The state prohibits you from performing a contract.

Why a general liability exemption clause is often not enough

If a party breaches a contractual obligation, it shall compensate the other party for the resulting damage. The damaging party is exempted from the obligation to compensate if it proves that it was temporarily or permanently prevented from performing by an extraordinary, unpredictable, and insurmountable obstacle arising independently of its will (Section 2913 of the Czech Civil Code).

This liability is strict (objective): fault is not examined, and the supplier's internal relationship to the occurrence of the damage is irrelevant. The Czech Supreme Court explicitly stated this in judgment 25 Cdo 3788/2019. Therefore, it does not help the supplier that they acted with due care. They must prove that the obstacle was simultaneously extraordinary, unpredictable, and insurmountable, and that it arose independently of their will. The law provides three explicit exclusions: they are not exempted by an obstacle arising from their personal circumstances, an obstacle arising only while they were in default of performance, or an obstacle they were contractually obliged to overcome.

In practice, disputes mainly revolve around the word "unpredictable". A ban, the threat of which had been reported in the trade press for several months, may be deemed predictable, even if no one knew the specific date and wording. Regarding the second criterion, "insurmountable", it will be examined whether performance was possible through alternative means, such as via another supplier or from a different location.

However, a contract does not have to be a mere copy of the law. Unless explicitly prohibited by law, the parties may arrange their rights and obligations differently from the law (Section 1(2) of the Czech Civil Code). A force majeure clause can thus define its own list of events, automatically extend deadlines, exclude contractual penalties, establish a right to withdraw, or allocate costs. Limits do exist: one cannot waive in advance the right to compensation for harm caused intentionally or by gross negligence, or harm to a person's natural rights (Section 2898). If the clause is not set up differently, the statutory conditions for exemption apply, and the outcome will only be decided by a dispute.

What a liability exemption clause must contain to cover an official ban

A good clause starts with a definition. Instead of a general list like "natural disaster, war, riots", it is advisable to explicitly state that an obstacle also includes a decision or measure by a state authority that prohibits or substantially restricts performance: sanctions, embargoes, export or import bans, or the withdrawal of a permit or license. Without an explicit list, a ban might fall under a general clause, but this will depend on the interpretation of the specific wording, which is precisely what parties often dispute.

The second element is distinguishing between when a ban completely rules out performance and when it merely makes it more expensive. The same clause should not cover both a ban and an increased customs duty, as a duty is a cost, not an obstacle. If the parties also want to address changes in costs, this belongs in a separate cost-allocation agreement; otherwise, both situations will be conflated, and the clause will lose its clarity.

The third element is the notification obligation. The law itself establishes this in the event of impossibility of performance: if the debtor fails to notify the creditor without undue delay that performance of the debt has become impossible, they shall compensate for the damage caused by the creditor not being notified in time (Section 2008 of the Czech Civil Code). However, the contract should go further and extend this obligation to imminent or temporary bans, requiring written form, a specific deadline, a description of the impact, and an estimate of the duration.

The fourth element is the obligation to mitigate the obstacle. The clause may stipulate that the affected party must make reasonable efforts to overcome the ban, such as using an alternative source or delivery route, and that they cannot claim exemption if they failed to make such efforts. This builds on the law, which does not exempt anyone who was contractually obliged to overcome the obstacle.

When a performance ban terminates an obligation and when it merely suspends it

If a debt becomes impossible to perform after the obligation arises, the obligation is terminated due to impossibility of performance, and the impossibility must be proven by the debtor (Section 2006 of the Czech Civil Code). However, performance is not impossible if the debt can be fulfilled under more difficult conditions, at greater cost, with the assistance of another person, or only after a specified time. Therefore, a permanent legal ban can only lead to the termination of the obligation if, because of it, the debt objectively cannot be fulfilled even through any of these alternative routes. The mere temporary nature of a ban usually does not establish impossibility; however, it is always necessary to assess the nature and purpose of the specific obligation.

This distinction has a fundamental practical impact. If a supplier invokes impossibility of performance, their obligation to perform may be terminated. However, liability for damage resulting from non-performance is a separate issue. In the cited judgment, the Czech Supreme Court concluded that although the obligation was terminated due to impossibility of performance, the debtor could still be liable for damage under Section 2913. They are only exempted if they prove a ground for exemption. Furthermore, the customer often argues that performance is possible, just more expensive or delayed; the court will determine the boundary based on the specific circumstances.

The law also addresses situations where only a part of the performance is impossible. In the case of impossibility of only a part of the performance, the obligation is terminated in its entirety if it follows from the nature of the obligation or the purpose of the contract, which was known to the parties at the time of its conclusion, that the performance of the remainder has no value for the creditor; otherwise, it is terminated only as to that part (Section 2007 of the Czech Civil Code).

For suppliers and customers, this means that the contract should determine in advance how a partial ban will be handled. If the delivery is to be divided into multiple partial performances, the contract should include an agreement on whether a ban on one part terminates the entire contract or only the affected part, and what happens to any advances already paid. Without such an agreement, a solution is only sought in a dispute.

Why a drop in profitability and higher customs duties will not solve the problem

A common mistake is the belief that a change in commercial conditions, such as a new customs duty or quota restrictions, gives the debtor the right to withdraw from the contract or change the price. The law is based on the opposite principle: if circumstances change after the conclusion of the contract to such an extent that performance becomes more difficult for one of the parties, this does not affect their obligation to fulfill the debt (Section 1764 of the Czech Civil Code).

The law provides an exception only for a change of circumstances so substantial that it creates a particularly gross disproportion in the rights and obligations of the parties, either by disproportionately increasing the cost of performance or disproportionately reducing the value of the subject of performance. The affected party may then demand a renegotiation of the contract if they prove that they could not have reasonably foreseen or influenced the change and that it occurred after the conclusion of the contract; however, they may not suspend performance because of this (Section 1765(1) of the Czech Civil Code).

Furthermore, the right to renegotiate does not arise for a party that has assumed the risk of a change of circumstances. If the parties fail to agree, the court may, upon application, change or cancel the obligation. However, the court will reject the application if the affected party failed to exercise the right to renegotiate within a reasonable period after they must have discovered the change; the law presumes this period to be two months (Section 1766 of the Czech Civil Code). This is not a strict deadline upon the expiry of which the right would automatically lapse, but a statutory presumption of reasonableness. However, a company that merely waits after a new measure is introduced risks losing its protection.

Therefore, renegotiation is suitable only as a last resort. Relying on a court adjustment of the contract after a change of circumstances means waiting months or even years for a decision while performance is either ongoing or stalled. It is more sensible to agree on an adjustment mechanism in advance, similar to the price clauses discussed in the article on inflation clauses in contracts for work, where the price changes according to a predetermined formula.

The risk of a change of circumstances can also be assumed consciously in the contract. A supplier who explicitly declares in the contract that they bear the risk of changes in legislation and trade measures cannot later invoke renegotiation under the law. Therefore, when signing template contracts, companies often unknowingly accept risks they would rather not face later.

In practice, this means reading even those provisions in the contract that do not seem to relate to official bans at first glance, such as a supplier's declaration that they hold all permits and that no legal regulation will prevent performance. In a later dispute, such a declaration can function as an assumption of risk. However, the interpretation of the specific agreement will decide, not a mechanical rule.

What the parties should agree on in the event of a ban: price, deadline, advances, withdrawal

The first question is whether and for how long performance is postponed in the event of a ban. The contract may stipulate that in the event of a temporary ban, the performance deadline is extended by its duration, up to a maximum of a certain number of months. Once this limit is exceeded, both parties may withdraw from the contract without penalty. Such a structure protects the supplier from contractual penalties for delay and the customer from being bound indefinitely.

The second question is the fate of advances and performances already provided. If the contract stipulates that upon termination due to a ban, advances are returned, and at the same time that the supplier is not entitled to compensation for costs incurred in preparing the performance, the risk lies with the supplier. The opposite structure shifts the risk to the customer. The parties should make this choice consciously and reflect it in the price, rather than leaving it to interpretation.

The third question is the relationship of the ban to contractual penalties and damages. Statutory exemption under Section 2913(2) concerns compensation for damage and does not automatically resolve contractual penalties on its own. Therefore, the contract should explicitly state that if performance is prevented by an official ban, no right to a contractual penalty for delay or to damages for non-performance arises. Without such an agreement, a dispute remains as to whether the conditions for exemption were met.

The fourth question is who will bear the costs of mitigation, such as relocating production, sourcing from another supplier, or obtaining a different permit. A reasonable solution is usually to share the costs according to a predetermined key, as transferring them entirely to the supplier could lead to them terminating the order rather than bearing the costs.

The fifth question is how the clause will be reflected in downstream contracts. A contract with a customer may terminate in the event of a ban, but contracts with subcontractors often continue to run, leaving the supplier paying for performance they can no longer use. Therefore, it is sensible to align the deadlines and conditions of the clause in both chains so that the risk does not stop in the middle.

How to set up contractual protection in long-term supply contracts

Long-term supply contracts are the most sensitive to official bans because the contract spans years and regulations change over time. It is therefore advisable to include a regular review in the contract, for example once a year, during which the parties assess whether the regulatory environment has changed so much that clauses on bans, prices, or deadlines need to be adjusted. A review prevents an initially appropriate provision from becoming unusable over time.

For strategic supplies, it makes sense to assess before signing whether performance could run into existing or upcoming restrictions. How to proceed when reviewing a contract before signing and what is most often forgotten is described in the article on reviewing a commercial contract before signing. At the same time, foreign regulations with an impact on performance in another country must be assessed separately, according to the law governing the contract and the law of the affected state.

It is useful to combine the review with a brief internal procedure: who in the company monitors regulatory changes, who they report them to, and who decides that it is necessary to negotiate a contract adjustment with the counterparty. Without such a procedure, the company will learn about a ban from the media and read the clause for the first time only when it needs to be applied.

Another layer of protection is the information obligation during project preparation. The supplier should be obliged to notify the customer if performance depends on a permit, license, or import from a specific country, so that the customer knows what the entire chain relies on. A customer who is aware of this dependency can request a backup source or negotiate a right to withdraw in the event of its failure.

It is also useful to consider delays caused by a third party. A ban often does not affect the supplier directly, but rather their subcontractor, which raises the question of whether this is an obstacle for the supplier or their own risk. A similar logic is addressed in the article on suspension of work and postponement of the completion date, which assesses when a delay justifies an extension of the deadline.

Exactly how to set up an official ban clause and risk allocation for a specific delivery depends on how large a part of the performance could be affected by the ban and who is better able to foresee it – which is why the Prague-based ARROWS law firm always assesses this based on the specific supply structure, rather than using a universal clause.

Risks of an unaddressed official ban in a contract

Summary

The law exempts the debtor from liability for damage only in the event of an extraordinary, unpredictable, and insurmountable obstacle arising independently of their will, and the burden of proof lies with them; fault is not examined. The termination of an obligation due to impossibility of performance does not automatically relieve them of liability for damage, higher performance costs do not make performance impossible, and a change of circumstances only gives the right to renegotiate, not the right to postpone performance.

For company management, this leads to a clear task: contractually determine what happens to the deadline, price, advances, and contractual penalty when the state bans performance, and do so before signing, not after the ban. A well-drafted clause is cheaper than a dispute over who will bear the loss from an event that no one could control.

The Prague-based legal team at ARROWS law firm drafts contractual clauses for cases of official bans and restrictions, assesses whether an existing contract covers such a situation, and helps negotiate adjustments with the counterparty. Write to us at consultation@arws.cz or explore our contracts and negotiation practice.