Authors: Petr Kadlec, Štěpán Štarha
The coronavirus pandemic has led to a steep increase in demand for certain commodities and consequently to their general shortage. Apart from a solidarity wave we can unfortunately also witness excessive prices charged in an attempt to take advantage of the current situation to one’s own economic benefit. The Office for the Protection of Competition (Office) has already declared its preparedness to take action against undertakings that take advantage of the current situation.[1] However, the office can intervene only in a situation involving a cartel agreement or abuse of dominance.[2] Not everyone knows that protection against excessive prices is also offered to affected entities by Act no. 526/1990 Sb. on Prices, as well as by the legal regulation of excessive loss and usury under the Civil Code. These regulations also provide protection in situations in which the Office cannot intervene.
The most extreme intervention under the Act on Prices is official price setting (fixed, maximum or minimum prices) or pricing moratorium (prohibition to increase prices). Fixed prices have been consistently applied e.g. to cigarette prices (by the Customs Inspection Office for the Central Bohemian Region) or to some components of the price for electricity and gas supply (by the Energy Regulation Office). The last time the Ministry of Finance set a maximum price was in the case of a price rise in response to the rapid increase in prices for class FFP3 respirators on 4 March 2020.[3] Another price regulation method is cost-based regulation, under which conditions are set out for price negotiations (in the form of a binding pricing or price calculation procedure by including justified costs and a reasonable profit) in particular in the health care sector, public transport and for drinking water. The pricing supervisory authorities[4] may impose a penalty of up to CZK 10 million for a breach of regulated prices.
Nevertheless, the Act on Prices also provides for the possibility of sanctions for the sale of unregulated goods or services if a more advantageous economic position is abused by the seller or the purchaser to gain disproportionate material benefit either by selling for a price including unjustified costs or unreasonable profit by applying a higher selling price than what is the usual price or purchasing for a price significantly below justified costs or lower than what is the usual price. This is a situation in which the seller or the purchaser causes harm to the other party by applying a price that is higher or lower respectively than the price they would achieve in a situation of being exposed to substantial price competition. A profit that is considered to be reasonable is the usual profit achieved on a long-term basis through comparable economic activities andensuring reasonablereturnof the used capital within a reasonable period of time.
Unlike in the case of a dominant position (overseen by the Office) based on market power allowing an undertaking to behave highly independently of other undertakings or consumers, in the case of a more advantageous economic position it suffices if an undertaking does not face substantial pricing competition. Thus, unlike in the case of a dominant undertaking, its position is assessed in relation to a particular buyer or seller as the weaker contracting party.[5] To prove abuse of a more advantageous economic position by a seller or buyer it is not necessary to prove that a practice objectively restricted or could have restricted competition. What is important is whether the seller or the buyer gained disproportionate material benefit to the detriment of the other party.[6]
It is apparent that the Act on Prices, which is only sporadically used in this respect, provides consumers with a potentially very efficient tool in facing unfair practices of suppliers as well as customers who take advantage of a particular situation to gain unreasonable profit, typically by overpricing goods in short supply. The supervisory authority may impose a fine of up to five times the amount of the disproportionate material benefit or up to CZK 10 million if it is impossible to determine the amount of the disproportionate material benefit. If a harmed buyer (or seller) files a motion at a Specialised Tax Office, administrative proceedings are commenced and a fine for an offence is imposed, it is not ruled out that the buyer can subsequently seek, in civil court, compensation for damage caused to them by the offender committing the offence of abuse of a more advantageous economic position. However, based on our experience, we should add that the Specialised Tax Office commences such administrative proceedings in absolutely exceptional cases and, therefore a professionally drafted motion with elaborate argumentation pointing at the existence of a more advantageous economic position is thus essential.
Consumers and entrepreneurs who conclude a contract outside the course of usual business are granted protection by the Civil Code against what is called excessive loss. Excessive loss occurs if one party is bound under a contract to provide performance that is grossly disproportionate to the performance provided by the other party. Gross disparity is established by comparing the agreed price with the price that is usual at the place where and time when the contract is concluded. The Civil Code does not provide for any limit whose violation would constitute gross disparity. However, inspired by Austrian law, our commentaries refer to one half.A party which suffered loss may defend itself by seeking cancellation of the contract in court and restoration of the original condition. However, this right is available only for one year from the conclusion of the contract and then it ceases to exist if not exercised during this period. The party that causes loss may avert cancellation of the contract if compensating the other party for its loss.
However, the Civil Code provides for numerous limitations of situations in which cancellation of a contract can be sought due to excessive loss. It is, for example, when the party causing loss was not and could have not been aware of the causing disproportion or if, in contrast, the harmed party was or must have been aware of the actual price but still agreed with the excessive price. The harmed party also loses its right to seek cancellation of the contract if it expressly waived this right and declared that that it accepted performance for an excessive price due to special liking. However, this is not the case if it is expressed, for example, in terms of business or standard contract formulations used by the harming party.
Due to the restrictive coronavirus measures many people have lost their source of income. According to the media, the majority of Czech families do not have savings to live on for two or more months. If the state does not provide support to a larger extent, the affected families will face duress. Should they borrow money in such a situation or receive other performance the value of which is in gross disproportion to what they have provided to the other party and should the other party be aware of the duress and gross disproportion in performance and abuse it,such a situation would qualify as usury. The Civil Code does not provide any definition of gross disparity. According to legal commentaries, the limit for usury is double the amount of the value of performance and consideration. When assessing performance and consideration the objective value of performance at the conclusion of the contract should serve as the basis.
Experts are not in agreement regarding the legal consequences of a usurious contract. They all agree that such a contract is invalid but they are not in agreement as to whether invalidity of the contract is relative or absolute. However, an entrepreneur who concluded such a contract in the course of business does not have the right to invoke the invalidity of a usurious contract.
Last but not least, please note that usury may also qualify as a criminal offence for which evidence of intent is required but unlike civil usury this type of offence can also be committed against an entrepreneur. Under the current crisis it is also possible to apply even more severe penal rates.
[1] Joint statement by the European Competition Network (ECN) on application of competition law during the COVID-19 pandemic available at https://www.uohs.cz/cs/hospodarska-soutez/aktuality-z-hospodarske-souteze/2750-spolecne-prohlaseni-souteznich-uradu-eu-sdruzenych-v-evropske-soutezni-siti-ecn-tykajici-se-uplatnovani-pravidel-ochrany-hospoda.html.
[2] In connection with the use of dominance the Office refers to exclusionary practices more than to exploitive conduct that is typical for overpriced products, see https://www.uohs.cz/cs/hospodarska-soutez/aktuality-z-hospodarske-souteze/2756-dohled-nad-dodrzovanim-pravidel-hospodarske-souteze-v-dobe-krize-zpusobene-onemocnenim-covid-19.html.
[3] See the Decree of the Ministry of Finance no. 03/2020, amending the list of goods with regulated prices issued by the Decree of the Ministry of Finance no. 01/2020.
[4] Competences of pricing authorities are stipulated by Act no. 265/1991 Sb., on competences of Czech authorities in the field of pricing.
[5] See the explanatory memorandum to Act no. 403/2009 Sb., amending Act no. 526/1990 Sb., on Prices
[6] As the Supreme Court confirmed in judgment no. Komp 3/2006-511of 18 December 2007.
