How to Negotiate Business Contracts with Czech Partners as a Swiss Company

The Formality Trap: Why Swiss "Good Faith" Can Be a Liability in Prague

The Czech legal system, particularly after the comprehensive recodification with the new Civil Code in 2014, operates on a different philosophy. Here, the written agreement is not merely a reflection of the parties' relationship; it is the legally recognized relationship itself. Any ambiguity, omission, or vaguely worded clause will be interpreted strictly, creating a system that prioritizes certainty, sometimes at the expense of what might be considered fairness in other jurisdictions.

What is the risk of an informal agreement?

This philosophical divergence creates a critical "validity trap" for Swiss companies. A business practice that is a strength in Switzerland—relying on established relationships and mutual understanding—can become a direct legal vulnerability in the Czech Republic. The most significant risk lies in the Czech requirement for a mandatory written form, or písemná forma, for certain types of contracts to be legally valid.

A prime example is the Agency Agreement. A Swiss principal might engage a Czech sales agent based on a series of meetings and detailed email exchanges, believing a binding relationship has been formed. However, under Section 2483 of the Czech Civil Code, an Agency Agreement is legally void—non-existent—unless it is executed in writing. A verbal agreement is not merely difficult to prove; it has no legal standing whatsoever.

The consequences are severe. Your company could invest significant resources in a Czech agent, only to discover you have no enforceable contract. If the agent underperforms, breaches confidentiality, or begins working for a competitor, your legal recourse is virtually non-existent. The time and money invested are lost, leaving you with no mechanism to protect your market position.

The Smluvní Pokuta: A Contractual Penalty Unlike Any in Swiss Law

Of all the legal traps awaiting foreign companies, the most financially dangerous is the misunderstanding of the Czech contractual penalty, known as the smluvní pokuta. This powerful legal instrument has no direct equivalent in the Swiss Code of Obligations and can turn a minor contractual breach into a major financial liability. Assuming it functions like a standard penalty clause is a mistake that can cost your company dearly.

How does the Czech penalty differ from the Swiss approach?

Under the Swiss Code of Obligations, penalty clauses are generally seen as a way to pre-estimate and compensate for damages arising from a breach. The Czech smluvní pokuta, by contrast, is a far more flexible and potent tool for the creditor. Its primary purpose is not just to compensate but to be preventive and punitive. It is designed to create a powerful motivation for the other party to comply strictly with all terms.

This difference manifests in two critical ways:

1. It applies to monetary breaches. A Czech company can legally include a clause imposing a substantial penalty for a simple delay in payment. This is a fundamental departure from many legal systems where penalties are reserved for non-monetary obligations.
2. No proof of damage is required. The penalty is enforceable even if the creditor suffered no actual financial damage from the breach. The mere fact of the breach is enough to trigger the full penalty.

This asymmetry of understanding can be weaponized in negotiations. A knowledgeable Czech party can insert a smluvní pokuta clause that appears standard to a Swiss counterpart but carries disproportionate financial power. A minor, common operational issue, such as an administrative delay in payment, can trigger severe consequences.

Imagine a contract with a clause stipulating a penalty of 0.5% of the total contract value for each day of delay in payment. A short, ten-day delay could trigger a penalty equivalent to 5% of the entire deal—far exceeding any statutory interest and potentially erasing the project's profit margin. In a Czech court, this clause is likely to be upheld.

Can an excessive penalty be challenged?

While Czech law allows for judicial moderation of "disproportionally high" penalties, relying on this corrective measure is a risky and expensive litigation strategy. A landmark 2023 decision by the Czech Supreme Court further complicated this by ruling that courts can now consider circumstances that arose after the breach when assessing a penalty's fairness, adding a layer of unpredictability to any legal challenge. Proactive, expert contract drafting is the only reliable protection.

The Battle of the Forms: Whose Contract Terms Win?

A common scenario in international trade is the "battle of the forms": a Swiss company sends a purchase order with its standard terms and conditions (T&Cs), and the Czech supplier replies with an invoice referencing their own, different T&Cs. In this situation, whose terms govern the contract? The Czech answer may surprise you and silently erase your company's standard legal protections.

What is the "Knock-Out Rule"?

Prior to 2014, the Czech Republic followed the "Last-Shot Rule," where the last set of terms sent before performance was deemed accepted. However, the new Civil Code introduced a more modern approach: the "Knock-Out Rule".

Under this rule, a contract is considered formed based on the terms that the parties agree on. However, any conflicting provisions in both sets of T&Cs are "knocked out"—they are considered null and void and do not become part of the contract. The resulting gap is then filled by the default provisions of the Czech Civil Code.

This creates a hidden danger. Your company’s carefully drafted T&Cs containing crucial clauses on liability limitations, specific warranty disclaimers, or payment deadlines can simply vanish, replaced by statutory rules that are often far less favorable and expose you to unforeseen risks. For example, your liability cap could be replaced with unlimited statutory liability.

Fortunately, the application of the Knock-Out Rule can be contractually excluded. However, this must be done explicitly in the main body of the agreement, not just within the T&Cs themselves, requiring proactive and knowledgeable legal drafting.

Navigating Liability, Termination, and Deadlines

Beyond the major doctrinal traps, several other critical differences in Czech commercial law can expose Swiss companies to risk if not properly managed. These relate to how liability is defined, how contracts are terminated, and the deadlines for taking legal action.

How is liability for damages different in the Czech Republic?

A particularly dangerous area of divergence lies in the treatment of damages. Swiss companies often include clauses in their contracts excluding liability for "consequential" or "indirect" losses. In the Czech Republic, such a clause is legally meaningless and offers no protection.

Czech law does not recognize the concepts of "consequential loss" or "indirect loss." To claim damages for a breach of contract, a party must prove a direct causal link between the breach and the harm suffered. This means that a standard limitation of liability clause drafted under Swiss or Anglo-American principles will fail to exclude the very risks it was designed to cover.

How long do you have to file a claim?

The time limit for taking legal action—the statute of limitations—is another critical area. Swiss companies may be accustomed to longer periods for bringing claims. In the Czech Republic, the clock ticks much faster. The general subjective limitation period for many commercial claims is only three years from the date the right could first have been exercised. Missing this deadline means your right to claim is forfeited entirely, regardless of the merits of your case.

What are the requirements for contract termination?

Reinforcing the theme of formalism, Czech law generally requires a higher degree of formality for contract termination than Swiss law. While Swiss law can be flexible, even permitting verbal termination of some contracts if not otherwise specified, terminating a commercial relationship in the Czech Republic typically requires clear, written notice delivered to the other party to be effective. Relying on informal communications to end a contract can lead to disputes and findings that the contract remains in force.

Your Strategic Partner in the Czech Republic

The Czech legal system is modern, reliable, and fully integrated with the EU framework. However, as this guide demonstrates, it contains specific rules and concepts that can pose significant risks for foreign companies operating under different legal assumptions. Navigating this landscape successfully requires expert local counsel.

For over a decade, ARROWS has been the trusted partner for foreign companies doing business in the Czech Republic. As an international law firm operating from Prague, European Union, we combine deep knowledge of local law with a keen understanding of the challenges faced by international clients. Our ARROWS International network, built over 10 years and active in 90 countries, ensures we can handle the most complex cross-border matters.

Our experience is extensive; we support over 150 joint-stock companies and 250 limited liability companies in their operations. Our dedicated team provides comprehensive support, from the initial drafting of legally required documentation and contract review to prevent fines, to providing formal legal opinions on your legal standing and, if necessary, representation in court or before public authorities. 

We also offer professional training for employees and management to ensure your team is aware of local compliance requirements. Don't let unforeseen legal differences derail your business success in the Czech Republic. For expert guidance and tailored legal solutions, contact our team today. Get tailored legal solutions by writing to consultation@arws.cz.