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Commercial Code causes confusion

Frequent changes to laws for businesses result in ambiguity

By Riva Froymovich
Staff Writer, The Prague Post
July 18th, 2007 issue

The country’s unstable Commercial Code is confusing to business owners and judges alike, according to those involved in the system.
National courts have changed the laws that govern business activity nine times in the past two years — and almost 50 times in the past 16 years.
Such ambiguity in the law can prove difficult for businesses trying to set up shop here, said Nathan Brown, owner of Czech Point 101, a firm that guides foreigners interested in investing in the country.
As a result, Brown is cautious when dealing with authorities.
Americans were uncertain whether they still needed proof of residence to serve as directors of limited-liability companies, for example, after the courts struck down a provision that required all foreigners to do so. That change came after European Union accession in 2004. Limited-liability companies are called s.r.o.s in the Czech Republic.
“There is no other new provision which would say explicitly, ‘It is possible,’ ” Brown said. “There was confusion regarding how this would actually be applied. Now it is apparent that a person from any nation, upon meeting basic requirements but not a residency permit, can serve as the director or jednatel [legal representative] of a Czech s.r.o.”
Brown tells foreigners trying to deal with that particular new rule to take the previously required documents to the appropriate government offices.
“The changing laws are a source of frustration,” Brown said. “There is the law, and then the practical application of that law, as in how the law is actually applied by the officers in the different offices.”
Supreme Court Justice Ivana Štenglová recently voiced her disapproval to the press over confusion in the system.
“Problems arise from the fact that the content of some clauses is ambiguous,” Štenglová said, explaining that it is difficult for businessmen, lawyers and even judges to interpret the law, which leads to perpetual reinterpretation.
“If laws are not stable, it diminishes the legal security of people who have to comply with the rules,” Štenglová said. High court rulings lose meaning when they’re based only on the case-by-case decision-making of lower courts, she added.
Higher courts could create a stronger legal precedent to eliminate interpretation problems; otherwise, the time line to establish clear business practices will keep being extended, she said.
“Fair and honest businessmen are trying to comply with the rules,” she said.
EU accession introduced new changes in the Commercial Code. But there are also frequent changes inside the country to improve laws, correct mistakes and attempt to push through special interests, Štenglová said.
“Well-crafted laws and a certain attitude of legislative discipline would be a possible solution,” she said.
The American Chamber of Commerce takes a slightly more positive view.
“Business keeps creating new conditions and new processes and new products,” said Weston Stacey, AmCham’s executive director. “It would be a very negative sign of the health of the economy if there were not constant pressure to update the code.”
Besides, if the Commercial Code stayed in the same condition that it was in 10 years ago, it would be impossible to persuade new businesses to come here, Stacey added.
A more consistent code would make the business market here more attractive, however, Stacey said.
The biggest problem for businesses is how long most enforcement proceedings take, he said. Inconsistent and unpredictable rulings are also problematic. Courts become a primary driver of unethical or illegal business practices as a result, Stacey said.
In some cases, businesses just need more information about exactly what is legal and what is not, he said. Companies may want to expand their businesses or restructure their offices, for example, but they need a court to explain the particular legal procedures involved.
Echoing Štenglová, Stacey said changing court decisions results in “uneven compliance and confusion” among businesses.
“I do not think we can condemn the attempts to improve the act, but perhaps we could urge the government to find a better process for modernizing the code,” he said.
That’s something Justice Minister Jiří Pospíšil has also proposed, Stacey said.
— Naďa Černá contributed to this report.

Riva Froymovich can be reached at rfroymovich@praguepost.com


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