Litigation or negotiation?

Four Questions That Will Decide the Next Step

A dispute with a business partner is not decided by who is right, but by how much of your truth you can turn into money. Therefore, a company must first answer four questions. How strong is the evidence? Does the counterparty have the assets to satisfy the claim? What is the value of future cooperation to the company? And how much time is left before the statute of limitations expires? Only the answers to these questions will reveal whether a lawsuit is a useful tool or just an expensive step with no result.

The first question concerns evidence. A signed contract, accepted deliveries, agreed change orders, and emails in which the counterparty does not dispute the debt provide a strong position. Conversely, a dispute built on oral agreements, an unclear scope of work, or an expert opinion that the other party will also have prepared has an uncertain outcome. The weaker the evidence, the more it makes sense to seek an agreement, as the court may rule differently than the company expects.

The second question is the solvency of the counterparty, which often decides more than the law itself. A judgment against a company with no assets only means additional enforcement costs that yield nothing. Before making a decision, the finance department should therefore review the counterparty's financial statements in the registry of deeds, the insolvency register, and their payment history with your company. If the debtor is nearing bankruptcy, swift negotiations on installments or security can yield more than a lawsuit filed a year from now.

The third question is how much the loss of the relationship costs. A major customer, a sole component supplier, or a long-term partner in a consortium is usually more valuable to a company than a single disputed invoice. A lawsuit typically ends the relationship, even if no one intends it to. The fourth question is time. Under Czech legislation, the general statute of limitations is three years and continues to run even during routine correspondence, so the company must have it calculated before starting negotiations.

When to Negotiate and When to File a Lawsuit Immediately

Negotiation makes sense where both parties have something to lose and where the amount of the claim is disputed rather than its existence. Typically, this involves extra work on a construction project, a discount for defective performance, or settlement after premature termination of a contract. In such disputes, an expert opinion often decides the case, and the outcome is uncertain for both sides. A company that reaches an agreement saves time and expert costs, and gets its money sooner.

At the same time, negotiation and a lawsuit are not mutually exclusive. Many disputes are settled only after a lawsuit is filed, as it is often the lawsuit that forces the other party to take the claim seriously. Under Czech legislation, the court must strive for an amicable settlement of the dispute and may also recommend mediation to the parties. Filing a lawsuit therefore does not close the door to an agreement. It only changes who has the stronger bargaining position in negotiations and who bears the risk of further delay.

It is better to go straight to court in three situations. The first occurs when the counterparty does not dispute the debt but simply does not pay, using the creditor as a source of cheap credit. The second situation is when there is a risk that the debtor will transfer assets or cease to exist. In such cases, speed is decisive, and the company should also consider an interim injunction; when the court will order one is discussed in the article on how to freeze the situation immediately. The third situation occurs when the end of the limitation period is approaching and the counterparty is clearly dragging out negotiations.

For management, this leads to a practical rule. Do not ask whether to negotiate or sue. Ask how long to negotiate, under what conditions, and what happens when the deadline expires. Companies that handle disputes repeatedly have a pre-determined limit for each negotiation, after which they hand the matter over to lawyers to file a lawsuit. How such disputes arise and develop is described in the text on disputes from business cooperation.

How to Conduct Negotiations Without Weakening Your Position in Court

Negotiations only make sense if the company conducts them as if a court were to decide the matter one day. Everything you say or write during negotiations can end up in the case file. Whether it is worth negotiating and how far to go with concessions depends on the strength of the evidence and the status of the limitation period on a given day. This is why the Czech legal team at ARROWS law firm assesses both aspects for each dispute individually, even before the company sends its first offer.

The first step is an internal analysis. Who is negotiating on behalf of the company, what is their mandate, and what is the lowest acceptable amount? The answers belong on paper and must be approved by management, not by a sales representative who knows the counterparty personally. The second step is a written proposal for negotiations, making it clear which claim you want to discuss and by when. Keep the response in which the other party agrees to negotiate carefully.

The third step is a firm schedule with a date when negotiations will end if they do not yield a result. Without a deadline, negotiations drag on, and the company loses time and money on interest. Although a defaulting debtor usually pays late payment interest, this does not cover the loss of liquidity or managers' time. The schedule should therefore include two to three meetings, a deadline for a counterproposal, and the date when the company will file a lawsuit.

The fourth step is choosing the format. Direct negotiations between statutory bodies work when the companies want to continue doing business together. Mediation helps when the parties are no longer speaking constructively. However, the parties must conclude a mediation agreement with a registered mediator in writing. The fifth step is keeping minutes of the outcome of each meeting. Many disputes later revolve around who offered what and when the negotiations ended.

When the Statute of Limitations Suspends During Negotiations

The three-year period begins to run when the company became aware, or should and could have become aware, of the circumstances decisive for asserting the claim (Section 619 of the Czech Civil Code). Furthermore, a property right is time-barred no later than ten years from the date it became due, unless the law provides otherwise. However, under Czech legislation, the law protects a creditor who enters into an out-of-court negotiation agreement with a debtor: the limitation period does not run during such negotiations (Section 647 of the Czech Civil Code).

At the same time, mere correspondence does not suspend the statute of limitations. A company that exchanges letters for a year may find that only a few months remain of the three years. The period starts running again as soon as one of the parties clearly refuses to continue negotiations or when the parties agree that negotiations have ended. If the period had not yet started running before the agreement, it will only start running from that moment. Thus, protection does not apply to every contact with the counterparty, but only to negotiations agreed upon by both sides.

The Czech Supreme Court has interpreted what such an agreement requires. An agreement can also be concluded informally, for example, by both parties starting to negotiate the same claim. However, a unilateral effort by one party or a letter in which the other party definitively rejects the claim is not sufficient. By explicit refusal, the court means an unambiguous refusal, which does not have to be expressed in words. The judgment was published in the Collection of Supreme Court Decisions and Opinions under number 20/2026 (Supreme Court Case No. 23 Cdo 431/2024).

When Negotiations End and the Limitation Period Runs Again

In a follow-up case, the Czech Supreme Court approved the conclusion that negotiations ended when the creditor filed a lawsuit seeking to judicially resolve the very contractual obligation about which the parties were negotiating (Supreme Court Case No. 33 Cdo 2415/2025). The limitation period for their subsequent claim for damages thus started running again, and renewed contact after several years did not save the claim. This does not mean that every lawsuit between the same companies ends all their negotiations; what matters is what it concerns. A lawsuit directly concerning the disputed claim suspends its limitation period, provided the creditor properly continues the proceedings.

The decision implies a simple discipline for management: have the negotiation agreement confirmed in writing and record the date. If the counterparty does not respond to the proposal, no agreement has been reached and the limitation period continues to run. Whether correspondence with a specific partner established a negotiation agreement and when it ended depends on the wording of the letters and the behavior of both parties. Therefore, the Czech legal team at ARROWS law firm always assesses this issue based on specific documents, never by a general rule.

Negotiations can also end by both parties letting them fizzle out. According to the Czech Supreme Court, the parties can also agree to end negotiations tacitly if their inactivity implies a will not to negotiate further. New negotiations can then suspend the period again, but the time between the two negotiations is counted towards the limitation period. Therefore, even in the case of interrupted negotiations, the company must continuously recalculate how much time remains before the statute of limitations expires.

Pre-action Notice, Settlement, and Settlement Agreement: How to Turn an Agreement into an Enforceable Outcome

Before filing a lawsuit for payment or other performance, a company must send the debtor a pre-action demand for performance. Without a pre-action demand sent at least seven days before filing the lawsuit, a successful plaintiff is generally not entitled to compensation for the costs of proceedings (Section 142a of the Czech Code of Civil Procedure). The court may award costs even without a pre-action demand, but only exceptionally and for reasons worthy of special consideration. Therefore, always send a pre-action demand, even if the parties are currently negotiating.

The second tool is a settlement agreement (narovnání), by which the parties replace a disputed or doubtful obligation with a new one they have agreed upon. A settlement agreement cannot be challenged simply because one party conceded more. Its validity is not questioned even by a mistake regarding what was disputed, unless it was induced by the other party's deceit. For the company, this means a significantly lower risk of the dispute being reopened after signing.

However, a standard written settlement agreement is not an enforceable title, and if the debtor does not pay, the company must sue again. This step is avoided if the parties conclude a settlement before the court, or if the debtor signs a notarial deed with consent to enforceability. An approved court settlement has the effects of a final judgment (Section 99 of the Czech Code of Civil Procedure). The court can approve a settlement in ongoing proceedings as well as in conciliation proceedings, which can be proposed even before filing a lawsuit. Under Czech legislation, the court must approve a mediation agreement in conciliation proceedings within thirty days at the latest.

For management, the choice between a settlement agreement and a court settlement is a matter of trust in the counterparty. For a partner who honors agreements, a written settlement agreement with firm deadlines and a contractual penalty is sufficient. For a partner who has already failed to pay once, a court settlement or a notarial deed with consent to enforceability is worthwhile, as they can be directly enforced. The difference in time and cost only becomes apparent when the other party fails to comply with the agreement.

How Companies That Handle Disputes Repeatedly Resolve Them

Companies that handle disputes regularly do not decide on a lawsuit based on emotions, but according to a pre-determined escalation path. They include an escalation clause in their contracts, under which the dispute is first resolved by project managers, then by statutory bodies, and only then by the court. Each stage has a short deadline. A well-drafted clause does not preclude a lawsuit, but it gives the negotiations structure and proof of when each phase ended.

The second feature is an internal decision-making matrix. It contains an estimate of the probability of success, the expected costs of the dispute, the solvency of the counterparty, and the value of the relationship. Management then compares two figures: how much the company will realistically gain through a lawsuit after deducting costs and time, and how much the counterparty is offering today. The decision cannot then be blamed on vanity or fear of court.

The third feature is the parallel pursuit of both paths. Experienced companies conduct negotiations while simultaneously preparing the lawsuit and evidence. Once negotiations end, they file the lawsuit within a few days, giving the counterparty no time to transfer assets. How litigation lawyers handle such preparation in practice is described in the text on the procedural experience of litigation lawyers.

During negotiations, the counterparty commonly proposes unsecured installments, a discount in exchange for another contract, or a postponement with a promise that everything will be resolved. A warning sign is a proposal that has no deadline, does not include interest, and provides no security in case the debtor fails to pay. Do not accept such a proposal in its original form. Redraft it into a settlement agreement with a contractual penalty or a court settlement.

Mistakes That Turn Negotiations into Wasted Time

The most expensive mistake is negotiating without calculating the limitation period. The company assumes that negotiations suspend the period, but a negotiation agreement was never established because the counterparty merely replied to letters and rejected the claim. The result is a time-barred claim, which the court will not award if the debtor raises the statute of limitations defense. The prevention is to calculate the end of the period right at the beginning and file the lawsuit on time, even if negotiations are still ongoing.

The second mistake is negotiating without a mandate and without a limit. A sales representative offers a discount that management has not approved, and the company then either concedes more than it wanted or withdraws the offer and loses credibility. The third mistake is forgetting the pre-action demand for performance before filing a lawsuit. The company wins the dispute, but the court will generally not award compensation for attorney costs because the debtor was not given the opportunity to pay voluntarily.

The fourth mistake is concluding an agreement that cannot be enforced. An oral promise, an email agreeing to an amount, or an agreement with no due date leaves the company right where it was. The fifth mistake is forgetting about the debtor's assets. While the parties negotiate, the debtor transfers assets, and a lawsuit filed too late ends in a judgment with no possibility of enforcement. How deeply to investigate the counterparty's assets and when to opt for security is assessed by the Czech legal team at ARROWS law firm based on the size of the claim and signals from registries.

The cost of these mistakes varies, but the pattern is the same. The company first loses time, then its bargaining position, and finally part of the claim. Yet, each of these mistakes can be detected right at the beginning of preparation when someone reviews the contract, correspondence, limitation status, and the financial situation of the counterparty. Such a check costs a fraction of what the company stands to lose through a time-barred or unenforceable claim.

Risks When Choosing Between Court and Negotiation

Summary: What Management Needs to Decide

This article has shown that the choice between a lawsuit and negotiation is not a matter of courage, but of four facts: the strength of the evidence, the solvency of the counterparty, the value of the relationship, and the time remaining before the statute of limitations expires. Negotiation makes sense when it is mainly the amount of the claim that is disputed and both parties have something to lose. A lawsuit is called for when the debtor fails to pay without reason, when there is a risk of asset loss, or when the end of the limitation period is approaching.

For management, the most important thing is that negotiations have firm rules. The negotiation agreement should be confirmed in writing, the schedule must have an end date, and the outcome must be enforceable. A company that negotiates without these rules risks a time-barred claim and an unenforceable agreement. Delaying the decision does not pay off, as the limitation period continues to run in the meantime.

The Czech legal team at ARROWS law firm will assess the strength of the claim and the solvency of the counterparty, and conduct negotiations with your partner. They will prepare a settlement agreement or a court settlement and represent companies in litigation as well as in settlement negotiations. Write to us at consultation@arws.cz or see how our lawyers handle commercial and court disputes. The earlier preparation begins, the more options a company has during negotiations and in court.