFY">32</p> <p style="margin-bottom: 0cm;" align="JUSTIFY">approach has been recently quite substantially eroded by the introduction of new legislation<span class="editor-footnote">See esp. the Unfair Contract Terms Act 1977, the Unfair Terms in Consumer Contracts Regulations 1994, the Sale of Goods Act 1979, the Supply of Goods and Services Act 1982, etc. </span>(often inspired by the EU), the undisputed fact remains that the contractual discipline of English law continues to make this legal system a popular choice even for transactions that have no connection with England whatsoever.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">English law traditionally distinguishes between two types of contractual terms, conditions and warranties. Only a breach of the former may lead to a termination of the contract, whereas a breach of the latter can only be remedied by the award of damages. More recently the courts have developed the concept of an innominate term,<span class="editor-footnote">Hong Kong Fir Shipping Co. Ltd. V. Kawasaki Kisen Kaisha Ltd. [1962] 1 All ER 474.</span> the breach of which can be sanctioned by repudiation only if the innocent party has been substantially deprived of "the whole of the benefit which it was intended that he should obtain from the contract".<span class="editor-footnote">I</span></span><span class="editor-footnote">bid. at p. 494 per Lord Diplock, on classification of contractual terms under English law see e.g. Richards, P. Law of Contract 6th edition Pearson Longman, 2004, p. 135 et seq.</span> This was sometimes criticized as improper due to the introduction of uncertainty. However, it is necessary to bear in mind in this context that the parties are free to agree that a particular term of a contract is an essential condition, and it will then generally be treated as such by the English courts notwithstanding the fact that the practical importance of such a term may be merely marginal. Notwithstanding the aforementioned, in the light of Schuler AG v. Wickman Machine Tool Sales Ltd,<span class="editor-footnote">[1974] AC 235.</span> in order to successfully prevent a court's intervention with the will of the parties on the grounds of "reasonableness", it is advisable for them to express such intention as clearly and unequivocally possible. Lord Reid's decision in that case makes it clear in this respect that the "[u]se of the word 'condition' is [merely] an indication — even a strong indication — of such an intention but it is by no means conclusive." This clearly illustrates that even English courts may in certain circumstances favor justice over certainty when interpreting contractual terms.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">In contrast to English law, Czech law creates two major contractual regimes, which are in many instances independent of and operate parallel to each other, although the relationship of the Commercial Code<span class="editor-footnote">Act No. 513/1991 Coll., as amended.</span> to the Civil Code<span class="editor-footnote">Act No. 40/1964 Coll., as amended.</span> is generally understood as one of lex specialis.</span><span class="editor-footnote">Section 1 of the Commercial Code (Scope of Applicability) regulates the relationship of the Commercial Code and other sources of law in the following way: "(1) This Code regulates the status of entrepreneurs, business obligations and some other relations connected with business activities. (2) The legal relations specified in subsection (1) above are subject to the provisions of this Code. Should it prove impossible to resolve certain issues according to the provisions of this Code, they shall be resolved in accordance with the civil law provisions. In the event that such issues cannot be resolved in accordance with the civil law provisions, they shall be considered according to trade usage (commercial practice) and, in the absence of this, according to the principles upon which this Code is based."</span>. As this article focuses on commercial transactions only, it will concentrate on the possibilities of a Czech court to interfere with transactions governed by the Commercial Code. Commercial Code classifies default situations in commercial transactions into two main categories, essential breaches and non-essential breaches. If a debtor's or creditor's default constitutes an essential breach of the contractual obligation, the other party may withdraw from the contract after notifying the party in default.<span class="editor-footnote">Section 345 of the Commercial Code.</span> If default on the part of the debtor or the creditor amounts to a non-essential breach of the contract, the other party may withdraw from the contract only after providing the party in default with additional time for performance.<span class="editor-footnote">Section 346 of the Commercial Code.</span> In cases of doubts, a breach is deemed to be nonessential. It is necessary to point out here that sections 345 and 346 of the Commercial Code are nonmandatory (i.e., parties can agree otherwise and such agreement will be upheld by Czech courts). The parties are also absolutely free to agree on what kinds of breaches shall be deemed essential. Thus, the court will interfere neither with the parties' agreement with respect to the relative importance of the terms of their contract, nor with their decision on whether and under what conditions they can repudiate the contract as the result of such default or breach. It is therefore possible to conclude that the approach of a Czech court to a breach of a term in a commercial transaction should not substantially differ from the approach of an English court. In other words, with regard to transactions governed by the Commercial Code, a Czech Court can be expected to be almost as hesitant as an English court to intervene with the express wording of the contract unless absolutely necessary.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <h2 style="margin-bottom: 0cm;" lang="cs-CZ" align="JUSTIFY">7. Other Limits to the Control of a Transaction by the Proper Law</h2> <p> </p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">It has already been mentioned that it is of great concern to the commercial world that the law chosen to govern transactions is capable of shielding those transactions from the adverse influences of other legal systems as effectively as possible. However, such shields can never be absolute and perfect, not even under English law. Thus, both English and Czech law, and presumably the vast majority of other legal systems in the world, recognize that the proper law of the contract cannot govern questions related to corporate capacity of the parties, <span class="editor-footnote">Janred Properties Ltd v ENIT [1989] 2 All ER 444, Section 3(1) of the Act No. 97/1963 Coll., the International Private Law and Procedure Act, as amended. </span>negotiability of bond instruments, <span class="editor-footnote">Article 1(2)(c) of the Rome Convention.</span> creation of security interests over land, </span><span class="editor-footnote">Re Charge Card Services [1987] Ch 150, Section 5 of the Act No. 97/1963 Coll., the International Private Law and Procedure Act, as amended.</span> regulation of mergers and acquisitions, <span class="editor-footnote">National Bank of Greece and Athens SA v Metliss [1958] AC 509, Adams v National Bank of Greece SA [1961] AC 255.</span> etc.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"> </p> <h2 style="margin-bottom: 0cm;" align="JUSTIFY"> 8. Conclusion</h2> <p> </p> <p style="text-align: justify;"><span lang="cs-CZ">The analysis above reveals an interesting paradox. The more hostile and resistant the English courts are to the application of the rules of international law — on the basis of which they should, in certain circumstances, apply foreign mandatory rules — the more suitable and convenient such an environment is for international commercial transactions. It is apparent that in many instances the courts seem to be ready to take bold and radical steps to defend the traditional systemic virtues of the English law, no matter how inconsistent these are with the general trends in the international community. However, one should appreciate that they have a good reason to do this if they wish to maintain the status of England as an international financial and commercial center of worldwide importance. Preserving the traditional "rigor commercialis"</span><span class="editor-footnote">Eörsi, Gyula. A propos the 1980 Vienna Convention on Contracts for the International Sale of Goods [1983] American Journal of Comparative Law, Vol. 31, No. 2, pp. 333-356.</span> of the English law is thus often seen as a priority. It seems to be self-evident that when analyzing the reasons for English law being so frequently chosen by the parties, one also should not underestimate the practical advantages of using the English language before the courts and of the long tradition of international disputes being decided in England.</p> <p style="margin-bottom: 0cm;" align="JUSTIFY"><span lang="cs-CZ">Nevertheless, the aim of this article was also to show that the Czech Republic is not too far behind England in terms of limiting the power of the courts to interfere with commercial contracts. This is surely a strong indication to the parties to such contracts that they need not be greatly concerned that the choice of Czech law as the governing law of their transactions will unexpectedly frustrate their express agreement by an unforeseeable action taken by the Czech courts.</span></p> <p class="editor-page-number" style="margin-bottom: 0cm;" align="JUSTIFY">33</p> <p style="margin-bottom: 0cm;" align="JUSTIFY">H<span lang="cs-CZ">aving said this, in the author's opinion, it would still be unwise to underestimate the general differences in approach of the world's two main legal cultures to the questions of party autonomy. "The philosophy of the Common law is utilitarian and its primary concern is with the economic exchange between the parties. The philosophy of the Civil law, it has been said, is closer to that of Kant. It is primarily concerned, not with the economic exchange between the parties, but with the exchange of consents and with the moral evaluation of the behaviour of the parties. […] A consequence of this commercial orientation of the Common law is that if a choice has to be made between certainty and justice in the individual case, it is likely to be made in favour of certainty."</span><span class="editor-footnote">Nicholas, B. The United Kingdom and the Vienna Sales Convention: Another Case of Splendid Isolation? [1989] Law Quarterly Rev Vol. 10, pp. 201-243. </span>These two radically different approaches are usually deeply rooted in the heads of the common law judges as well as their continental colleagues. At a general level, this fact seems to suggest that, notwithstanding the conclusions of the comparative analysis above, the choice of a continental legal system continues to be an inherently risky alternative in practice.</p> <p><em><img src="images/otakar hjek.bmp" border="0" alt="" /></em></p> <p style="text-align: justify;"><em>Mgr. Otakar Hájek graduated from the Law Faculty of Charles University in Prague in 2006. He is currently finishing his LL.M. degree at King's College London and works as an in-house lawyer in a London hedge fund. He is a  corresponding member of the Editorial Board of the Common Law Review.  </em></p> 29.04.2012, 13:39