Recently, there has been wide discussion on the admissibility of arbitration clauses in contracts concluded with a consumer. This issue is important as it is decisive for determining the institution competent to decide a dispute and may have a huge impact on the protection of consumer rights.

Consumer protection

The provisions are contained in the Civil Code in sec. 51a et seq. The key principle of the private law regulation is the rule of imbalance, ie, providing for stronger consumer protection in relationships with contracting parties.

Regarding consumer affairs, Czech law transposed the Directive 93/13/EEC on unfair terms in consumer contracts, which strongly protects the interests of a consumer. Based on this law, the Civil Code, sec. 56, states that consumer contracts may not contain clauses that, contrary to the requirements of good faith, constitute a considerable imbalance in the rights and obligations of the parties to the detriment of the consumer. The law then enumerates clauses that are inadmissible.

The Directive was not, however, sufficiently transposed, creating uncertainty about the applicable law, especially regarding dispute resolution. Contrary to the Civil Code, the Directive explicitly deems unfair “excluding or hindering the consumer’s right to take legal action or to exercise any other legal remedy, particularly by requiring the consumer to take disputes exclusively to arbitration not covered by legal provisions.”

The fact that the Czech Civil Code did not implement this formulation as one of the prohibited clauses has been one of the main reasons for legal uncertainty for consumers over the past few years.

Arbitration Act

This uncertainty originated also from the Czech law on arbitration, in particular Act No. 216/1994 Coll., which stipulates that the parties may agree that any dispute between them shall be decided by one or more arbitrators or a permanent Court of Arbitration.

In light of the missing regulation in the consumer protection regulation, the arbitration provision leaves the door open for entrepreneurs who try to secure their best interests in consumer contracts. The parties agree in the contract to appoint a private arbitration institution or arbitrator as the decision-making authority, which is hardly ever an independent third party. As a result, the interests of the consumer are never prioritised and, in most cases, the entrepreneur receives preferential treatment.

Case law: Changing old habits

Such a situation led to a crucial judgment of the District Court of Ostrava in March 2010 under which the court granted wide protection to consumers under European law.

The court concluded that the Czech wording of the Civil Code inadequately transformed the Directive. Even though the legal provisions do not stipulate such a ban, the court held that it is the general duty of the Czech Republic to transpose the directive in a proper manner and to grant the required protection to consumers. Thus, the entrepreneur as the other party to the consumer contract cannot be allowed to abuse its stronger position, which is based on the inability of the consumer to change the wording of the contract as a formal contract.

The court thus held that it is a prohibited unfair practice where the dispute is transferred from independent public courts (i) to an arbiter who cooperates with the entrepreneur, (ii) to an arbiter who is financially supported by the entrepreneur, or (iii) where it is not possible to appeal the arbitration award.

Even though the court set forth certain criteria to be weighed when deciding on arbitration clauses in consumer contracts, the general outcome is clear: in the case of a breach of this rule, the court has the right and duty to declare any award null, without having to file a motion for cancellation of the arbitration award. This results from sec. 56 of the Civil Code, which considers any contract term deemed invalid under European law and the Czech transposition to be invalid.

Conclusion

Arbitration clauses should be treated as a potentially problematic part of the consumer contract and included only after serious reflection and with special attention to the possibility of imbalances between the consumer and the entrepreneur.

This uncertainty about the applicable law led to a crucial judgment of the District Court of Ostrava in March 2010 under which the court granted wide protection to consumers under European law.