CMS Expert Guide on rising raw material prices in Czech Republic

Consequences for the performance of public contracts

1. Have specific legislative or regulatory provisions been adopted by the Government in relation to the increase in the price of raw materials?

No specific legislative or regulatory provision has been adopted by the Czech Government.

However, the Ministry for Regional Development (the body responsible for establishing the legal framework for public procurement) together with the Office for the Protection of Competition (the supervisory body overseeing public procurement) published a joint statement (the Statement) in September 2021 dealing with the increase in prices of building materials. The Statement is a non-binding, soft law document meant to provide guidance to Czech contracting authorities and economic operators in the event of a need to renegotiate contracts or increase prices.

The Statement addresses the three stages of the public procurement process, namely:

  1. already concluded public contracts;
  2. ongoing public procurement; and
  3. public procurement in preparation.

It summarises the applicable laws and regulations and provides guidance on how the issue of increased prices for building materials can be addressed in the existing legal framework.

The Statement does not introduce, nor indicates the introduction of, any new laws or regulations, and addresses only public construction contracts, although it should be generally applicable to all public contracts.

2. Does this situation give rise to amendments to existing public contracts?

The Czech Act on Public Procurement (the PPA) primarily regulates the procedures for awarding public contracts, while the contracts themselves are governed by Czech private law (mainly the Czech Civil Code).

The Statement points out that if a public contract has already been concluded, only “non-substantial changes” as set out in Section 222 of the PPA can be made. This effectively means that changes that increase the price of the public contract (overall or of individual sub-items), extend the implementation term (or other binding deadlines), modify or remove penalties, etc., can be implemented only if the conditions for their implementation set out in Section 222 of the PPA are met.

The Statement further mentions that the prices of contracts already concluded can be adjusted in accordance with Sections 1765 and 2620 of the Civil Code. Under Section 1765 of the Civil Code, a disadvantaged party may demand renegotiation of the contract in the event of a significant change in circumstances, and petition the court to adjust the commercial terms if negotiations fail. Section 2620 of the Civil Code also addresses the possibility to demand modification to a contract by court in the event of a significant change in circumstances. While Section 1765 of the Civil Code applies to all contracts, Section 2620 of the Civil Code applies only to contracts for work.

The application of both Sections 1765 and 2620 of the Civil Code can be contractually excluded if one or both parties assumes the future risk of a change in circumstances. The Statement emphasises that such exclusion does not prohibit the contracting authorities from “voluntarily” agreeing with economic operators to modify a contract. However, the Statement stresses that any agreement on price changes made under the Civil Code must at the same time meet the conditions of Section 222 of the PPA, which effectively means that the contracting authority cannot allow a “substantial” change to the contract without a new procurement procedure.

3. Does this situation allow for the imprévision theory to be implemented?

This concept is not recognized under Czech law.

4. Will delays or the failure to perform a public procurement contract in this context lead to sanctions being imposed on economic operators?

The Statement does not provide any recommendations regarding the potential non-application/non-enforcement of sanctions, such as compensation for damages or contractual penalties. It only stipulates that any non-application/non-enforcement of sanctions must comply with Section 222 of the PPA.

In accordance with Section 2913(2) of the Civil Code, a party is relieved of the obligation to pay damages if it proves that it could not fulfil the relevant obligation due to an extraordinary, unforeseeable and insurmountable event beyond its control. This is the Czech law definition of a “force majeure” event. It is not uncommon for public contracts to have a specific force majeure clause which relieves a party from additional contractual obligations if a force majeure event occurs (such as to deliver on time or pay contractual penalties). Although price increases do not usually constitute a “force majeure” event, it may be a different situation regarding events leading to such price increases.

5. Do the relevant regulations contain anything about the execution of public contracts?

The Statement stresses that the contracting authorities should keep in mind potential future price changes when preparing upcoming public contracts. According to Section 100(1) of the PPA, the contracting authorities may introduce a mechanism to change a public contract after it has been concluded by reserving the right to amend the public contract in the tender documentation, provided that the conditions and scope of such amendments are clearly defined and the overall nature of the contract remains the same. 

Such reservations should allow the contracting authorities to react flexibly to changes in the construction market. In particular, inflation clauses or clauses allowing changes in the prices of materials should be considered on the basis of objectively ascertainable information, which may include data from the Czech Statistical Office, indices and exchange rates used in the markets for individual commodities (e.g. London Metal Exchange), and updating data from price systems (e.g. Czech systems RTS or URS). 

At the same time, the Statement mentions that the application of reservations allowing for price increases may have an impact on the contracting authorities’ budget. They should therefore consider a limit on the overall price increase or a threshold from which approval by the contracting authority would be required.

In the case of an ongoing public procurement procedure, the contracting authorities may consider changing the tender documentation or, if that is not possible, cancelling the ongoing public procurement procedure and starting a new procurement process.

6. Are public contracts that are governed by private law mentioned in the relevant regulations?

Since the PPA primarily regulates the procedures for awarding public contracts, while the contracts themselves are governed by Czech private law (mainly the Czech Civil Code), this topic has been already addressed in more detail in section 2.