Commercial contracts with Czech partners

Understanding the fundamental difference between common law and civil law

When American companies approach Czech contract negotiations, they typically operate under common law assumptions that do not apply in the Czech Republic.

The Czech legal system is rooted in civil law principles, which means contracts function according to an entirely different philosophy than the one American executives learned in their home jurisdictions.

In common law systems like the United States, contracts are interpreted based on the parties' actual intent, with courts filling gaps through flexible doctrines and business reasonableness standards. The American legal tradition trusts parties to negotiate at arm's length and generally enforces what they have written.

The Czech Civil Code contains detailed statutory provisions that automatically apply to fill gaps in contracts, regardless of whether the parties actually intended these statutory provisions to govern their transaction.

This means that when an American company drafts a contract using a template prepared for U.S. law and simply translates it into Czech or presents it to a Czech partner, the contract may contain provisions that are either unenforceable under Czech law or that will be interpreted in ways that contradict the American party's original intent.

The lawyers at ARROWS Law Firm combine in-depth knowledge of the Czech legal environment with extensive experience in international and cross-border cases, allowing them to help American companies structure contracts that actually work within the Czech legal framework.

What Czech courts actually look for in contracts

Czech courts apply a strict interpretation method that foreign companies frequently misunderstand. When examining a contract, Czech courts focus on the linguistic expression of the parties' will and apply the Czech Civil Code provisions to fill any gaps.

Unlike American courts, which may heavily weigh industry customs and broad context, Czech courts place significant emphasis on the written text and statutory definitions. This approach creates immediate consequences for American companies accustomed to longer, more narrative-style contracts.

An American contract might include extensive recitations (preambles) about what the parties intend to accomplish. While helpful, Czech courts prioritize the operative clauses over these recitations. Furthermore, under Section 557 of the Civil Code, a rule similar to contra proferentem applies.

The written form requirement: specifics of Czech law

American business culture often relies on email confirmations and informal documentation. Czech law imposes written form requirements for specific types of valid acts. While the current Civil Code has liberalized formalities for general B2B contracts, strict written form is still mandatory for key transactions.

If you appoint a Czech representative without a written agreement, the contract may be invalid, or at best, the statutory provisions governing agent relationships will automatically apply.

The requirement for written form extends beyond merely documenting the agreement. Czech law distinguishes between simple written form (signed document) and stricter forms. For instance, transferring an ownership interest in a Czech limited liability company ( s.r.o.) requires signatures to be officially certified.

The lawyers at ARROWS Law Firm help American clients prepare contracts that satisfy all Czech formal requirements, preventing costly disputes over whether a contract was ever validly concluded.

Electronic signatures and digital contracting

The Czech legal framework, following the EU eIDAS Regulation, recognizes different levels of electronic signatures. While the Czech Labour Code and Civil Code allow for electronic conclusion of contracts, high-stakes transactions require caution.

There are three main types of electronic signatures: simple electronic signatures, advanced electronic signatures, and qualified electronic signatures (QES). For actions requiring strict written form or where the document serves as key evidence in public registers, a simple electronic signature is often insufficient.

Contractual penalties: a critical difference from liquidated damages

American companies frequently include "liquidated damages" clauses. Czech law utilizes the "contractual penalty" ( smluvní pokuta ), governed by Sections 2048–2052 of the Civil Code. It operates under fundamentally different rules than the American equivalent.

In Czech law, a contractual penalty functions as a flat sanction for a breach of duty, regardless of whether any actual damage occurred.

However, two critical traps exist for American drafters:

• Relationship to damages: If a contractual penalty is agreed upon, the creditor cannot claim damages for the breach covered by the penalty unless the contract explicitly states otherwise. American templates often stay silent on this.
• Disproportionate penalties: Courts can reduce (moderate) a contractual penalty if they find it "manifestly disproportionate." While there is no fixed percentage, penalties exceeding roughly 0.5% of the contract value per day of delay are often scrutinized.

Vague phrases like "a penalty shall apply for any breach" are often found unenforceable by Czech courts.

Liability limitations and exclusions: not what you think they are

American companies routinely include clauses excluding liability for "indirect damages," "consequential damages," and "lost profits." These exclusions are standard in the US but require careful drafting in the Czech Republic.

There is no direct statutory equivalent to the US concept of "consequential damages," so excluding them without defining them may lead to interpretation disputes.

More importantly, certain liabilities cannot be excluded. Under Section 2898 of the Civil Code, you cannot exclude or limit liability for:

• Harm to the natural rights of a person (life, health).
• Damage caused intentionally.
• Damage caused by gross negligence ( hrubá nedbalost ).

Any clause attempting to exclude liability for gross negligence or intentional acts is invalid.

Furthermore, liability caps must be reasonable; if a weaker party is involved (which is less common in pure B2B but possible), a cap that effectively eliminates the right to compensation could be deemed contrary to good morals.

Understanding force majeure in the Czech context

Force majeure ( vyšší moc ) is recognized under Section 2913(2) of the Civil Code as an extraordinary, unforeseeable, and insurmountable obstacle preventing performance.

Key distinctions in Czech law include the objective standard, where the obstacle must prevent anyone in that position from performing. Additionally, unless the contract states otherwise, force majeure generally excuses the obligation to pay damages but does not automatically extinguish the obligation to pay a contractual penalty for delay.

The ARROWS Law Firm regularly advises American companies on structuring force majeure clauses that actually protect them under Czech law and explicitly address the interplay with contractual penalties.

The pre-litigation demand letter requirement

One of the most commonly overlooked requirements in Czech commercial litigation is the pre-litigation demand letter ( předžalobní výzva ).

Under Section 142a of the Civil Procedure Code, a plaintiff who seeks to recover legal costs from the defendant must send a formal demand for performance to the defendant's last known address at least seven days before filing the lawsuit.

If you file a lawsuit without sending this demand, the court may still hear the case. However, even if you win the case fully, the court generally will not award you reimbursement for legal costs (attorney fees, court fees).

Given that Czech litigation follows the "loser pays" principle, failing to send this simple letter can cost an American company thousands of dollars in unrecoverable legal fees.

Warranty and defect notification: notice deadlines you cannot miss

Czech law distinguishes between statutory liability for defects (existing at the time of transfer of risk) and a contractual quality guarantee (warranty covering a future period).

In B2B transactions, the purchaser must inspect goods and notify the seller of defects "without undue delay" ( bez zbytečného odkladu ) after they could have been discovered. For apparent defects, this means practically immediately upon delivery.

If an American company waits months to report a defect that should have been found during a standard incoming inspection, the Czech court will likely reject the claim because the notice was not timely.

Risk assessment: dangers in contracts with Czech partners

Executive summary for management

Contractual gap-filling in Czech law automatically fills gaps in contracts with statutory provisions. Silence in a contract does not mean "no rule applies"; it means "the Czech Civil Code applies," which may favor the other party.

American templates often fail to effectively separate penalties from damages, potentially capping your recovery.

Procedural strictness regarding form requirements, strict defect notification deadlines, and pre-litigation notices are not mere formalities. They determine enforceability and cost recovery.

Using a raw US template in the Czech jurisdiction often results in a contract where the most critical protective clauses are either void or interpreted counter-intuitively.

Choosing jurisdiction and dispute resolution wisely

Under the EU Brussels I bis Regulation, jurisdiction is generally based on the defendant's domicile. If you sue a Czech partner, the default venue is a Czech court.

Litigation in Czech courts offers enforceability within the EU but involves proceedings in the Czech language. Litigation in US courts offers familiarity, but enforcement is difficult as there is no bilateral treaty on the recognition of judgments between the US and the Czech Republic.

Arbitration is often a strong alternative. The Czech Republic is a signatory to the New York Convention, making arbitral awards enforceable globally.

The ARROWS Law Firm advises on selecting the optimal dispute resolution clause based on the location of assets and the nature of the business relationship.

Cross-border service and enforcement considerations

Serving a lawsuit on a Czech entity must follow the Hague Service Convention. Sending documents via FedEx directly to the defendant is generally insufficient for proper service of process in a US lawsuit intended to be enforced in CZ.

Enforcing a Czech judgment against a US entity's assets in the US requires filing a recognition action under the state law where assets are located.

Given the complexities of cross-border enforcement, it is often strategic to choose the forum where the defendant holds the majority of their assets.

Conclusion of the article

Commercial contracts with Czech partners present complexities that extend far beyond translation. The fundamental differences between civil law and common law systems create pitfalls for American companies relying on domestic habits. Whether the issue involves contractual form, penalty enforceability, or strict warranty deadlines, Czech law demands specific attention.

The specialists at ARROWS Law Firm handle this agenda daily, minimizing the risk of costly errors.

If you are negotiating with Czech partners, contact consultation@arws.cz to ensure your agreements are enforceable and tailored to the reality of the Czech legal framework.