Commercial Contracts with German Partners

Are you a German company expanding into the Czech Republic? While the Czech market offers stability and opportunity, assuming its legal system mirrors Germany's can lead to costly contractual mistakes. This guide provides specific answers to prevent unforeseen legal and financial risks. As a leading Czech law firm in Prague, EU, with extensive experience helping foreign clients, ARROWS provides the clarity you need. If you need an English-speaking lawyer in Prague to navigate Czech commercial contracts, you are in the right place.

Do you need advice on this topic? Contact the ARROWS law firm by email office@arws.cz or phone +420 245 007 740. Your question will be answered by "Mgr. Vojtěch Sucharda", an expert on the subject.

 

Understanding the Czech Legal Framework: More Than Just a Neighboring System

German companies often feel a sense of familiarity when entering the Czech market. Both countries share a continental civil law tradition, and older Czech codes were historically influenced by German and Austrian law. However, this familiarity can create a false sense of security, which is a significant business risk. The modern Czech Civil Code (Act No. 89/2012 Coll.) introduced principles that diverge in critical ways from the German Civil Code (BGB).

The new Czech Civil Code grants significant contractual freedom in business-to-business (B2B) relationships, allowing parties to tailor their agreements to their specific needs. However, this freedom is not absolute. Any contractual term can be invalidated if it violates foundational principles such as "good morals" or "public order". Understanding this framework is the first step toward drafting contracts that are not only favorable but also legally enforceable in the Czech Republic.

The danger for German businesses lies not in ignorance of Czech law, but in the illusion of knowledge. Applying German legal logic or using translated German contract templates without a specific review under Czech law can lead to clauses being misinterpreted or voided by Czech courts. This oversight is the root cause of many subsequent, and expensive, contractual disputes.

FAQ – Legal tips about Czech B2B Contracts

• Q: How much freedom do we have in a B2B contract in the Czech Republic?
  A: You have significant freedom to define terms. However, clauses cannot violate "good morals" or public order, and certain protective rules for weaker parties can still apply even in B2B contexts. For a review of your contract's compliance, contact us at office@arws.cz.
• Q: Is a verbal agreement with a Czech partner legally binding?
  A: While some verbal agreements can be binding, they are extremely difficult to enforce and highly risky. Key contracts, especially in employment, must be in writing to be valid.6 Always insist on a written contract. Need help drafting one? Email us at office@arws.cz.

The Battle of the Forms: The 'Knock-Out Rule' Trap for German Companies

One of the most common and damaging mistakes arises from the "battle of the forms"—when two businesses exchange documents with their own conflicting terms and conditions (T&Cs). While German law may follow a version of the "last-shot rule" (where the last set of terms sent governs the contract), the Czech Civil Code uses the "knock-out rule".

Consider this scenario: your German company sends a purchase order with your standard T&Cs. Your Czech partner replies with an invoice or order confirmation that includes their T&Cs, which differ on key points like liability limits and jurisdiction. You accept the delivery. Under the Czech "knock-out rule," a contract is formed, but all conflicting clauses are "knocked out" and rendered void.

The legal gap created by these voided clauses is automatically filled by the default provisions of the Czech Civil Code. This means your business could be bound by statutory Czech rules you never negotiated or agreed to. This passive assumption of risk can fundamentally alter the commercial and financial profile of your transaction, exposing you to unlimited liability, unfavorable warranty periods, and litigation in Czech courts.

Risks of Misunderstanding Contract Formation Rules

Risks and Penalties	How ARROWS Helps
Loss of Liability Limitations: Your contractual cap on damages is "knocked out," exposing you to unlimited liability under Czech statutory law.	Contract Drafting & Review: We ensure your T&Cs are explicitly agreed upon, making them legally binding and preventing the "knock-out rule." Need a contract review? Contact us at office@arws.cz.
Unfavorable Jurisdiction: Your "choice of court" clause is voided, forcing you into litigation in Czech courts instead of German ones.	Legal Opinions: We provide clear legal opinions on the enforceability of your existing contracts and draft robust jurisdiction clauses. Get tailored legal solutions by writing to office@arws.cz.
Unintended Warranty Obligations: Your specific warranty terms are replaced by Czech statutory provisions, potentially extending your obligations.	Drafting Legally Required Documentation: We draft master service or supply agreements that supersede conflicting T&Cs and clearly define all obligations. For immediate assistance, write to us at office@arws.cz.
Contractual Uncertainty & Disputes: The contract proceeds with ambiguous key terms, leading to costly disputes over performance obligations.	Representation Before Authorities: If a dispute arises, we represent your interests based on a deep understanding of Czech contract law. Our lawyers are ready to assist you – email us at office@arws.cz.

Liability for Defects vs. Warranty: A Critical Distinction You Can't Ignore

In German commercial law, the concepts of liability for defects and warranty are often closely linked. In the Czech Republic, they are two distinct legal concepts, and confusing them can leave your business exposed. It is crucial to understand the difference between odpovědnost za vady (liability for defects) and záruka za jakost (warranty of quality).

Liability for Defects is a statutory obligation that applies automatically. The seller is legally responsible for any defects that exist at the moment the risk of damage passes to the buyer. This is a baseline legal protection for the buyer.

Warranty of Quality, on the other hand, is not automatic in B2B contracts. It is an additional, voluntary promise from the seller that the goods will maintain specific characteristics for a certain period. If your contract does not explicitly grant a warranty, you do not have one under Czech law.

This distinction becomes critical when a podstatné porušení smlouvy (material breach of contract) occurs. A breach is considered material if the seller knew (or should have known) at the time of signing that the buyer would not have entered the contract had they foreseen the breach. In the case of a material breach, the buyer has powerful remedies, including the immediate right to withdraw from the contract—a significant commercial risk for any supplier.

FAQ – Legal tips about Defect Liability Claims

• Q: Does a two-year warranty automatically apply to B2B sales in the Czech Republic?
  A: No. The 24-month period is for consumer contracts. In B2B, statutory liability applies to defects at delivery, but any extended "warranty" must be explicitly agreed upon in the contract.10 Need to draft a warranty clause? Write to us at office@arws.cz.
• Q: What is the most powerful remedy if my Czech partner commits a "material breach"?
  A: You have the right to choose your remedy, including immediately withdrawing from the contract, demanding replacement goods, or seeking a price reduction.12 To understand your options, email our experts at office@arws.cz.
• Q: How quickly must I report a defect to my Czech supplier?
  A: You must notify them "without undue delay" after discovery. Any delay can result in the loss of your rights to a claim.10 For urgent advice on a defect claim, contact us at office@arws.cz.

Hidden Dangers: When Can Your Czech Contract Be Deemed Invalid?

Beyond disputes over specific clauses, German companies face the ultimate risk: having their entire contract declared invalid from the beginning (ab initio). This can happen in several ways, but two scenarios are particularly dangerous for foreign businesses.

First, relying on vague or overly broad Representations and Warranties can render them unenforceable. A recent Prague High Court ruling determined that general statements not linked to specific, verifiable obligations (e.g., "the company has no outstanding legal impediments") are too uncertain to support a claim for a contractual penalty. This highlights the danger of using boilerplate language from other jurisdictions.

Second, a critical compliance trap exists for companies working with public entities, such as municipalities, state-owned enterprises, or public institutions. Under Czech law, most contracts with such bodies must be published in the public Register of Contracts. If a contract is not published within three months of being signed, it is automatically considered invalid from the outset. It is treated as if it never existed.

If performance has already occurred under a contract later deemed invalid, you cannot sue for breach of contract. Instead, you are forced into a much more complex legal proceeding to recover your losses under the doctrine of "unjustified enrichment" (bezdůvodné obohacení). This shifts the burden of proof and creates significant uncertainty, turning a simple procedural oversight into a major financial and legal battle.

Risks of Invalid or Unenforceable Contract Clauses

Risks and Penalties	How ARROWS Helps
Total Unenforceability of Contract: Failure to publish a contract with a public entity in the Register of Contracts makes it void from the start. You cannot enforce any of its terms.	Regulatory Compliance & Due Diligence: We identify all statutory obligations, including publication requirements, and manage the process to ensure your contract is valid and effective. Do not hesitate to contact our firm – office@arws.cz.
Invalid Penalty Clauses: Relying on vague representations and warranties makes your contractual penalties unenforceable, leaving you without a key remedy for breach.	Precision Contract Drafting: We draft clear, specific, and actionable obligations that are legally enforceable under Czech law, ensuring your penalty clauses are robust. Get tailored legal solutions by writing to office@arws.cz.
Complex Recovery Claims: If a contract is void after performance, you cannot sue for the contract price and must instead file a more complex "unjustified enrichment" claim.	Litigation & Dispute Resolution: We represent clients in all forms of commercial disputes, including complex claims arising from invalid contracts. Need legal help? Contact us at office@arws.cz.
Loss of Probationary Period Rights: An incorrectly agreed-upon probation period in an employment contract is void, removing your ability to terminate an unsuitable employee easily.	Preparation of Internal Company Policies: We ensure all your employment documentation is fully compliant with Czech labor law, protecting your management flexibility. For immediate assistance, write to us at office@arws.cz.

How ARROWS Protects Your German Business in the Czech Republic

Navigating these complexities requires more than just legal knowledge; it demands a partner who understands both the Czech legal environment and the expectations of international business. As an international law firm operating from Prague, European Union, ARROWS is uniquely positioned to bridge this gap. Our team combines deep local expertise with a global perspective, honed over 10 years of building our ARROWS International network across 90 countries.

We have a proven track record of supporting over 150 joint-stock companies and 250 limited liability companies in their Czech operations. We protect our clients by providing practical, business-focused legal solutions.

Our services for German companies include:

• Drafting and reviewing bilingual commercial contracts that are clear and enforceable.
• Structuring T&Cs and liability clauses to avoid the "knock-out rule."
• Providing legal opinions on the key differences between Czech and German contract law.
• Representation in negotiations, court litigation, and arbitration proceedings.
• Ensuring full regulatory compliance, including managing obligations for the Register of Contracts.
• Delivering professional training for your management on the specifics of Czech commercial law.

To secure your business operations in the Czech Republic, partner with a law firm that understands both worlds. Contact our team of experts at office@arws.cz.

What Is Your Next Step?

Success in the Czech market depends on managing risk effectively. The most common and costly mistakes—falling into the "knock-out rule" trap, misunderstanding the difference between liability and warranty, and facing contract invalidity—are entirely preventable with the right legal guidance. Proactive legal counsel is not a cost; it is an investment in certainty, security, and profitability.

Don't let preventable legal mistakes undermine your success in the Czech market. For a confidential consultation on your commercial contracts, contact ARROWS, a leading Czech law firm in Prague, EU, today at office@arws.cz.

FAQ – Most common legal questions about Czech-German Commercial Contracts

1. Q: We use our standard German T&Cs for all EU business. Is this a problem in the Czech Republic?
A: Yes, it is a significant risk. Due to the Czech "knock-out rule," if your partner's T&Cs conflict with yours, both sets of conflicting clauses become void and are replaced by Czech law. This can eliminate your liability caps and other protections. To ensure your terms are enforceable, contact us for a review at office@arws.cz.

2. Q: What is the statute of limitations for a breach of contract claim in the Czech Republic compared to Germany?
A: The general subjective limitation period in the Czech Republic is three years.16 Germany also has a standard three-year period, but with many specific exceptions for different types of contracts, such as two or five years for sales and works contracts.17 The rules for when the period begins can also differ. Get clarity on your specific case by emailing office@arws.cz.

3. Q: If we get a judgment from a German court, is it enforceable in the Czech Republic?
A: Yes. As both are EU member states, judgments are generally enforceable under the Brussels I Regulation (Recast). The process is streamlined, and a Czech court will recognize a German judgment, though there are limited grounds for refusal, such as public policy. For assistance with cross-border enforcement, write to us at office@arws.cz.

4. Q: What is the biggest cultural mistake German businesses make in contract negotiations?
A: While legal rules are paramount, German businesses can sometimes appear overly formal or rush to business too quickly. Czech partners often prefer to build a relationship first before making a deal. Understanding these nuances can smooth negotiations. Our lawyers provide not just legal but also practical business advice. Start the conversation at office@arws.cz.

5. Q: Can we agree to resolve disputes via arbitration instead of in a Czech court?
A: Absolutely. Arbitration is a common and effective method for resolving commercial disputes in the Czech Republic and is often faster than court litigation. The arbitration agreement must be in writing. We can help you draft an enforceable arbitration clause. Our lawyers are ready to assist you – email us at office@arws.cz.

6. Q: My Czech partner claims a "material breach" and wants to cancel our contract. What are my options?
A: A "material breach" under Czech law gives the other party the immediate right to withdraw from the contract. You must act quickly to assess the validity of their claim and negotiate a solution. This is a serious situation requiring urgent legal advice. For immediate assistance, write to us at office@arws.cz.

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