Are you entering into a contract with a Czech company?

Why a Contract with a Domestic Partner is an Underestimated Risk

Companies pay the most attention to contracts that inherently inspire distrust—with a foreign partner, a new supplier, or a company in a high-risk industry. A contract with a typical Czech company, perhaps one the firm has known for years, undergoes significantly less scrutiny because nothing suggests a problem at first glance. However, this asymmetry of attention does not correspond to the actual risk: insolvency or non-performance is just as real a threat with a domestic partner as with a foreign one, it is just discussed less. This is precisely why the steps that determine whether a claim can actually be enforced in the event of a dispute are most often omitted in these contracts.

Enforceability is not a question that a court resolves only after a dispute arises. It is the result of eight decisions made when the contract is signed—who you have verified, who signed the contract, how the debt is secured, and whether you have an instrument in hand that allows for enforcement without lengthy court proceedings. This text goes through all eight points in the order in which they should be checked.

The difference between a company that follows these steps and one that relies on a domestic partner without verification is not apparent at all as long as the partner pays on time. It only becomes clear when they stop paying—and that is precisely the moment when most of these eight points can no longer be retroactively added to the relationship.

Verifying the Counterparty and Who is Authorised to Sign the Contract

The first question is not whether you know the partner, but whether you have verified them as of the date of signing. Before concluding a significant contract, it is worthwhile to check the current extract from the Commercial Register, the status in the Insolvency Register, and the entry in the register of unreliable value-added tax payers. All three sources are publicly available online for free, so the check takes no more than a few minutes, yet in practice, it is commonly skipped for domestic partners. The status of an unreliable payer poses a significant tax risk for the customer, mainly because, under statutory conditions, it establishes their liability for the value-added tax that the supplier fails to pay to the state.

Moreover, this check should not be done just once. A partner who was in good standing when a framework agreement was signed two years ago may be insolvent today—and companies that repeat the check only occasionally often learn of the partner's problem only when they stop paying.

The second question, just as important as the partner's existence and solvency, is who is authorised to sign the contract on behalf of the counterparty. A member of the statutory body may represent the legal entity in all matters; if the authority of the statutory body belongs to several persons, they form a collective statutory body, and unless the founding legal act specifies how its members represent the legal entity, each member acts independently—however, if the founding legal act requires joint action, a member may act independently only as an agent for a specific legal act (Section 164 of the Civil Code).

However, the statutory body is not the only one who can act on behalf of the company, and it is important to know this as a buyer, not just as a seller. A legal entity is also represented by its employees to the extent usual for their position or function, with the decisive factor being the state as it appears to the public (Section 166 of the Civil Code). If an entrepreneur authorises someone to carry out a certain activity in the operation of their business, this person represents the entrepreneur in all acts that usually occur during this activity (Section 430 of the same Act). In addition, a procurator or an agent based on a power of attorney can act on behalf of the company.

For companies with collective management, it is therefore necessary to check the extract from the Commercial Register to see whether each executive director acts for the company independently, or whether the joint action of two or more persons is required. If only one executive director signs the contract where the register requires the signature of two, the legal act is not binding on the company without further action; the acting person would in such a case be bound themselves.

Under certain conditions, however, the company can subsequently approve such an act and thus ratify it with retroactive effect. The Supreme Court assessed a situation in which a contract was signed on behalf of a company by only one of two executive directors, although they were supposed to act jointly, and concluded that the exceeding of the representative authority of a statutory body can be subsequently approved according to the general rules on representation; a company that began to perform under such a contract thereby approved it without undue delay (judgment of the Supreme Court Ref. No. 27 Cdo 4593/2017 of 23 July 2019, available at rozhodnuti.nsoud.cz).

However, relying on subsequent approval is a risky strategy—it is safer to verify the manner of acting in the register extract before signing.

Furthermore, the extract from the Commercial Register is publicly available and free of charge, so this check does not represent any additional administrative burden—it is just a matter of not forgetting it at the time of signing. For a procurator, it is necessary to verify whether the procuration was granted and to what extent. However, internal limitations on the procuration, such as a prohibition on signing contracts above a certain value, have no effect on third parties, even if they have been published (Section 453 of the Civil Code)—such a limitation therefore neither protects nor binds the counterparty dealing with the procurator.

Debt Security and a Notarial Deed as a Direct Enforcement Title

Even a perfectly concluded contract with a verified partner remains an unsecured obligation if the parties do not agree on any form of security. The most common instrument is a guarantee, where the guarantor undertakes to the creditor that they will satisfy their claim if the debtor fails to do so (Section 2018(1) of the Civil Code); other instruments include a security bill of exchange or a lien on the debtor's property.

For riskier business relationships, where a group of related companies provides the guarantee itself, specific issues arise, which are discussed in the text on cross-guarantees. The choice between different security instruments depends on the value of the transaction and the assets the partner has available. For smaller business relationships, a simpler form may suffice, such as blocking part of the purchase price in an escrow account until agreed conditions are met, which limits risk without the need for more complex security instruments.

Separate from securing the debt itself is the question of how quickly enforcement can be initiated in case of non-payment. A standard lawsuit for payment of a debt requires going through the entire fact-finding court proceeding before the creditor obtains an enforcement title—which, in a busy court, can take months or even years, even if the claim is undisputed.

A notarial deed on a legal act, in which a party undertakes to fulfil a monetary debt, may contain the consent of the obligated party for a decision to be ordered and executed according to this deed, and for such a notarial deed to be an enforcement title if they fail to fulfil their obligation properly and on time; the content of such a legal act must also include the amount of the debt and the deadline for performance (Section 71a(1) of the Notaries Act).

This instrument changes the nature of the entire relationship: if the partner does not pay, the creditor does not have to wait for a judgment and can proceed directly to enforcement. A notarial deed with consent to direct enforceability can be arranged directly at the time of signing the contract as part of the security. However, the same law also provides for a situation where the partner is already in debt and the contract did not contain any consent to enforceability: a notarial deed can also be drawn up subsequently as an acknowledgement of an existing monetary debt with consent to enforceability, but this requires the cooperation of the debtor and their consent (Section 71a(2) of the same Act)—the creditor cannot create this instrument unilaterally.

The cost of a notarial deed depends on the amount of the secured debt and is determined by the notarial tariff. The exact amount should always be verified with a specific notary according to the current tariff and compared with the value of the receivable and the costs that would otherwise be incurred in a contentious fact-finding proceeding for the same receivable. Companies that consider a notarial deed only for exceptionally high transactions overlook that it is also worthwhile for recurring deliveries, where the individual receivables add up to a comparable amount over the year.

Delivery, Court Jurisdiction, and Arbitration Clause

The contract should specify the address to which legally significant communications, including reminders and contract withdrawals, are to be delivered. It is presumed that a shipment sent using a postal service provider arrived on the third working day after dispatch, but if it was sent to an address in another country, then on the fifteenth working day after dispatch (Section 573 of the Civil Code).

This presumption of receipt works in favour of the sender, but only if they send the shipment to the correct address, and it is also rebuttable, although the burden of proof lies with the party claiming that they did not receive the shipment. If the partner has changed their registered office in the meantime and the contract does not contain a mechanism for updating the delivery address, the creditor cannot invoke the presumption and must prove actual delivery otherwise, which is considerably more difficult.

A more reliable alternative to post is a data box. Every legal entity registered in the register of persons has a data box established by law, and a document delivered from one company's data box to the accessible data box of another is delivered at the moment of login, but no later than the tenth day after delivery, even if the addressee does not log in at all. This fiction of delivery can be agreed upon in the contract for communication between companies as equivalent or preferential to postal delivery, because unlike a postal address, the data box is not tied to a registered office, which can change without notice.

The delivery address should be stated in the contract separately from the registered office recorded in the Commercial Register, as the two addresses often differ in practice and the partner may not physically accept correspondence at the company's registered office at all. It is also advisable to include a contact e-mail address for routine communication, although this in itself does not create the same legal presumption of delivery as a letter or a data box message.

The contract should also specify which court will resolve any dispute, or alternatively, contain an arbitration clause. For relationships between entrepreneurs arising from their business activities, the parties may agree in writing on the local jurisdiction of another court of first instance, unless the law provides for exclusive jurisdiction; however, this is only a choice of local jurisdiction, not a circumvention of the rules of subject-matter or exclusive jurisdiction.

An alternative is an arbitration clause, by which the parties can agree that property disputes between them shall be decided by one or more arbitrators, or by a permanent arbitration court, instead of a court (Section 2(1) of the Arbitration Act). Such an arbitration agreement must be concluded in writing, otherwise it is invalid (Section 3(1) of the same Act).

An arbitral award, like a court judgment, is an enforcement title, and arbitration proceedings can be faster than court proceedings, depending on the rules of the specific arbitration court and the nature of the dispute. Whether it is actually more advantageous in a particular case, however, depends on the costs, the complexity of the evidence, and whether the dispute will require interim measures, which an arbitrator generally cannot order on their own. The relationship of this security to other instruments, such as a security bill of exchange, is discussed in the text on what happens when a debt is paid but the bill of exchange remains in the creditor's hands.

The Most Common Mistakes in Contracts with Domestic Partners

The most common mistake is a one-time verification of the partner when the contract is first signed, which is never repeated in a long-term cooperation. The company thus trades for years with a partner whose current financial and insolvency status it does not know at all. Setting a reminder for regular partner checks is a matter of a single calendar entry, not a costly process.

The second mistake is a contract signed by only one executive director where the founding documents require the joint action of two or more persons. This defect is only revealed in a dispute when the counterparty argues that the acting person was not authorised to bind the company, and rectification at that point is considerably more difficult than checking the register extract before signing—as subsequent approval depends on whether the company actually consented to it through its conduct, which is not always certain.

Moreover, the company signing the contract usually has no reason to doubt the partner's authority to sign, because it does not know what the manner of acting recorded in the register looks like unless it actively requests the extract.

The third mistake is relying on a standard lawsuit as the only method of enforcement for larger amounts, without the parties considering a notarial deed with consent to direct enforceability. The creditor then waits for a judgment for months or years, even if the partner does not actually dispute the debt. The cost of a notarial deed should be compared with the value of the receivable, not with what it would cost to draft a standard contract—it is a different type of cost that pays off precisely by saving months or years of waiting for a judgment.

The fourth mistake is a contract without an up-to-date delivery address and without a mechanism for changing it. When the partner stops communicating, the creditor has no certainty that a reminder or a withdrawal from the contract has even reached their sphere. The solution is a clause requiring the partner to notify of a change of registered office or delivery address, otherwise delivery is made to the last known address with full legal effect.

Where the Enforceability of a Contract with a Domestic Partner Breaks Down

Final Summary

The article has shown that the enforceability of a contract with a domestic partner is not decided in court, but at the time of its signing: who was verified, who signed the contract, how the debt is secured, and whether the creditor has an instrument that shortens the path to enforcement. A contract with a Czech company is not automatically safer than a contract with a foreign partner—it just inspires less caution, and that is precisely why checks are most often omitted.

Two habits are key for company management. The first is to repeat the verification of the partner in the Commercial and Insolvency Registers continuously throughout the cooperation, not just when the contract is signed. The second is to consider a notarial deed with consent to direct enforceability for larger amounts, which changes the time needed to collect a debt from years to weeks. Both habits are cheap and quick compared to the cost of a dispute conducted without them.

Postponing these steps does not pay off, because most of them only fully manifest themselves when the partner stops paying—and at that point, it is no longer possible to retroactively add the partner's verification as of the signing date, the manner of acting for the company, or the debt security. The notarial deed is an exception in this regard: even after a problem arises, it can be drawn up as an acknowledgement of an existing debt, provided the partner consents—but without their cooperation, the creditor cannot create it unilaterally, so relying on this option instead of preparing in advance is risky.

Companies that have these steps in place from the beginning of the cooperation collect debts in a matter of weeks; companies that relied on a domestic partner without verification wait months for an enforcement title and then find that there is nothing left to enforce. This difference in time and outcome arises exclusively from what was, or was not, agreed upon at the moment of signing, not from additional activity at the time of the dispute.

The lawyers at ARROWS law firm will verify your business partner, propose suitable debt security, prepare a notarial deed with consent to direct enforceability, and represent you in the recovery of the receivable, including enforcement proceedings. Write to us at consultations@arws.cz or browse our contracts and negotiation service.