Business Contracts with Czech Partners

Two Worlds of Law: Why Your UK Contract Fails in the Czech Republic

This isn't just a technicality; it has major practical consequences. In the UK, contracts must be exhaustive because courts primarily enforce what is explicitly written. In the Czech Republic, the Civil Code provides a detailed framework that fills in gaps a contract might leave open. This means a standard UK contract is often unnecessarily long and may contain clauses that are irrelevant or unenforceable here.

The Principle of Good Faith: A Duty You Can't Ignore

A critical difference is the principle of good faith (dobrá víra). In Czech law, it is a foundational pillar of all private law, requiring parties to act honestly and fairly in all dealings. English law, by contrast, does not recognise a general, overarching duty of good faith in contract performance.

This creates a significant risk. You might assume you can pursue your commercial interests as long as you don't breach the contract's explicit terms. However, a Czech court will interpret your actions through the lens of good faith, potentially creating obligations you never anticipated. Relying on the English approach can lead to disputes and unexpected liabilities.

Mistake #1: The "Smluvní Pokuta" – A Penalty Clause That Bites Back

Of all the legal traps awaiting British companies, the most financially dangerous is the misunderstanding of the Czech contractual penalty, or smluvní pokuta. Assuming it functions like an English penalty clause is a mistake that can cost millions.

In English law, a clause that imposes a penalty for a breach of contract is generally unenforceable unless it represents a "genuine pre-estimate of loss". Its purpose is compensatory. The Czech smluvní pokuta is fundamentally different. It is a powerful and flexible tool designed to be preventive and punitive.

Under the Czech Civil Code, a smluvní pokuta can be used to secure any contractual obligation, including monetary ones like late payment. Crucially, the penalty is enforceable even if the creditor suffered no actual financial damage from the breach. A British company might overlook such a clause, assuming it’s unenforceable, only to face a crippling financial demand.

For example, a contract might stipulate a penalty of 0.5% of the total contract value for each day of delay in payment. A ten-day administrative delay could trigger a penalty of 5% of the entire deal—a sum that could erase your profit margin. While Czech courts can moderate an "unreasonably high" penalty, this is a costly and uncertain litigation strategy.

Mistake #2: Ignoring Czech Formal Requirements

While English law can be flexible regarding contract formalities, Czech law is often stricter. Relying on verbal agreements or failing to meet specific written requirements can render your entire agreement void.

For example, certain agreements, such as agency agreements, must be in writing to be legally valid under the Czech Civil Code. A verbal agreement with a commercial agent in the Czech Republic is void from the start. This means you would have no legal recourse to enforce exclusivity, protect confidential information, or claim damages if the agent fails to perform.

Termination procedures also demand strict adherence. In the Czech Republic, unilateral termination of a commercial contract generally requires a written notice delivered correctly, and statutory notice periods often apply. Simply sending an email may not be sufficient, and failing to follow the correct procedure can invalidate the termination, leaving you exposed to claims for damages.

Mistake #3: Underestimating Post-Brexit Enforcement Challenges

Before Brexit, enforcing a UK court judgment in the Czech Republic was almost automatic under the Brussels I bis Regulation. That simple regime is now gone, making cross-border enforcement significantly more complex, costly, and time-consuming.

Today, your options are limited. If your contract contains an exclusive jurisdiction clause, you may be able to rely on the 2005 Hague Convention. For other situations, the new 2019 Hague Judgments Convention, which entered into force in the UK in July 2025, offers a broader framework but is still new and untested in practice.

If neither convention applies, you must fall back on Czech domestic law, specifically the Act on Private International Law. This process is unpredictable and lengthy, taking anywhere from 12 months to over two years if opposed. It also involves additional costs for official translations and court fees. A poorly drafted dispute resolution clause could mean your UK judgment is practically worthless in the Czech Republic.

Mistake #4: Choosing the Wrong Dispute Resolution Method

The choice between litigation in a state court and private arbitration is a strategic decision that has major consequences post-Brexit. While London is a world-leading centre for both, the enforceability of the outcome in the Czech Republic is now very different.

As discussed, enforcing a UK court judgment is complex. In contrast, an arbitral award is far more easily enforceable internationally thanks to the 1958 New York Convention, which Brexit did not affect. This convention allows arbitral awards from institutions like the London Court of International Arbitration (LCIA) to be enforced in over 160 countries, including the Czech Republic, through a streamlined process.

Arbitration also offers confidentiality, which is crucial for protecting sensitive business information, and allows you to select arbitrators with specific industry expertise. While it has its own costs, for high-value international disputes, the certainty of enforcement often makes it the superior choice. ARROWS lawyers have extensive experience with international arbitration and can advise you on the best strategy for your specific contract.

Mistake #5: Using a UK Template Contract

The most fundamental mistake is assuming that a standard UK contract, translated into English, is suitable for a Czech partner. This approach is a recipe for disaster because it ignores the core differences between common law and civil law.

A UK contract will be filled with concepts that have no meaning in Czech law, such as the doctrine of consideration (the requirement for something of value to be exchanged for a promise to be binding). Conversely, it will lack essential Czech concepts like the powerful smluvní pokuta. Its detailed, exhaustive nature, designed for a common law system, may also create confusion when interpreted by a Czech court accustomed to relying on the Civil Code.

This creates a legally weak document that fails to protect your interests. Clauses you rely on may be unenforceable, while you may be exposed to risks you never anticipated.

Secure Your Czech Business Ventures with ARROWS

Expanding into the Czech Republic, a safe European harbour, offers immense potential, but it requires expert legal guidance. As an international law firm operating from Prague, European Union, ARROWS provides the bridge between the UK's common law and the Czech Republic's civil law systems. Our lawyers combine deep local knowledge with extensive experience advising foreign clients.

We support over 150 joint-stock companies and 250 limited liability companies, and our ARROWS International network, built over 10 years, allows us to handle complex cross-border matters seamlessly. We are known for our speed, quality, and proactive approach—we even connect clients with mutual business interests.

Don't let avoidable contract mistakes undermine your success. Get tailored legal solutions by writing to consultation@arws.cz.