Have you had the contract reviewed?

Why a Contract Review Is Not the Same as Reading It

A commercial contract review is only meaningful if it asks a different question than a simple reading does. A reading tells you what the contract requires the parties to do under normal circumstances—who delivers what, when, and for how much. A review asks what happens when normal circumstances do not occur: a partner fails to pay, delays delivery, breaches confidentiality, goes bankrupt, sells the company, or the parties simply disagree on the interpretation of a single sentence.

Companies that only have their contracts read often sign documents that look professional because they contain all the usual sections—a preamble, definitions, payment terms, termination. However, this impression of completeness is misleading: the usual parts of a contract address the normal course of the relationship, not its failure, and it is precisely failure that a review targets. They lack answers to eight questions that become relevant only in a conflict, when it is too late to add them to the contract. A specific example of such a gap, protection against escalating input prices, is discussed in the text on inflation clauses in contracts for work.

This is precisely why a review is conducted according to a fixed checklist of risk points, not based on an overall impression of the text. The lawyer reviewing the contract systematically goes through the eight areas described in this text and, for each one, verifies whether the contract addresses the risk or remains silent, relying on general statutory provisions—which often work differently than the parties would expect. This systematic approach also has a practical advantage: it allows for a comparison of the quality of different contracts across a company's portfolio using the same yardstick, instead of assessing each contract in isolation based on how it subjectively appears.

Penalties for Breach of Duty and Limitation of Liability

If the parties agree on a contractual penalty of a certain amount or a method for determining its amount in the event of a breach of a contractual obligation, the creditor may demand the contractual penalty regardless of whether they have incurred damage from the breach of the secured obligation (Section 2048(1) of the Civil Code). This provision is key for creditors: without an agreed penalty, they must prove the existence and amount of damages in court, which is more time-consuming and evidentially demanding than enforcing a pre-agreed sum.

However, the statutory default rule is the opposite of what is often assumed: if a contractual penalty is agreed upon, the creditor is not entitled to compensation for damages arising from the same breach of duty (Section 2050 of the Civil Code). This is a dispositive rule, so the parties can agree that the contractual penalty does not exclude the right to compensation for damages, or that damages exceeding the penalty are also payable—but without such an agreement, the creditor loses the option to claim full damages in addition to the penalty.

It is equally important to check whether payment of the penalty also replaces the obligation to fulfill the debt itself, as the law explicitly states that payment of the contractual penalty does not relieve the debtor of this obligation, unless the parties agree otherwise. Companies often confuse this connection and assume that by paying the penalty, the other party is automatically released from its other obligations, which the law expressly excludes.

A review therefore always checks not only the amount of the penalty but also whether the contract explicitly addresses its relationship to damages. Furthermore, an unreasonably high claim for a contractual penalty can be reduced by a court at the debtor's request; the Grand Chamber of the Supreme Court has clarified that the court does not examine the abstract unreasonableness of the clause itself, but the unreasonableness of the specific claim under the circumstances in which the breach of duty occurred (judgment of the Supreme Court, file no. 31 Cdo 2273/2022 of 11 January 2023, available at rozhodnuti.nsoud.cz). A high penalty is therefore not primarily a risk of the entire clause being invalid, but a risk that a court will reduce it appropriately in a specific dispute.

Contracts often also contain a clause that limits one party's liability for damages to a certain amount, typically the value of the performance. Such a clause is generally valid, but it has a statutory limit that a review must be aware of. No account shall be taken of an arrangement which excludes or limits in advance the duty to compensate for harm caused to a person's natural rights, or caused intentionally or through gross negligence, nor of an arrangement which excludes or limits in advance the right of a weaker party to compensation for any harm (Section 2898 of the Civil Code).

Therefore, a limitation of liability can validly apply to a wide range of situations, but it cannot be invoked for harm caused intentionally or through gross negligence, for harm to a person's natural rights, or against a weaker party, and this right cannot be validly waived. A review should verify that the limitation clause respects this boundary—a formulation that excludes liability without such an exception will not apply to that extent under the law, even if both parties signed it.

In practice, it is recommended to formulate the limitation clause with an explicit exception for intent and gross negligence to ensure it remains applicable to the full extent intended by the parties, rather than having a court correct it later.

Force Majeure and Form of Communication Between Parties

If the contract does not contain its own regulation of force majeure, the statutory rule applies: the tortfeasor is relieved of the obligation to compensate for damages if they prove that they were temporarily or permanently prevented from fulfilling their contractual obligation by an extraordinary, unforeseeable, and insurmountable obstacle that arose independently of their will; however, an obstacle that the tortfeasor was obliged to overcome under the contract does not relieve them of the duty to compensate (Section 2913(2) of the Civil Code).

A contractual provision on force majeure does not necessarily have to be more lenient than this statutory standard—it mainly allows for its specification and the allocation of risks between the parties according to the specific field of business. A review checks whether the contract defines specific events considered as force majeure, what procedure the parties must follow when they occur (typically written notification without undue delay), and what the legal consequences are—suspension of performance, extension of deadlines, or the right to withdraw from the contract if the obstacle persists for longer than an agreed period.

The content of a contract can be amended by agreement of the parties; if this form is required only by the parties' agreement, the content of the contract can also be amended in another form, unless the parties' agreement expressly excludes it (Section 564 of the Civil Code). A review therefore checks two things: whether the contract not only requires written form for its amendments but also expressly excludes any other form, and whether it defines what is considered written form—typically an email from specified addresses, or exclusively a paper document with a signature.

If the agreed form is not observed, invalidity can only be invoked until performance has been rendered under the thus amended contract (Section 582(2) of the same Act)—this is another reason why relying on informal communication does not pay off.

Without a clear definition of authorized persons and the accepted form of communication, disputes arise as to whether a valid amendment has occurred at all. For each contract, a review should verify who is authorized to amend the contract on behalf of each party, and whether this person is the same as the one who is supposed to communicate with the other party about routine performance in practice. It is common for there to be a gap between the person who signed the contract and the person who actually communicates with the counterparty day-to-day—and it is the latter person whose email may later be deemed an invalid amendment to the contract.

Assignment of Contract and the Limitation Period

Unless the nature of the contract precludes it, either party may transfer its rights and obligations under the contract or a part thereof to a third person, provided the assigned party consents and performance has not yet been rendered (Section 1895(1) of the Civil Code). The statutory default is therefore always the consent of the other party as a condition for the assignment of the entire contract—which is advantageous for many companies, but not always sufficient.

It is necessary to distinguish the assignment of the contract as a whole from the assignment of an individual receivable, which a creditor can generally assign even without the debtor's consent, and the assumption of a debt, which, on the contrary, always requires the creditor's consent. A review therefore addresses not only whether the contract requires consent for the assignment of the contract as a whole, but also whether the client wants to make these three different rules stricter or, conversely, simpler in the contract, depending on which risk is relevant for the given relationship.

A review should check whether the contract also explicitly addresses the situation where it is not the contractual party that formally changes, but its owner. The statutory regulation of contract assignment does not apply to the sale of a share in a company that is a party to the contract—in that case, the contractual partner formally remains the same, even though it is now controlled by another person, for example, a direct competitor.

If a company wants to maintain control over who it actually does business with, it needs a separate change of control clause, which the law itself does not provide. A similarly motivated safeguard against the risk of the other party, but for solvency instead of ownership structure, is described in the text on cross-default clauses.

Under Czech legislation, the limitation period is three years and begins to run from the day the right could have been exercised for the first time, i.e., when the creditor learned or should and could have learned of the decisive circumstances—not automatically from the date the contract was signed (Section 629(1) of the Civil Code). In addition, there is also an objective ten-year period from the moment the right matured, regardless of when the creditor learned of it.

The parties may agree on a shorter or longer limitation period, but not less than one year and not more than fifteen years; if a shorter or longer period is agreed to the detriment of a weaker party, the arrangement shall be disregarded (Section 630 of the same Act).

It is precisely this ten-year objective limit that is the reason why it pays to extend the limitation period to up to fifteen years for long-term framework agreements—otherwise, a claim for defective performance from the beginning of the cooperation may expire, even if the creditor learns of the defect later, but still within the three-year period from discovery. Furthermore, it is necessary to distinguish the limitation period from special deadlines for notifying a defect, which have a different function: for a purchase, the law sets a final two-year period from the delivery of the item for notifying a hidden defect, and a similar rule applies to contracts for work.

Without timely notification of a defect, a court will not grant the right from defective performance if the other party objects—regardless of whether the claim itself is statute-barred or not. For one-off transactions with a short risk period, a shorter limitation period can, on the contrary, simplify the closing of the entire matter.

Termination of Cooperation and Dispute Resolution

The contract should clearly state the conditions under which either party can terminate the cooperation, what notice period they must observe, and what happens to work in progress, outstanding payments, or the return of documents and materials. The issue of retention money and its release after the termination of cooperation is often particularly contentious; how to address it is shown in the text on retention money in contracts for work. Without these provisions, the end of the cooperation is governed by general rules, which may not meet the expectations of either party for the specific type of contract.

A review should also check whether confidentiality obligations and other ancillary agreements survive the termination of the contract itself. Whether this is the case may follow from an express clause, but also from the interpretation of the specific provision and its purpose, or from the protection of trade secrets independently of the contract itself—protection therefore does not automatically end with the contract, but without an express provision, it remains uncertain and depends on interpretation.

A suitable solution is a clause that explicitly lists the provisions that survive the termination of the contract—typically confidentiality, limitation of liability, arbitration clause, and limitation period—and specifies how long this obligation lasts after the end of the cooperation, so that a court does not have to decide this by interpretation.

The final point of the review concerns where and how any dispute will be resolved. The contract should specify the court with local and subject-matter jurisdiction, or alternatively an arbitration clause, and for cross-border relationships, also the governing law.

Without this provision, the jurisdiction of the court and the governing law are determined by general conflict-of-law rules, which can lead to a court in a different country than the parties expected, or to the application of a law that neither party planned for. Even a contract with a partner based in the Czech Republic hides its own enforceability pitfalls, which are easily overlooked precisely because it seems to be the simplest case—this is addressed in the article Are you concluding a contract with a Czech company? Eight things that will determine if you can enforce it.

The Most Common Mistakes in Commercial Contracts

The most common mistake is a contract that includes a contractual penalty where the parties do not realize that they have, without further provision, lost their separate right to compensation for damages from the same breach. The statutory default rule is that by agreeing on a contractual penalty, the right to compensation for damages from the secured obligation is excluded, unless the parties agree otherwise. It is therefore advisable to state explicitly in the contract whether the contractual penalty replaces the right to compensation for damages in full, or whether both claims can coexist.

The second mistake is a limitation clause that excludes liability without an exception for intent and gross negligence. Under Czech legislation, such a clause is disregarded to this extent, regardless of what the parties thought they were signing, and relying on it creates a false sense of protection. This finding is often the biggest surprise for clients during a review, as they usually consider the limitation clause to be a reliable safeguard that can be relied upon without further ado.

The third mistake is the absence of a change of control clause in long-term contracts with key partners. A company discovers that its contractual partner is now owned by a competitor only when it is too late to do anything, because the statutory regulation of contract assignment does not cover this situation. The risk is higher the more sensitive the information or know-how the company entrusts to the contractual partner as part of the cooperation.

The fourth mistake is a contract without an extended limitation period for long-term framework relationships, where the objective ten-year period can terminate a claim for defective performance from the beginning of the cooperation before the company even has a chance to enforce the damages. The fifth mistake, which reviews reveal almost as often as the first four, is a contract without a clearly designated person authorized to negotiate changes on behalf of the partner, which leads to disputes over the validity of any subsequent agreement.

Where a Commercial Contract Review Pays Off Most

Final Summary

This article has shown that a commercial contract review is only meaningful if it asks a different question than a simple reading: not what the contract requires under normal circumstances, but who bears the risk when the eight specific situations described in this text occur. A contract that looks complete because it contains all the usual sections may still be silent on what happens in a dispute, a partner's insolvency, or a change in its ownership structure.

For company management, it is crucial to establish a review as a standard step before signing any significant commercial contract, not just for contracts that themselves raise doubts. It is precisely the contracts that look fine at first glance that most reliably contain gaps, because their acceptable appearance discourages a deeper check. Conversely, a contract that raises doubts from the outset usually undergoes a more thorough inspection precisely because it does not lull anyone into a false sense of security.

Implementing a review as a standard step, not an exceptional measure for suspicious contracts, is therefore the only way to uncover gaps systematically, not randomly. The cost of one review is a fraction of what a dispute conducted without clearly defined rules costs. Postponing a review does not pay off, because all eight described risks fully manifest themselves only in a conflict, when it is too late to add anything to the contract.

Companies that have established reviews as a standard process resolve disputes faster and with a clearer negotiating position; companies that relied on the impression of a professional-looking document discover the gaps only in court. The difference between the two groups of companies, moreover, does not become apparent immediately, but only after years, when one group resolves a dispute according to clearly written rules and the other according to what a court infers from the contract's silence. Whoever understands this difference in time gains an advantage that can no longer be caught up at the moment of a dispute.

The lawyers at ARROWS law firm review commercial contracts according to this eight-point checklist, amend contentious clauses, and prepare template contracts for repeated use in your company. You will always receive the findings from the review in a clear format that can be directly used in negotiations with the counterparty. Write to us at consultation@arws.cz or browse our contracts and negotiation service.