Latest from the Supreme Court: for the purposes of compensation for damages, state assets constitute a single entity: internal transfers of funds within the state do not constitute actual damage. What impact does this have on the assessment of liability for damages on the part of civil servants?
In the current practice of the Czech Republic’s state authorities, there is a tendency to seek compensation from employees or other natural persons for sums that one state body is required to pay to another, or for sums that a state-funded organisation is required to ‘transfer’ elsewhere into the state budget. However, it follows from recent case law of the Supreme Court that, for the purposes of compensation for damages, the state’s assets constitute a single entity: internal transfers of funds within the state do not constitute actual damage.
The State as a Single Asset Entity
Both legal doctrine and case law favour an interpretation whereby, for the purposes of compensation for damages, state property is regarded as a single entity, rather than as a collection of separate, mutually competing budgets of individual ministries, authorities or other organisational units. This approach reflects the fact that the state acts externally as a single legal entity, whose assets are concentrated primarily in the state budget or, where applicable, in other components of public assets.
From a practical perspective, this means that when assessing whether damage has occurred, the decisive factor is the impact on the state’s assets as a whole, not merely internal accounting or budgetary transfers between individual components.
If funds are merely ‘transferred’ from one chapter to another or from one organisational unit to the state budget, without the state as a whole suffering any loss of assets, no loss arises within the meaning of either civil or criminal law.
Case law: budgetary discipline and ‘loss’ within the state
This conclusion is illustrated by the Supreme Court’s judgment of 17 April 2019, ref. no. 21 Cdo 5190/2017. In the case in question, one organisational unit of the state was required to pay a levy to another organisational unit of the state for a breach of budgetary discipline resulting from the misconduct of its employee. The ‘aggrieved’ state body subsequently brought a claim against the employee for compensation for this amount as damages.
The Supreme Court rejected this approach and emphasised that:
- By paying the penalty for breach of budgetary discipline, the funds were returned to the state budget, i.e. ‘back’ to the assets of the state as a whole.
- This was therefore merely a transfer of funds within the state, not a definitive loss of those funds.
- => Consequently, the state’s assets were not diminished and the claimant, as the employer, did not suffer the alleged loss.
The Supreme Court reached the same conclusion in its judgment of 4 December 2017, ref. no. 31 Cdo 2764/2016, which concerned a penalty for breaching public procurement rules. Here, too, the situation involved a penalty imposed on a single state body; however, from an overall perspective, it again constituted merely a transfer of funds within public budgets, rather than a reduction in state assets.
Practical implications for claiming damages from state employees
This case law has a significant impact on state employers. If, as a result of an employee’s error, a penalty or levy is imposed which in reality constitutes merely an internal transfer of funds within the state (for example, from the budget of one organisational unit to the state budget, or between individual units), the occurrence of damage is ruled out.
The state as a whole has not lost any assets; it has merely reallocated them.
In these circumstances, it is not legitimate to claim compensation from a specific employee for damage that, in the sense of substantive law, did not arise at all. Any internal ‘reallocation’ or passing on of the negative effects of a budgetary penalty to an employee under the pretext of compensation for damage would be contrary to the interpretation established by the Supreme Court.
However, this does not mean that the employee’s misconduct will go unpunished. Labour law liability may apply in the form of disciplinary measures, a reassignment of duties, or organisational measures to prevent further misconduct. However, the direct recovery of monetary ‘damages’ from an employee presupposes that there was an actual reduction in the assets of the state as a whole, rather than merely an internal transfer of funds.
Practical recommendations: how to deal with claims for damages
When considering claims for damages against their employees, state authorities should first assess whether there has actually been a real financial loss on the part of the state as a whole. If the sanctions or levies merely constitute a transfer of funds within public budgets, it is appropriate to address the employee’s liability under employment law, rather than through a claim for damages.
At the same time, it is advisable to establish internal procedures that distinguish between situations where the state as a whole actually makes external payments (e.g. compensation to a third party, contractual penalties owed to a supplier, etc.) and situations where funds are merely transferred within the public sector. It is precisely in this second category that one must take into account that, according to the established case law of the Supreme Court, no damage within the meaning of civil law arises.
Conclusion
The case law of the Supreme Court confirms that, for the purposes of compensation for damages, the state is regarded as a single financial/property entity. Internal sanctions and levies, which merely transfer funds within the state budget or between organisational units, do not give rise to damages and therefore cannot constitute grounds for a claim for compensation against an employee.
These conclusions may also be applied per analogiam to other natural persons who act negligently in the performance of their duties (e.g. self-employed contractors or other suppliers to the state – ministries, state-funded organisations, etc.). In practice, this means that state authorities must carefully distinguish between actual financial losses incurred by the state as a whole and purely internal budgetary transfers – and select the appropriate type of liability for employees or other staff accordingly.
Author: Michal Odarčenko, Senior Associate, Corporate and M&A, LYNX Czech Republic
Source: Judgment of the Supreme Court of 17 April 2019, ref. no. 21 Cdo 5190/2017
Judgment of the Supreme Court of 4 December 2017, ref. no. 31 Cdo 2764/2016