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

A consortium is established by signature, not by registration

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

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

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

In practice, consortia appear in three situations, and each leads to a different distribution of risk. A capacity consortium arises when you cannot handle the volume of the contract on your own; both companies are substitutable, and the dispute is over money. A qualification consortium supplements missing references or turnover, and the failure of the partner who provided the qualification can affect its fulfillment or lead to an impermissible change of supplier. A technological consortium connects companies, each of which can perform a different part of the work, and you cannot make up for the failure of a partner on your own.

Joint and several liability: why the client does not care about your internal division

For debts arising from joint activity, the partners are liable to third parties jointly and severally (Section 2736 of the 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 requested company must perform regardless of what the internal share is. Settlement with the partner is only the second step, and the client is not interested in its outcome.

The harshest form of this rule was demonstrated in a dispute over the remediation of old environmental damage. Two companies joined into a consortium for a public contract to remove barrels of hazardous waste. The work did not start at all, one of the partner companies was criminally convicted for related conduct, and the state demanded contractual penalties exceeding thirty million CZK. It demanded them from both, including the one that practically did not participate in the execution of the work and did not know about the criminal activity.

The Czech Supreme Court concluded that a joint debt from the agreed contractual penalty arose for the partners due to a breach of duty, and that they are jointly and severally liable for its fulfillment under Section 2736; it described the assessment of the appellate court on this point as flawless (judgment of the Supreme Court, Case No. 23 Cdo 1051/2025 of January 5, 2026, available at rozhodnuti.nsoud.cz). Thus, joint and several liability does not have to 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 annulled the judgment of the appellate court in the ruling on the obligation of the passive partner and remanded the case to the appellate court to that extent for further proceedings, but for a different reason, namely due to the method of assessing the adequacy of the penalty. This does not change the conclusion on joint and several liability, but it does affect the amount that the passive partner will ultimately pay.

The conclusion on where the scope of joint and several liability comes from is also essential. The court rejected the interpretation according to which 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 the interpretation of 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 bid application — and that is precisely why the Czech legal team at ARROWS law firm reviews it before the bid is signed.

What your partner might sign on your behalf without you knowing

A partner will bind you to the client when they have your authorization, and you might give them this in a joint bid without fully realizing it, for example, through a general power of attorney for negotiations with the contracting authority. In a joint matter, the law considers them a mandatary of all partners, and a deviating internal agreement cannot be asserted against a third party in good faith (Section 2737 of the Civil Code). However, the mandate itself does not include representation, as emphasized by the Czech Supreme Administrative Court (resolution Case No. 10 Afs 66/2023 of November 29, 2023).

In practice, this is more dangerous than joint and several liability itself, because it happens continuously and unnoticed. A broadly drafted power of attorney will cover a signed minutes from a site meeting, an accepted change of deadline, an acknowledgment of a defect, and an agreement to shift the schedule, and every such action of the partner falls on you. You usually find out only when the client calculates a penalty based on a document you have never seen, and then you are left searching to see if the partner exceeded their authority.

Defense therefore begins with the scope of authorization, not with an internal prohibition. A limitation written only in the partnership agreement will not bind a client in good faith. The partner's power of attorney must be defined precisely, i.e., what they can do alone and what only together 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 right at the beginning. 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 Civil Code).

The second layer is the internal information duty. The contract should include an obligation for 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 do not even have a chance to find out what was signed on your behalf, and there is a risk that you will start acting according to a document you do not agree with. At the same time, copies of the documents are the first evidence for a subsequent recourse claim.

What a partnership agreement must contain to be of any use

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

The second block is the management of the contract. Determine who is the leading partner, 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 blamed on both. It has proven useful to designate one person with decision-making authority for operational matters and reserve joint decision-making only for listed cases, typically for changes in price, deadline, and scope of work.

The third block is the internal settlement of penalties, which is the core of the entire document. It must state that a penalty applied by the client is borne in full by the party that caused the breach, even if it was recovered from the other partner. This includes a payment deadline and late interest so that the settlement is not just a declaration.

The fourth block is the exit. Describe what happens if the partner ends up in insolvency, 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 the work in progress, and the method of settling what has already been paid. How to proceed towards the client in such a moment is analyzed in the text on contractual penalties in public contracts and claims of the consortium administrator.

Which of these four blocks is critical for your contract depends on whether you enter the consortium for capacity, qualification, or technology. Therefore, the scope of the partnership agreement is assessed by the Czech legal team at ARROWS law firm based on the specific contract, the tender conditions, and how strong the partner you are entering it with is.

How to secure recourse if your partner fails

An internal settlement on paper is only valuable if there are assets to perform from. The company that abandoned the contract is usually the one that has no money by the time you claim recourse. Security is therefore addressed at the time of signing, not after the damage, and it is advisable to derive its amount from the highest penalty that can arise from the contract.

In practice, three instruments stand up, differing in strength and feasibility. The strongest is a bank guarantee from the partner in an amount corresponding to their share in the contract, or their maximum possible penalty. The middle ground is retention money from joint payments released after the 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, making it 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 continuous monitoring. Reserve the right to inspect the documentation of the partner's part, participate in their site meetings, and receive information about their payment situation. You will notice deteriorating payment discipline towards their own suppliers sooner than from the register. What a managed claim looks like is shown in the text on judicial enforcement of claims against supplier companies.

In public procurement, the contracting authority has an explicit authorization. It may require suppliers submitting a joint bid to demonstrate what the division of liability for performance will be, and it may require all of them to bear joint and several liability (Section 103 of the Act on Public Procurement). If it requires joint and several liability, you cannot unilaterally exclude it in the bid, and it is reasonable to expect this starting point.

Therefore, do not look for room for negotiation in the question of whether joint and several liability will exist, but in what exactly it will apply to, and look for it in time. Until the deadline for submitting bids expires, it is possible to propose adjustments to the contract terms to the contracting authority: capping penalties, linking them to the part of the work where the breach occurred, or the possibility of replacing a defaulting partner without terminating the entire contract. However, the change is made by the contracting authority, and equally for all suppliers. After submitting the bid, the possibility of negotiation depends on the type of procurement procedure.

With private clients, there is more room, and it is worth taking advantage of it. There, it is also possible to negotiate divided liability according to parts of the work, provided 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 will hardly back down where it would lose the certainty of completion. If it requires that upon the withdrawal of one partner, the remaining one takes over their part, there is no point in refusing it. It makes sense to value this and reflect it in the internal settlement: the costs of taking over another party'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 also stand up to the law, not just to the partner. Replacing a supplier with another supplier is a material modification of the contract, unless the contracting authority explicitly reserved it in advance in the tender documentation (Section 222 of the Act on Public Procurement). Whether the departure of one of the partners is such a modification and how to handle it is therefore assessed according to the tender conditions and the implementation contract, not according to the internal agreement.

Mistakes that only show up with the first penalty

The most common mistake is a partnership agreement taken from a template without any connection to the specific contract. Such a document usually addresses profit shares and remains silent on who bears the penalty from the client, how delays are settled, and what happens when a partner leaves. Yet, these three things are precisely what decide the outcome.

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

The third mistake is a joint account without rules for managing it. The money from the contract lies there, and a partner in trouble will use it for their other obligations. Therefore, disposal rights should belong to two signatures, and withdrawals above a certain amount should be approved by both; otherwise, the security you painstakingly negotiated will dissolve before you need it.

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

Where cooperation in a consortium fails

Final Summary

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

For company management, this implies two figures that need to be known before signing. The first is the highest penalty that can arise from the contract, as that is precisely what you might have to pay in full. The second is the value of the security you actually have from the partner. If the second figure is significantly lower than the first, you are not entering a consortium, but rather providing a loan to your partner.

Delay here works only one way. As long as you are only bidding for the contract, the partner has a reason to yield, and the tender conditions can still be commented on; once the contract is awarded and underway, you have no leverage, and you will no longer negotiate internal rules. Consortia that turned out well had the penalty settlement, scope of powers of attorney, and security signed before the bid. The quality of the partnership agreement itself is well complemented by a review of the commercial contract with the client — this is precisely what the text titled What a commercial contract review should contain is about.

The Czech legal team 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 adjusting terms with the contracting authority, and represent you in claiming recourse and in any subsequent dispute. Write to us at consultation@arws.cz or check out our contracts and negotiations service.