Contract of assignment

The contract of assignment is one of the basic civil law contracts and its legal regulation can be found in Sections 724 to 732 of the Civil Code. It is an agreement by which the principal undertakes to perform certain activities for the principal, such as administering property, concluding contracts or acting on the principal’s behalf before the authorities or courts. Although the Commercial Code does not regulate the command contract, its provisions are also applicable in commercial law relations. The object of a contract of command may be the acquisition of movable or immovable property, the management of someone else’s property or the handling of a specific matter. Specific forms of a contract of command are a contract for the acquisition of a thing (Art. 733 et seq. CC) and a contract for the sale of a thing (Art. 737 et seq. CC). A contract of command may be concluded as a separate document or form only part of another contract. Such a contract is often used in legal, commercial and personal practice, whether it is for representation in legal transactions, property management or acting on behalf of another person. Crucially, the principal acts in the name and on behalf of the principal, creating a relationship of trust and responsibility between them.

What exactly is a command contract

A contract of agency is an agreement between two people or companies where one party (the principal) undertakes to arrange, arrange or procure something for the other (the principal), i.e. to do an act on behalf of or for the benefit of the latter.

It is not an employment contract or a performance agreement, but a commitment to do something, for example:

• to arrange for an official permit,
• to represent someone when signing a contract,
• manage the apartment,
• organise a business trip,
• or handle legal, accounting or administrative matters.
  

The principal may or may not be paid for this activity, depending on the agreement. The important thing is that the principal acts independently, but at the same time according to the instructions of the principal. The principal is responsible for ensuring that the task is carried out with professional care and in the interests of the principal.

Specific types of command contract

A principal contract is the basic type of contract under Sections 724 to 733 of the Civil Code, but in practice there are a number of specific forms, depending on the type of activity the principal undertakes to perform.

Mandate contract (in commercial relations)

• It is a commercial version of a contract of command pursuant to Sections 566 to 576 of the Commercial Code.
• It is used between business people, e.g. a firm instructs another firm to transact business on its behalf, negotiate with customers or represent it in a legal proceeding.
• The mandataire shall act professionally and shall be responsible for the proper handling of the matter.
• Typically, it is a commercial representation, brokerage or case management.
  

Lawyer’s (legal) retainer agreement

• It is concluded between the client and the lawyer.
• The client (principal) instructs the lawyer (principal) to represent him/her, to make submissions, to defend his/her interests or to draft a legal document.
• The remuneration is governed by the lawyer’s tariff.
• The contract is often in writing and includes confidentiality and information protection agreements.
  

Contract for the management of foreign property

• This is a specific form of order in which the principal manages the principal’s assets (e.g., home, real estate, investments).
• The trustee acts in the name and on behalf of the owner, often on a long-term basis.
• The contract must clearly define the scope of the powers, e.g. whether it can enter into contracts, receive payments, order services.
• It is used, for example, in the management of apartment buildings or rental properties.
  

Procuration or commercial representation

• It is not a “pure” command contract, but it has the same basis, the authority to act on behalf of the entrepreneur.
• The proxy is registered in the commercial register and has the power to represent the company in all legal acts.
• It is the broadest form of commercial mandate, legally and economically binding.
  

Medical or health order

• It is used in healthcare, e.g., a physician as a principal is instructed by a patient (principal) to perform a particular act or procedure.
• The contract is often part of the patient’s informed consent.
• This is a responsible form of order where health, confidentiality and professional care regulations also apply.
  

Agency agreement (civil form)

• Typically between individuals, e.g. you appoint someone to represent your interests at the authorities, when collecting parcels or when buying a car.
• It is a simple form of command without the business element.
  

Mediation contract (combined with an order)

• An agent (e.g. a real estate agent) acts under an order to find a prospective buyer or tenant for the principal.
• In practice, it has the characteristics of both a command and an agency contract.
• Remuneration is paid after successful mediation.
  

Particulars of a contract of assignment

The elements of a contract of assignment are regulated in Sections 724 to 732 of the Civil Code. This type of contract is a contract of obligation, i.e. it creates a relationship in which one party (the principal) undertakes to perform a certain action for the other party (the principal).

The basic elements of a command contract under the Act:

1. Parties

• Principal: a person who gives an order for the principal to do something for him or her.
• Principal: a person who undertakes to execute an order (to carry out an action on behalf of and for the account of the principal).

Both must have legal capacity.

2. Subject matter of the contract (§ 724 CC)

The object of a contract of assignment is the performance of certain activities for the principal, for example:

• the acquisition of a thing (movable or immovable),
• asset management,
• representation in legal transactions,
• proceedings before authorities, courts or third parties.

A contract does not refer to the result, but to the actual performance of the activity (unlike, for example, a works contract).

3. Form of contract

• The law does not require a written form; a contract of command may also be concluded orally or by implication (conduct).
• The written form is particularly recommended in business practice or when important legal transactions are involved.
  

4. Rights and Obligations of the Parties

The principal is obliged to:

• act personally, with professional diligence and in the interest of the principal,
• inform the principal of the execution of the action,
• hand over everything he has acquired in the execution of the order,
• maintain confidentiality about the principal’s affairs.
  

The principal is obliged to:

• provide the necessary assistance,
• reimburse the Principal for the costs reasonably incurred by the Principal,
• and, if remuneration has been agreed, to pay it.
  

5. Remuneration (§ 730 CC)

• A contract of assignment may be both gratuitous and gratuitous.
• If the remuneration was customary for the type of activity, it is presumed that the order was agreed for remuneration, even if this is not explicitly stated.
  

6. Termination of the contract of assignment (Art. 732 CC)

The contract of assignment shall terminate:

• by complying with the order,
• by revocation of the order by the principal,
• by termination of the order by the principal,
• by the death of one of the parties, unless the contract provides otherwise.
  

7. Specific types of command contract

• Acquisition contract (§ 733 – 736 CC)
• Contract for the procurement of the sale of a thing (Art. 737 – 741 CC)
  

These contracts have a common basis in the contract of command, but they regulate specific situations (e.g. mediation of the purchase or sale of a thing).

Legitimate use of a command contract

Representation in legal transactions

A person authorises another person to represent him/her at the authorities, when signing contracts, or when buying/selling a movable item (e.g. a car). Typical between relatives, colleagues, or between client and lawyer.

Advantages:

• Flexibility: an agreement between the parties is sufficient, it does not have to be an employment relationship.
• Speed: the principal can act immediately, no employee registration is required.
• Clear responsibility: the principal is responsible for the proper performance of the act.
  

Management of foreign property

The owner of the apartment authorizes the manager to handle maintenance, communicate with tenants, pay bills. Or the business owner will assign another person to manage the fleet or inventory.

Advantages:

• There is no need to conclude an employment contract with the administrator.
• The principal has a duty of care, but liability is contractually limited.
• Tax advantageous for the principal (if he/she is a self-employed person).
  

Procurement of a matter (one-off activity)

The customer authorises a person to process the building permit, to process official documents, to translate the text or to take delivery.

Advantages:

• Short-term, purposeful cooperation.
• There is no need to deal with levies and administration as with employees.
• It can also be concluded orally if it is not a complex transaction.
  

Working with an expert or consultant

The company appoints an external accountant, lawyer, architect, doctor, expert or consultant to carry out professional work for it.

Advantages:

• The possibility to use experts without creating an employment relationship.
• Flexible pay according to performance.
• The principal acts independently, without dependent status.
  

Mandate in business or commercial relations

The company authorizes another person (the principal) to negotiate contracts, take delivery of goods, and conclude deals. The legal basis may be a contract of assignment under the Civil Code or a mandate contract under the Commercial Code (§ 566-576).

Advantages:

• Allows business representation without employment.
• Clear delineation of powers and rewards.
• The mandataire bears limited risk but acts on behalf of the entrepreneur.
  

Representation in associations, communities, non-profits

A member of the community of owners is authorized to handle the agenda, communicate with the authorities or the accountant. Or a volunteer in a non-profit organization is tasked with securing a project, event or grant.

Advantages:

• No employment contract or trade licence is required.
• Allows you to legally reward a volunteer or a designated person.
  

When to definitely deal with a contract of injunction with a lawyer

• If the activity involves financial or legal liability (e.g. acting on behalf of another person).
• If the contract is to be long-term or recurrent (not to be confused with a contract of employment).
• If the subject matter is asset management, investment management, representation before courts or authorities.
• If foreign entities or contracts in a foreign language.
  

Commission contract and gratuitousness

The contract of assignment is regulated in § 724 et seq. Civil Code. It is a type of obligation whereby the principal undertakes to perform a certain activity for the principal on the principal’s behalf and the principal undertakes to compensate the principal for the necessary costs and to pay a reasonable remuneration, if agreed or customary.

It follows from the nature of the case that a contract of assignment is typically a gratuitous contract, unless the parties provide otherwise. The law does not expressly provide for a claim to remuneration as a necessary component of the command relationship, which distinguishes it from a contract for work (Art. 631 CC) or a mandate contract in commercial law (Art. 566 CC), where remuneration is the rule.

However, the gratuitous nature of a contract of assignment does not imply gratuitousness. The principal is always entitled to reimbursement of the necessary and reasonable costs incurred in the execution of the order (Art. 731 CC), even if the contract was concluded gratuitously.

Gratuitousness can be:

• explicitly agreed, e.g. in interest or family relationships,
• arise from the circumstances of the case if it is clear that the intention of the parties was not to provide remuneration.
  

If the question of remuneration is not provided for in the contract, the case law (cf. e.g. R 41/1970) assumes that it is an order without remuneration if the remuneration is not customary in view of the nature of the activity or the position of the principal. In commercial law relations, however, the opposite rule applies; according to Section 566(2) of the Commercial Code, a mandate agreement is deemed to be for remuneration unless its contents imply otherwise. In applying civil law, it is therefore necessary to take into account both the nature of the subjects and the purpose of the legal transaction. From a practical point of view, it is recommended that the question of whether or not the contract is remunerative should be expressly provided for in the text of the contract, thereby avoiding disputes of interpretation in the event that the principal claims remuneration or reimbursement of costs.

Employment on the basis of a contract of assignment

The contract of assignment pursuant to § 724 et seq. of the Civil Code constitutes a civil obligation relationship in which the principal undertakes to perform a certain activity for the principal. Unlike an employment relationship under the Labour Code (Act No 311/2001 Coll.), a commission contract does not constitute an employment relationship or any other employment relationship within the meaning of Article 1(3) of the Labour Code.

The employment of natural persons under a contract of employment is only permissible if it is a genuine independent civil relationship, i.e. if the features of dependent work pursuant to Section 1(2) of the Labour Code do not arise .

Signs of dependent work

Pursuant to Section 1(2) of the Labour Code, dependent work is considered to be an activity which is:

• exercised in a relationship of superiority and subordination,
• on behalf of the employer,
• according to his instructions,
• personally to the employees.
  

If these features are fulfilled, it is dependent work that can only be performed in an employment relationship (employment contract, agreement on work performed outside the employment relationship).

Inadmissibility of a cover-up of the employment relationship

If the contract is concluded to circumvent employment law (e.g. to avoid having to pay taxes, take holidays or keep working hours), it is a “disguised employment relationship” (shvarcsystem).

In that case:

• the labour inspectorate can sanction this as illegal employment
• the legal act is considered void for contradiction with the law according to § 39 of the Civil Code,
• and the relationship between the parties shall be treated as a statutory employment relationship if its characteristics are fulfilled.
  

Tax and levy obligations command contract

A contract of assignment under Sections 724 to 733 of the Civil Code is a civil contract, not an employment relationship. It follows that levies and taxes are determined according to the status of the principal, i.e. the one who performs the work:

• Natural person – non-entrepreneur (e.g. without a trade)
• self-employed (e.g. sole trader)
• Legal entity (e.g. Ltd.)
  

Principal as a natural person – non-entrepreneur

This is the most common case when, for example, someone carries out an activity on a one-off basis on the basis of an assignment.

Income tax

• Income from a commission contract is considered other income under Section 8 of the Income Tax Act.
• Tax base = income – provable expenses (e.g. travel, materials, fees).
• If expenses cannot be clearly demonstrated, only gross income may be allowed.
  

Taxation:

• If the recipient is an FO and is not a self-employed person and the income does not exceed € 500, it can be considered as occasional income, which is exempt from tax up to € 500 per year (§ 9(1)(g) of the Income Tax Act).
• PO taxes by default.
  

Social and health contributions

• If the recipient is an FO and not a self-employed person and the income exceeds €500, such income is subject to health insurance
• PO does not pay health levies.
  

Principal as a self-employed person (sole trader)

If the principal is a business (has a business registration number), the contract of assignment is usually concluded in the commercial relationship mode.

Income tax

• Income is income from business according to § 6 of the Income Tax Act.
• He can claim:
  • 60 % flat-rate expenses (max. € 20 000 per year), or
  • actual expenditure (accounting or tax records).
    
• Tax rate: 15% up to a turnover of €100,000, otherwise 19% to 35% (depending on the amount of the tax base).
  

Deductions

• The self-employed person pays his/her own social security and health contributions according to his/her tax return.
• Levies are generally calculated on the taxable amount
  

In this case, the principal does not deduct anything, he just pays the invoiced amount.

Principal as a legal entity (e.g. Ltd.)

If the activity is carried out by a company on the basis of a mandate contract:

• The company issues an invoice: the principal pays the amount including VAT (if he is the payer).
• The company taxes the income as corporate income (10% / 21% / 24% tax).
• No levies are payable on this as for employees.
• Liability and risks are dealt with contractually.

Comparison of the command contract with other contracts

Employment contract vs. command contract

• When the principal works regularly, as directed, at the designated time and on the principal’s resources.
• In fact, it is a dependent job, he should have an employment contract.
• Typical in the so-called “schvarcsystem”.
  

Contract for work vs. contract of assignment

• If it is about producing a specific result (e.g. a project, a text, a proposal), not about actually procuring the thing.
• Difference: command = action, work = result of action.
  

Mandate contract vs. command contract

• Both are similar, but the mandate contract is used in business-to-business relationships.
• A promissory note is civil, suitable for non-business owners.
  

Agreements for work performed outside the employment relationship (FTE, FTE) vs. command contract

• When it is a short-term job but actually has the characteristics of dependent work.
• Agreements are under the Labour Code, command contracts under the Civil Code.
  

In conclusion

A contract of agency is a useful and flexible legal instrument that allows you to entrust another person with the procurement of a specific activity or act without the need to enter into an employment relationship. In practice, however, it is often confused with an employment contract or a work contract, which can lead to confusion in the areas of tax, levies and legal liability. It is therefore important that the contract is drafted accurately, clearly defining the scope of the activity, the remuneration and the relationship between the parties. If you are unsure whether a retainer agreement is appropriate for your situation or need help getting it right, we at Highgate Law Firm are happy to advise you. Our lawyers will ensure that your contract is not only lawful, but also beneficial and secure for both parties.