How Hungarian firms should structure agreements with Czech partners: Common legal missteps

Expanding into the Czech market as a Hungarian business presents significant opportunities, but your success depends critically on understanding fundamental differences between Hungarian and Czech contract law. This article reveals the most common and costly mistakes Hungarian companies make when negotiating agreements with Czech partners—and how to avoid them. You will discover specific legal pitfalls, practical solutions, and actionable guidance to protect your business interests across the border.

Understanding the critical divide between Hungarian and Czech contract law

When Hungarian companies begin doing business in the Czech Republic, many assume that both countries share similar legal frameworks since they are EU members and neighbors. This assumption has cost Hungarian businesses significant amounts in unexpected liabilities and failed enforcement actions. The truth is more nuanced: while both nations operate under civil law systems, the Czech Republic's contract law operates on different principles than Hungarian law in several key areas.

The Czech Civil Code (Act No. 89/2012 Sb.), effective since 2014, establishes a system where written contracts are strictly interpreted.

This differs meaningfully from Hungarian law, which often retains greater flexibility in contractual interpretation. In practical terms, what seems like a minor omission in a Czech contract can eliminate your legal protections entirely, while a clause that might be treated leniently in Hungary can become a crushing financial obligation in Prague.

The ARROWS Law Firm, based in Prague and serving international clients across Europe, regularly assists Hungarian companies with cross-border disputes that could have been prevented through proper contract structuring from the outset. The complexity here extends beyond simple translation; it involves understanding how Czech courts interpret ambiguous language and how statutory provisions automatically fill contractual gaps.

The contractual penalty trap: Why the smluvní pokuta is so different

One of the most dangerous misconceptions Hungarian business leaders hold concerns contractual penalties. In many jurisdictions, penalty clauses are subject to strict judicial review, and courts frequently reduce penalties they deem excessive. The situation in the Czech Republic is specific and often more severe regarding enforcement.

The Czech "smluvní pokuta" (contractual penalty) is a powerful, flexible, and fully enforceable financial sanction.

Most critically, the Czech smluvní pokuta can be applied to any contractual obligation. A Hungarian manager might glance at such a clause and assume it is comparable to familiar penalty provisions at home. In reality, you could be agreeing to a financial sanction that accumulates daily.

Consider a practical scenario: a Hungarian supplier signs a contract with a Czech buyer that includes a smluvní pokuta clause imposing a penalty of 0.5 percent of the total contract value for each day of payment delay. An administrative delay of ten days—entirely unintentional and quickly resolved—triggers a penalty equivalent to five percent of the entire contract value.

Czech courts will generally enforce this clause without requiring proof that the creditor suffered actual financial damage.

The mere fact of the breach is sufficient to activate the full penalty (Section 2048 of the Civil Code). While courts have a moderation right (Section 2051), relying on it is risky and involves costly litigation. The ARROWS Law Firm works regularly with Hungarian businesses navigating these contractual penalty disputes.

microFAQ – Legal tips on contractual penalties in Czech contracts

1. Can a Czech court reduce a contractual penalty if it seems too high?
   Czech courts have the power to moderate "unreasonably high" penalties, but this requires litigation and the outcome is not guaranteed. The better strategy is to avoid problematic clauses in the contract itself. Contact office@arws.cz for a professional contract review.
2. Does the creditor have to prove actual damages to enforce a smluvní pokuta?
   No. The penalty is enforceable based purely on the breach itself, regardless of whether the creditor suffered any real financial loss. For advice on negotiating more balanced penalty terms, write to office@arws.cz.
3. Can I refuse to pay a contractual penalty if I believe it is excessive?
   Refusing payment creates additional legal risk and potential late payment interest on the penalty itself. Proper contract drafting and review at the negotiation stage is far more effective than challenging penalties after they are triggered. Get professional guidance at office@arws.cz.

When your contract isn't actually a contract: Formal requirements and the písemná forma

A second critical pitfall concerns the formal requirements for certain contracts to be legally valid. While general commercial contracts can often be informal, Czech law imposes strict mandatory form requirements for specific contract types, and failure to comply means the contract is legally void and unenforceable.

Under Section 2483 of the Czech Civil Code, a commercial representation agreement must be executed in writing (písemná forma) to be legally valid.

The most common example affecting Hungarian business relationships is the commercial representation (agency) agreement. A Hungarian principal might engage a Czech sales agent based on a series of meetings, email exchanges, and detailed discussions about commission rates and territory. The parties might believe a binding relationship has been established through these interactions.

Under Czech law, however, without a single written document or a qualified electronic signature, this agreement is invalid. This is not a technicality; it is a fundamental gap in legal protection. Hungarian business culture often emphasizes trust and relationship-based dealings. The Czech legal system, by contrast, treats the absence of written documentation in these specific cases as a failure of validity.

ARROWS Law Firm has represented numerous companies facing exactly this situation: after months of negotiations and substantial business commitments based on an alleged agency agreement, the relationship collapsed and the company discovered it had no legal protection whatsoever.

The ARROWS Law Firm specializes in helping Hungarian businesses navigate these formal requirements. Our lawyers can ensure that all necessary documents are properly executed and legally compliant with Czech statutory mandates.

microFAQ – Legal tips on contract formalities with Czech partners

1. If we have exchanged detailed emails and discussed all terms, isn't that sufficient to form an agency agreement?
No. Czech law requires a written contract for commercial representation (agency). Emails alone, unless they meet specific electronic signature standards (eIDAS), may not suffice to create a valid deed required by law. For assistance with drafting compliant agency agreements, contact office@arws.cz.

2. What happens if we discover too late that our contract wasn't properly formed?
You risk losing legal protections and the ability to enforce terms like non-compete clauses or specific performance. You may have to rely on unjust enrichment claims, which are harder to prove and quantify. The time to address this issue is before the business relationship begins. Write to office@arws.cz for contract review.

3. Are there other contract types besides agency agreements that require strict written form?
Yes. Contracts transferring real estate, licenses for industrial property rights in certain cases, and consumer credit contracts must meet formal requirements. Get expert guidance from office@arws.cz to ensure your agreements are properly structured.

The "knock-out rule" and the battle of standard terms and conditions

A third significant pitfall involves how Czech law handles conflicting standard terms and conditions between contracting parties. The Czech Civil Code utilizes a "knock-out rule" approach under Section 1751.

When two parties exchange conflicting standard terms and conditions (T&Cs), the contract is considered concluded, but provisions where the parties' T&Cs contradict each other are automatically rendered void ("knocked out").

The resulting contractual gaps are then filled by the default statutory provisions of the Czech Civil Code. This seems neutral in theory, but in practice, it exposes your business to unexpected liabilities. Imagine this scenario: your Hungarian company sends a purchase order incorporating your standard terms, which limit your liability for defective goods.

Your Czech partner responds with their own order confirmation containing different T&Cs—demanding unlimited liability. Under the knock-out rule, both sets of conflicting provisions are eliminated entirely. Your liability cap disappears, replaced by the statutory liability rules of the Czech Civil Code, which might be broader than you intended.

The ARROWS Law Firm advises Hungarian businesses on this specific issue regularly.

The solution requires specific contractual language excluding the automatic application of the knock-out rule or clearly defining which T&Cs prevail. Many Hungarian companies discover this problem only after a dispute has arisen. Proper drafting from the outset prevents this entirely.

The principle of good faith and fair dealing: A trap for aggressive negotiators

Czech law takes the principle of good faith seriously. The Czech principle of good faith and fair dealing ( poctivost and dobré mravy ) permeates all legal transactions. More significantly, Czech law recognizes the doctrine of pre-contractual liability ( culpa in contrahendo ).

Under Section 1729 of the Czech Civil Code, if negotiations between parties have reached a point where the conclusion of a contract appears highly likely, a party that terminates the negotiations without a just cause acts dishonestly and may be liable for damages.

This creates a significant departure from practices where walking away from negotiations before a formal contract is signed is seen as risk-free. In the Czech context, if negotiations have reached an advanced stage and one party suddenly terminates them without legitimate justification, they could face damages for the other party's wasted costs and lost opportunity.

Hungarian business negotiators accustomed to aggressive tactics—making last-minute demands or threatening to terminate negotiations to force concessions—must adjust this approach when dealing with Czech partners to avoid triggering liability.

The danger of implicit obligations and statutory gaps

A fourth critical difference concerns how Czech law treats obligations that are not explicitly stated in the contract. The Czech Civil Code provides extensive default provisions that automatically apply to fill contractual gaps if the parties did not specifically negotiate these terms.

The Czech Civil Code then automatically imposes statutory provisions covering warranty periods, liability limitations, termination rights, and other matters.

You might draft a short, straightforward contract believing you have addressed all necessary issues. One practical example: in Czech B2B sales contracts, unless explicitly stated otherwise, the seller is liable for defects existing at the moment of risk transfer.

ARROWS Law Firm works with Hungarian companies to ensure that all material terms are explicitly stated and that default provisions are either accepted or properly modified through negotiated terms.

If your contract does not explicitly regulate this liability (creating a warranty or limiting rights from defective performance), you are automatically bound by the full statutory obligations of the Czech Civil Code.

Risks and Sanctions	How ARROWS Helps (office@arws.cz)
Unexpected contractual penalties: A clause that seems minor accumulates into a devastating financial liability.	Expert contract review and drafting: ARROWS Law Firm analyzes all penalty provisions, restructures them to be balanced and enforceable.
Void agency agreements: Informal arrangements believed to be binding prove legally non-existent.	Compliance documentation: ARROWS Law Firm ensures all agency agreements meet Czech formal requirements (written form) to prevent invalidity.
Automatic application of Czech statutory liability: Default provisions automatically apply to fill contract gaps.	Strategic contract structuring: ARROWS Law Firm explicitly addresses all material terms and negotiates deviations from statutory defaults where beneficial.
Knock-out rule eliminates your protective clauses: Conflicting standard terms and conditions automatically void liability limitations.	Standard terms compliance: ARROWS Law Firm drafts contracts that properly address the knock-out rule and ensures your standard terms remain effective.
Pre-contractual liability exposure: Terminating advanced negotiations without clear justification can create legal liability.	Negotiation guidance: ARROWS Law Firm advises on how to conduct and terminate negotiations in compliance with Czech legal standards.

The pre-contractual liability doctrine: When negotiations themselves create obligation

The Czech doctrine of pre-contractual liability ( culpa in contrahendo ) is a specific risk. Under Section 1729 of the Czech Civil Code, a party can be held liable for losses incurred by the other party if they terminate negotiations without just cause at a stage where the other party reasonably expected the contract to be concluded.

Czech courts generally require that the terminating party had a legitimate business reason.

The key question becomes: what constitutes "just cause" for terminating negotiations? Discovering better terms elsewhere (unless negotiations were exclusive), becoming unable to finance the transaction, or identifying material risks that were not previously apparent would likely qualify as just cause. However, arbitrary termination simply to cause damage or without any reason is actionable.

The ARROWS Law Firm regularly advises on how to navigate these issues—how to structure negotiations, when and how to withdraw from discussions safely, and how to protect yourself from pre-contractual liability claims.

Missing deadlines and administrative requirements: The Czech datová schránka issue

A fifth practical pitfall concerns administrative requirements. The Czech "datová schránka" (Data Mailbox) is a mandatory electronic communication system through which Czech authorities deliver official notices to companies.

Hungarian companies with a Czech branch or subsidiary must actively monitor their datová schránka.

Failure to monitor this system means you might miss critical legal deadlines. Under the fiction of delivery, a message is deemed delivered 10 days after it lands in the box, even if you never open it. The consequences can be severe: tax penalties, fines, and judgments by default.

ARROWS Law Firm advises Hungarian companies on these administrative requirements and helps establish systems to ensure notices are monitored.

This requirement is also critical for directors of Czech subsidiaries. If you are a manager, you must ensure the datová schránka is monitored to fulfill your duty of care ( péče řádného hospodáře ).

Dispute resolution and enforcement: Cross-border realities

Both Hungary and the Czech Republic are EU member states, meaning that the Brussels I bis Regulation applies to the recognition and enforcement of judgments. A judgment obtained in a Hungarian court is generally recognized in the Czech Republic without special procedures. However, practical enforcement can still be time-consuming due to procedural differences and court backlogs.

Because of this, many international business advisors recommend that contracts between Hungarian and Czech businesses consider international arbitration clauses.

Arbitral awards are enforced internationally through the 1958 New York Convention. This often creates greater speed and neutrality than relying on national courts, especially in complex commercial disputes.

ARROWS Law Firm regularly advises Hungarian companies on dispute resolution strategies, including how to structure arbitration clauses effectively (e.g., using the Arbitration Court attached to the Czech Chamber of Commerce or other institutions) and how to ensure that your dispute resolution approach is practical.

Understanding variable payment terms and late payment interest

Another area where Hungarian and Czech practice may diverge concerns payment terms and late payment interest. Czech law imposes statutory interest rates for late payment. The statutory late payment interest rate in the Czech Republic is set by government regulation and corresponds to the repo rate published by the Czech National Bank plus 8 percentage points.

Czech law generally discourages payment periods exceeding 60 days unless they are not grossly unfair to the creditor.

While parties to a B2B contract can agree to different payment terms, terms that are "grossly unfair" to the creditor may be unenforceable. Hungarian companies should expect that Czech partners may be aggressive about enforcing payment terms and charging late payment interest.

The ARROWS Law Firm advises on appropriate payment term structures that protect your business while complying with Czech law.

microFAQ – Legal tips on dispute resolution and payment terms

1. Should we include an arbitration clause or specify Hungarian courts in our contract with a Czech partner?
While EU regulations ensure Hungarian judgments are recognized, arbitration often provides a faster and more neutral resolution for cross-border commercial disputes. The ARROWS Law Firm can structure arbitration clauses that are enforceable. Write to office@arws.cz for advice.

2. What late payment interest rates should we expect if Czech customers pay late?
The statutory rate is the CNB repo rate plus 8% p.a. However, contractual penalties ( smluvní pokuta ) are often used in addition to or instead of statutory interest to secure payments. Get advice on payment term structuring at office@arws.cz.

3. If we have a judgment from a Hungarian court, is it enforceable against a Czech defendant?
Yes, under the Brussels I bis Regulation, it is automatically recognized. However, you will still need to file a motion for enforcement ( exekuce ) in the Czech Republic to actually seize assets. The ARROWS Law Firm can guide your enforcement strategy—contact office@arws.cz.

Executive summary for management

Properly structuring agreements with Czech partners requires detailed knowledge of Czech contract law. The time invested in proper contract drafting at the outset is far less than the time and cost of litigation.

The Czech smluvní pokuta operates under strict rules and can create significant financial liability.

A single penalty clause negotiated without expert review can erase an entire transaction's profit. Management should ensure all penalty clauses are reviewed by legal specialists. Czech law also automatically fills gaps in contracts with statutory provisions that may not be favorable, requiring explicit attention to all material contractual terms.

Operating in the Czech market requires active management of the mandatory datová schránka (Data Mailbox).

Missing administrative deadlines through oversight can result in legal fictions of delivery and subsequent penalties. Finally, while EU regulations facilitate cross-border enforcement, strategic decisions about dispute resolution—whether to use arbitration or national courts—determine the speed and efficiency of resolving potential conflicts.

Conclusion of the article

Expanding your Hungarian business into the Czech Republic creates genuine opportunities, but success depends critically on understanding that Czech contract law operates on specific principles. The contractual penalty provisions, formal requirements for agency contracts, the knock-out rule, and the doctrine of pre-contractual liability create a legal landscape where general business experience must be supplemented by local legal expertise.

We regularly work with Hungarian managers and corporate legal departments to structure agreements that protect business interests while complying with Czech requirements.

The ARROWS Law Firm, based in Prague, has represented international businesses navigating exactly these issues. Our lawyers combine in-depth knowledge of the Czech legal environment with practical experience in cross-border cases. The good news is that these risks are entirely manageable if addressed properly from the outset.

The ARROWS Law Firm can provide contract review and drafting, representation in negotiations, and ongoing legal support.

Do not leave the foundation of your Czech business operations to chance. We are insured for professional liability up to CZK 500 million, offering our clients security. Our experience with over 150 joint-stock companies and 250 limited liability companies gives us practical knowledge of real business situations.

Get in touch with the ARROWS Law Firm at office@arws.cz today. Our lawyers are ready to review your specific situation and help you structure your Czech business relationships on a solid legal foundation.

FAQ – Frequently asked legal questions about how Hungarian firms should structure agreements with Czech partners

1. If we have been doing business with our Czech partner for years without formal written contracts, do we need them now?
Yes. While informal relationships may work temporarily, certain contract types—specifically commercial representation (agency) agreements—are invalid unless in writing under Czech law. Furthermore, without a written contract, you are relying entirely on statutory default rules which may not favor you. If you are facing this situation, write to the ARROWS Law Firm at office@arws.cz to discuss formalizing your existing business relationships.

2. Should we use Hungarian law or Czech law to govern our agreements?
This depends on leverage and specific goals. Using Czech law for a contract performed in the Czech Republic is often more practical for enforcement purposes against a Czech entity. A compromise often involves using Czech law combined with an arbitration clause to ensure neutrality. The ARROWS Law Firm can advise on the best choice for your specific agreement—contact office@arws.cz.

3. What is the difference between a "warranty" and "liability for defects" under Czech law?
Liability for defects ( práva z vadného plnění ) is a statutory obligation regarding the state of goods at the time of risk transfer (usually delivery). A Warranty for Quality ( záruka za jakost ) is a voluntary commitment that the goods will be fit for purpose for a specific period after delivery. If your contract does not explicit grant a warranty, you may only be relying on the statutory liability for defects. The ARROWS Law Firm can structure these provisions appropriately—reach out at office@arws.cz.

4. How can we avoid the "knock-out rule" eliminating our protective clauses?
The knock-out rule automatically voids conflicting provisions in standard terms and conditions. The solution is to include specific language in the main body of your contract that explicitly states which terms prevail or excludes the application of Section 1751(2) of the Civil Code regarding conflicting terms. This requires careful drafting. The lawyers at ARROWS Law Firm have extensive experience with this issue—contact office@arws.cz.

5. What should we do if our Czech partner sends us contract terms after we have already begun negotiations?
Do not accept terms sent by the other party without expert review. The timing of when terms are exchanged and how they interact with the knock-out rule can significantly affect your legal position. The ARROWS Law Firm regularly reviews agreements during negotiations to identify problematic provisions. If you have received unexpected contract terms, write to office@arws.cz for immediate analysis.

6. If we face a dispute with our Czech partner, will our Hungarian court judgment be enforceable in the Czech Republic?
Yes. Under the EU's Brussels I bis Regulation, judgments in civil and commercial matters are recognized and enforceable across member states. However, you will still need to initiate enforcement proceedings ( exekuce ) in the Czech Republic to collect on the judgment. If you are facing a dispute, the ARROWS Law Firm can provide specialized guidance on enforcement—contact office@arws.cz.

Disclaimer: The information contained in this article is for general informational purposes only and serves as a basic guide to the issue. Although we strive for maximum accuracy in the content, legal regulations and their interpretation evolve over time. To verify the current wording of the regulations and their application to your specific situation, it is therefore necessary to contact ARROWS Law Firm directly (office@arws.cz). We accept no responsibility for any damage or complications arising from the independent use of the information in this article without our prior individual legal consultation and expert assessment. Each case requires a tailor-made solution, so please do not hesitate to contact us.