Entering into a major contract with another company – how to divide responsibility in a consortium

A Consortium is Formed by Signature, Not by Registration

If several persons undertake by contract to associate as partners for a common purpose of activity or property, an association is formed (Section 2716 of the Czech Civil Code). A consortium is the practical name for this type of association. Nothing else is required for its formation: no registration, no separate name, no capital contribution. If you sign a document with another company stating that you are bidding for a contract and will perform it jointly, the consortium exists from that moment, whether you call it that or not.

This also implies what a consortium is not. It does not create a legal entity, has no assets or statutory body of its own, and cannot be sued as a whole. The Supreme Court of the Czech Republic summarises this by stating that a partnership agreement does not lead to the establishment of a legal entity, but only to the creation of contractual relationships between the partners. The client therefore sues the specific companies, not the "association". For you, this means that any dispute over a penalty will be brought by the client against one or both companies by name.

This inconspicuous nature is precisely why the law provides strong protection for the other party. The existence of the consortium and the content of your agreement are not published anywhere, so the client has no way of knowing who is responsible for what internally. The law therefore works with the simplest rule: all partners are liable for debts arising from the joint activity. What exactly is considered such a debt is then determined mainly by the contract you sign with the client.

In practice, consortia appear in three situations, each leading to a different risk allocation. A capacity-based consortium is formed when you cannot handle the volume of the contract on your own; both companies are interchangeable and the dispute is about money. A qualification-based consortium supplements missing references or turnover, and the failure of the partner who provided the qualification can affect its fulfilment or lead to an inadmissible change of supplier. A technology-based consortium brings together companies, each of which can perform a different part of the work, and you cannot make up for a partner's failure with your own resources.

Joint and Several Liability: Why the Client Doesn't Care About Your Internal Arrangements

For debts arising from their joint activities, the partners are liable to third parties jointly and severally (Section 2736 of the Czech Civil Code). In practice, this means that the client can demand the entire performance or any part of it from any of you, and the company called upon must perform regardless of its internal share. Settling with your partner is a secondary step, and its outcome is of no concern to the client.

The harshest form of this rule was demonstrated in a dispute over the remediation of an old environmental burden. Two companies formed a consortium for a public contract to remove barrels of hazardous waste. The work never started, one of the partner companies was criminally convicted for related actions, and the state demanded contractual penalties exceeding thirty million crowns. It demanded them from both, including the one that had practically no involvement in the performance of the work and was unaware of the criminal activity.

The Supreme Court concluded that the partners incurred a joint debt for the agreed contractual penalty due to the breach of duty and that they were jointly and severally liable for its payment under Section 2736; it described the appellate court's assessment on this point as flawless (judgment of the Supreme Court, file no. 23 Cdo 1051/2025 of 5 January 2026, available at rozhodnuti.nsoud.cz). Thus, joint and several liability may not end with the main obligation and can also apply to penalties for its breach.

One thing needs to be added to the judgment to avoid misunderstanding. The Supreme Court overturned the appellate court's judgment regarding the passive partner's obligation and remanded the case to the appellate court for further proceedings in this respect, but for a different reason, namely the method of assessing the reasonableness of the penalty. This does not change the conclusion on joint and several liability, but it does change the amount that the passive partner will ultimately pay.

Also significant is the conclusion about where the scope of joint and several liability comes from. The court rejected the interpretation that public procurement rules themselves would modify the external relations of the consortium. The actual content and scope of joint and several obligations are determined by interpreting the implementation contracts. In other words, what you will be liable for is decided in the text of the contract for work with the client, not in the tender application—which is precisely why the lawyers at ARROWS law firm review it before the bid is signed.

What Your Partner Can Sign Without Your Knowledge

A partner binds you to the client when they have your authorisation to do so, and in a joint bid, you can give them this authorisation without fully realising it, for example, through a general power of attorney for dealing with the contracting authority. In a joint matter, the law considers them an agent for all partners, and a different internal arrangement cannot be invoked against a third party acting in good faith (Section 2737 of the Czech Civil Code). However, the mandate itself does not include representation, as the Supreme Administrative Court has emphasised (resolution file no. 10 Afs 66/2023 of 29 November 2023).

In practice, this is more dangerous than joint and several liability itself, because it happens continuously and without notice. A broadly written power of attorney will cover a signed site meeting minute, an accepted deadline change, an acknowledgement of a defect, and an agreement to shift the schedule, and every such act by your partner affects you. You usually find out when the client calculates a penalty based on a document you have never seen, and then you are left trying to determine if your partner exceeded their authority.

Defence therefore begins with the scope of the authorisation, not with an internal prohibition. A restriction written only in the partnership agreement will not bind a client acting in good faith. The partner's power of attorney must be precisely defined, i.e., what they can do alone and what only with you, typically with two signatures, and the same rule should be reflected in the contract with the client or notified to them in writing at the outset. If the partner then exceeds the defined authority, they will only bind you if you approve their action without undue delay (Section 440 of the Czech Civil Code).

The second layer is the internal information obligation. The agreement should include a commitment from the partner to provide you with a copy of every document exchanged with the client within an agreed deadline, along with a penalty for breach. Without this, you have no way of knowing what has been signed on your behalf, and you risk starting to act according to a document you do not agree with. Copies of documents are also the primary evidence for a later recourse claim.

What a Partnership Agreement Must Contain to Be Useful

The first block is the division of work and responsibility in a proportion that reflects reality. You need to determine who does which part, who bears the costs for it, and in what proportion the profit and loss are divided between you. This ratio is also the key for later recourse, so if it is set differently from the actual division of labour, you will create a dispute yourself.

The second block is the management of the contract. Determine who the lead partner is, what they can do alone and what only with the consent of the other, how decisions are made in case of disagreement, and who communicates with the client. Without a decision-making mechanism, the consortium will get stuck at the first complication, and the delay will be at the expense of both. It is advisable to appoint one person with decision-making power for operational matters and reserve joint decision-making only for specified cases, typically for changes in price, deadline, and scope of work.

The third block is the internal settlement of penalties, and this is the core of the entire document. It must state that any penalty imposed by the client is borne in full by the party who caused the breach, even if it was collected from the other partner. This should be accompanied by a payment deadline and default interest, so that the settlement is not just a declaration.

The fourth block is the exit strategy. Describe what happens if a partner becomes insolvent, loses their license, stops performing, or withdraws from the cooperation. You need to arrange for the takeover of their part of the work, access to their documentation and work in progress, and how to settle what has already been paid. How to proceed with the client in such a situation is discussed in the text on contractual penalties in public procurement and claims of the consortium administrator.

Which of these four blocks is critical for your contract depends on whether you are entering the consortium for capacity, qualification, or technology. Therefore, the lawyers at ARROWS law firm assess the scope of the partnership agreement based on the specific contract, the tender conditions, and the strength of the partner you are teaming up with.

How to Secure Recourse if a Partner Fails

An internal settlement on paper is only valuable if there are assets to collect from. The company that caused the contract to fail is often the one with no money by the time you file a recourse claim. Security should therefore be arranged at the time of signing, not after the damage has occurred, and its amount should be based on the highest penalty that could arise from the contract.

In practice, three instruments stand up to scrutiny, differing in strength and feasibility. The strongest is a bank guarantee from the partner for an amount corresponding to their share of the contract, or their maximum possible penalty. A middle ground is a retention from joint payments, released upon completion of their part. The weakest, but most feasible, is a guarantee from the partner's parent company or its shareholders.

The second layer is insurance. Request proof of liability insurance coverage and verify the limit and exclusions, especially for contractual penalties, which are often excluded from insurance coverage, so it is necessary to read the specific insurance terms. Coverage documented by an insurer's certificate is information; a partner's declaration is not.

The third layer is ongoing monitoring. Reserve the right to inspect the documentation for your partner's part of the work, attend their site meetings, and receive information about their payment situation. You will notice deteriorating payment morale towards their own suppliers sooner than you will from the public register. What a managed claim enforcement looks like is shown in the text on judicial enforcement of claims against supplier companies.

s of ARROWS law firm will set uWhat the contracting authority wants and what can be negotiated

In public procurement, the contracting authority has an explicit right. It can require suppliers submitting a joint bid to document how liability for performance will be divided, and it can require that all bear joint and several liability (Section 103 of the Public Procurement Act). If it requires joint and several liability, you cannot unilaterally exclude it in the bid, and it is reasonable to start with this assumption.

Therefore, do not look for room for negotiation on whether there will be joint and several liability, but on what exactly it will cover, and look for it in time. Until the deadline for submitting bids, you can propose amendments to the contractual conditions to the contracting authority: capping penalties, linking them to the part of the work where the breach occurred, or the option to replace a defaulting partner without terminating the entire contract. However, the change is made by the contracting authority, and it applies to all suppliers equally. After the bid is submitted, the possibility of negotiation depends on the type of procurement procedure.

With private clients, there is more room, and it is worth using it. There, you can even negotiate divided liability according to parts of the work, if they are technically separable and can be accepted independently. The condition is that the division is unambiguous and that the client has a clear partner for each part to turn to in case of a defect or delay.

On the other hand, the contracting authority is unlikely to back down where it would lose the certainty of completion. If it requires that in the event of one partner's withdrawal, the remaining ones take over their part, there is no point in refusing. It makes sense to price this in and reflect it in the internal settlement: the costs of taking over another's part of the work are among the items you will claim from the departing partner, and they must be named in the partnership agreement.

In a public contract, the takeover mechanism must stand up to the law, not just the partner. Replacing a supplier with another supplier is a substantial change to the contract obligation, unless the contracting authority has explicitly and unambiguously reserved this right in the tender documentation (Section 222 of the Public Procurement Act). Whether the departure of one of the partners constitutes such a change and how to handle it is therefore assessed according to the tender conditions and the implementation contract, not the internal agreement.

Mistakes That Only Surface with the First Penalty

The most common mistake is a partnership agreement taken from a template with no connection to the specific contract. Such a document usually addresses profit shares and is silent on who bears the penalty from the client, how delays are settled, and what happens if a partner leaves. Yet these three things are what determine the outcome.

The second mistake is relying on the client to claim the penalty from the party who caused it. The client naturally goes after the one with the money, and that is their right. Assume that you will be the one to pay, and set up your security accordingly. How to defend against a claim once it has arrived is discussed in the text on defending against a major claim for damages.

The third mistake is a joint account without rules for its use. The money from the contract sits there, and a partner in trouble will use it for their other obligations. Therefore, dispositional authority should require two signatures, and withdrawals above a certain amount should require approval from both; otherwise, the security you painstakingly negotiated will dissolve before you need it.

The fourth mistake is a late reaction to a partner falling behind. The longer you try to resolve it by agreement, the less time is left to take over their part and the higher the penalty that will fall on both. When it is still appropriate to support a partner and when to take over their work is assessed by the lawyers at ARROWS law firm for the specific contract, based on the state of the work and the wording of both contracts.

Where Consortium Cooperation Fails

Final Summary

The article has shown that in a consortium, it is not just about how you divide the work, but mainly that you are both jointly and severally liable to the client for debts arising from the joint activity. This joint and several liability stems from the law, can also apply to penalties for a breach committed by your partner, and you cannot limit it towards the client through an internal agreement; what exactly constitutes a joint debt is determined by the contract with the client.

For company management, this means there are two numbers you need to know before signing. The first is the highest penalty that can arise from the contract, because you might have to pay all of it. The second is the value of the security you actually have from your partner. If the second number is significantly lower than the first, you are not entering a consortium, but providing a loan to your partner.

Procrastination here works in one direction. While you are still bidding for the contract, your partner has a reason to make concessions, and the tender conditions can still be commented on; once the contract is won and underway, you have no leverage, and you will not be able to negotiate internal rules. Consortia that ended well had the penalty settlement, the scope of powers of attorney, and the security signed before the bid was submitted.

The lawyers at ARROWS law firm will prepare and review the partnership agreement and powers of attorney, vet the partner and their insurance coverage, prepare documents for amending the conditions with the contracting authority, and represent you in enforcing recourse claims and in any subsequent dispute. Write to us at consultation@arws.cz or browse our contracts and negotiations service.