How to avoid frequent mistakes in commercial contracts with Czech partners as a Lithuanian business

If your Lithuanian business operates in the Czech Republic or is considering expanding there, understanding the differences between Lithuanian and Czech contract law is essential. Many Lithuanian entrepreneurs have experienced costly surprises simply because they applied their domestic legal assumptions to Czech deals. This article reveals the five most dangerous mistakes Lithuanian companies make and how to prevent them.

Understanding the fundamental differences between Lithuanian and Czech contract law

Lithuanian businesses naturally tend to approach Czech contracts using the legal framework they know from home. This assumption, while understandable, is one of the most expensive mistakes you can make. The Czech legal system—governed primarily by the Civil Code—operates on specific principles that may differ from Lithuanian law, creating potential pitfalls for the unwary. While both countries are EU members, the differences in contract interpretation and enforcement mechanisms are substantial enough to expose your company to risk.

A critical area lies in how contracts are interpreted. While the Czech Civil Code prioritizes the actual intention of the parties over the literal wording, proving a verbal intention that contradicts a written text is procedurally extremely difficult in commercial disputes. Czech courts place significant weight on the professional nature of the parties (B2B relationships).

If a contract is written, courts will generally assume it reflects the true will of the parties unless strong evidence suggests otherwise. In Lithuanian business culture, minor details might be resolved later "in the spirit of good faith," but relying on this flexibility in the Czech Republic is risky. What seems like a minor ambiguity to be resolved later could become a legally binding and financially punishing obligation in Prague.

Additionally, Czech law places enormous weight on the principle of good faith (poctivost and dobrá víra), which is a foundational pillar of all private law. This means that Czech courts will interpret your contractual actions through the lens of honesty and fair dealing. A party acting in ways that are commercially unreasonable or dishonest can be found in breach of this implied duty.

The ARROWS Law Firm has extensive experience representing foreign clients operating in the Czech Republic, and they regularly advise Lithuanian businesses on these cross-border contract pitfalls.

The smluvní pokuta trap: understanding Czech contractual penalties

The single most financially dangerous mistake that Lithuanian companies make is underestimating the Czech contractual penalty, known as the smluvní pokuta . This legal instrument creates a strict liability regime and can transform a minor operational breach into a catastrophic financial liability if you do not understand how it works. Many Lithuanian entrepreneurs assume that penalties function solely as damage compensation. This assumption frequently proves incorrectly.

In many jurisdictions, penalties are often inextricably linked to damages. By contrast, the Czech smluvní pokuta functions primarily as a flat-rate sanction. The critical distinctions are these:

1. Independence from damage: The penalty is enforceable even if the creditor suffered absolutely no financial damage from the breach.

2. Relationship to damages: Unless the contract expressly states otherwise, payment of the contractual penalty precludes the creditor from claiming damages for the same breach.

However, most Czech-drafted contracts explicitly exclude this default rule, allowing the Czech partner to claim both the penalty and full damages. This means you could be required to pay a substantial penalty for a brief administrative delay in payment, regardless of whether your Czech partner actually lost money.

Consider a concrete example that ARROWS Law Firm has encountered: a Lithuanian supplier signs a contract with a Czech buyer containing a clause stipulating a penalty of 0.1% of the total contract value for each day of delay. While this seems low, it amounts to 36.5% annually.

If the penalty is set higher, e.g., 0.5% per day, a simple ten-day delay could trigger a penalty of 5% of the entire contract value. In a Czech court, this penalty clause is likely to be upheld as long as the breach is documented, though extremely high rates might be challenged as contrary to good morals.

When excessive penalties can be challenged

While Czech law does provide a mechanism for judicial moderation of penalties that are deemed "unreasonably high", relying on this corrective measure is an expensive and uncertain strategy. Czech courts have authority to moderate a penalty, but they are not required to eliminate it entirely—they may only reduce it to a level considered "sufficient" given the circumstances.

Furthermore, recent case law from the Czech Supreme Court emphasizes that courts may consider all circumstances of the case when assessing whether a penalty is disproportionate. This potentially includes circumstances that arose after the breach, adding a layer of unpredictability.

The practical reality is this: a Lithuanian company that signs a standard Czech-drafted contract without thorough legal review is likely accepting a far stricter regime than it anticipates. The ARROWS Law Firm specializes in reviewing commercial contracts for foreign clients and routinely identifies hidden or inadequately understood penalty clauses. To understand the specific risks in your contracts, contact office@arws.cz.

Related queries – Legal tips on contractual penalties in Czech contracts

1. Can a Czech partner impose a penalty for late payment without proving any actual losses?
Yes. Czech law allows contractual penalties for late payment (or other breaches) that are entirely independent of actual damage suffered by the creditor. The penalty is enforceable based simply on the fact that the breach occurred.

2. If I pay the contractual penalty, am I also liable for damages?
By default (statutory rule), payment of the penalty satisfies the claim and you do not have to pay damages for the same breach. However , the vast majority of commercial contracts expressly override this rule, stating that the creditor is entitled to the penalty in addition to full damages. You must check the specific wording of your contract.

3. Are there any penalty clauses that Czech courts will refuse to enforce?
Czech courts can moderate (reduce) penalties that are "unreasonably high" to a reasonable level. They rarely declare them void entirely unless they are so extreme that they violate good morals. Determining what is "unreasonable" depends on the value of the secured obligation and the circumstances of the breach.

Formal requirements and the validity trap

One of the most insidious legal traps for Lithuanian businesses operating in the Czech Republic involves the formal requirements for certain types of contracts. While the general rule in Czech law is freedom of form (contracts can be verbal), specific contract types—most notably commercial representation (agency) agreements ( smlouva o obchodním zastoupení )—have a mandatory written requirement. Failure to comply renders the agreement invalid due to lack of form.

A Lithuanian company might establish an agency relationship with a Czech agent based on meetings, email exchanges, and a clear verbal understanding. From the perspective of Czech law, however, a valid commercial representation contract does not exist. This could lead to complex legal outcomes.

While the agent might claim unjust enrichment for work performed, the specific statutory protections, notice periods, and non-compete clauses you thought were agreed upon would be unenforceable. The ARROWS Law Firm has represented foreign companies in exactly this situation, discovering that months of business activity were legally undefined.

What other contracts require written form?

The requirement for written form extends beyond agency agreements.

• Commercial Representation (Agency): Must be in writing.
• License Agreements: An exclusive license must be in writing.
• Real Estate: All contracts transferring or encumbering real estate rights must be in writing.
• Credit/Consumer Contracts: Generally require written form.
• Employment Contracts: Must always be in writing.

The practical challenge is that even for contracts where written form is not mandatory (like a general Service Agreement), relying on verbal terms makes the content of the contract extremely difficult to prove in court. Under Czech civil procedure, the burden of proof lies with the plaintiff.

The ARROWS Law Firm handles international commercial contracts on a daily basis and ensures that all agreements meet both the mandatory formal requirements and the evidentiary needs of the client. Contact office@arws.cz to ensure your agreements have the proper legal form.

Related queries on formal requirements for Czech contracts

1. If I have conducted extensive email negotiations with my Czech partner, is that considered a "written contract"?
It depends. Simple emails may not always satisfy the strict requirement of written form for certain specific acts (like real estate transfers), but for most commercial contracts, an exchange of emails where the content is clear and the parties are identified is often sufficient. However, for critical agreements like Commercial Agency, a single document signed by both parties is strongly preferred.

2. What happens if I establish a business relationship with a Czech agent verbally?
The contract for commercial representation is invalid for lack of form. This creates a legal limbo. The agent cannot enforce specific statutory agency commissions, but you cannot enforce the agreed-upon termination notice periods or non-compete clauses.

3. Are there other contract types besides agency agreements that require formal written documentation in Czech law?
Yes. Employment contracts, transfers of real estate, exclusive IP licenses, and certain financial contracts require written form. Always verify the form requirement for your specific business deal.

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Statute of limitations: the silent threat to your legal rights

One of the most insidious risks in cross-border commerce is the expiration of legal rights due to statute of limitations ( promlčení ). An entrepreneur operating under domestic assumptions may miss the strict Czech deadlines. Importantly, in Czech law, the expiration of the limitation period does not extinguish the right automatically, but if the debtor raises the objection of limitation in court, the court cannot grant the claim.

The general subjective limitation period for civil claims under Czech law is three years from the moment the person learned (or should have learned) of the harm and who caused it. This is subject to an overriding objective limitation period of ten years from when the claim arose regardless of knowledge.

Crucially, in B2B (commercial) relationships, parties can agree to shorten or extend the limitation period, ranging from 1 year to 15 years. If you do not utilize this option in your contract, the statutory default applies. A Lithuanian company might assume it has ample time to file a lawsuit, only to find that the three-year subjective period has passed.

A practical scenario: when time runs out

Consider a scenario: a Lithuanian company receives defective goods in 2021 but only discovers the full extent of the latent defect in 2024. If the contract is governed by Czech law and relies on the default statutory rules, the subjective period begins when the defect was discovered (or could have been).

However, one must also check specific warranty periods and complaint deadlines ( reklamace ), which are distinct from the statute of limitations. Failure to notify the defect "without undue delay" can lead to the loss of rights entirely, well before the statute of limitations expires.

In cross-border transactions, determining the correct limitation period is complex because it depends on the governing law chosen in the contract. The ARROWS Law Firm handles cross-border disputes regularly and understands these complex rules. Contact office@arws.cz to ensure your claims are filed in time.

Related queries on statute of limitations in Czech law

1. How long is the standard commercial statute of limitations?
The statutory default is a subjective period of three years from when you could have first exercised the right (usually when you learned of the breach/debt), capped by a ten-year objective period.

2. Can we agree on a longer period?
Yes. In B2B contracts, you can negotiate a limitation period anywhere between 1 and 15 years. This is a powerful tool for creditors (e.g., extending the period to 5 years gives you more breathing room).

3. Does the period start when the breach occurs?
Not necessarily. The subjective period starts when you knew (or should have known) about the circumstances determining the right. The objective period generally starts when the claim arose (e.g., the due date).

Dispute resolution: choosing the right forum for Czech disputes

The choice of law and dispute resolution clauses determine whether you will be fighting in Lithuania, in Czech courts, or in international arbitration. An improperly drafted clause can force you into a costly legal battle in an unfamiliar system.

Litigation in the Czech Republic is conducted exclusively in the Czech language. Any evidence submitted in English or Lithuanian must be accompanied by an officially certified translation ( soudní překlad ). A Lithuanian company that files documents in English risks having them disregarded, and missed deadlines can result in a default judgment.

Czech courts, arbitration, or a combination?

For Lithuanian businesses, the key decision is between state courts and arbitration.

• Czech Courts: Judgments are enforceable across the EU. However, proceedings are public, formal, and can be lengthy (often 2-4 years for complex cases).
• Arbitration: Offers confidentiality and speed. You can select arbitrators with industry expertise. Arbitral awards are enforceable globally.

However, arbitration clauses must be drafted carefully. Czech law is strict regarding the validity of arbitration agreements to prevent abuses. For B2B disputes, arbitration is highly effective if the clause designates a reputable institution.

The ARROWS Law Firm has extensive experience drafting valid arbitration clauses and representing clients in both venues. If you are uncertain about the best dispute resolution mechanism, contact office@arws.cz.

Standard terms and conditions: the battle of forms problem

A common situation is the "battle of forms" where both parties exchange their own standard terms and conditions (Ts&Cs). Czech law employs a specific rule: If the Ts&Cs conflict, the contract is considered concluded, but the conflicting provisions cancel each other out (the "knock-out" rule).

The resulting gaps are then filled by the default statutory provisions of the Czech Civil Code. This creates a hidden danger where your carefully drafted liability caps or warranty limitations might vanish because they conflicted with the other party's terms.

Why standard terms and conditions must be properly incorporated

For Ts&Cs to be valid, they must be properly incorporated into the contract. In B2B relationships, it is sufficient if the terms are known to the parties or attached to the offer. Simply referencing Ts&Cs on an invoice sent after the contract is concluded is generally insufficient.

Furthermore, Czech law prohibits "surprising clauses" in Ts&Cs. Any provision that the other party could not reasonably expect is ineffective unless they expressly accepted it. This applies especially to clauses hidden in fine print. The ARROWS Law Firm regularly reviews standard terms and conditions to ensure compliance. Contact office@arws.cz to have your Ts&Cs reviewed.

The principle of good faith

The principle of good faith ( poctivost ) requires parties to act honestly and fairly. Czech courts interpret contractual obligations through this lens. Your business instincts may lead you to believe that "if it's not forbidden in the contract, it's allowed."

However, a Czech court may find that behaviour which is technically within the contract terms but commercially unfair constitutes a breach of good faith. This can limit the exercise of rights, such as terminating a contract or demanding penalties, if done in an abusive manner.

Risks associated with common contract mistakes

Risks and Sanctions	How ARROWS (office@arws.cz) helps
Unexpected contractual penalties: A minor delay triggers penalties of substantial value; potential accumulation of penalty + damages if not excluded.	Contract review and penalty analysis : ARROWS lawyers identify penalty risks and negotiate terms that exclude cumulative liability for damages and penalties.
Invalid agency agreements : Relying on verbal understandings with Czech agents results in void contracts due to lack of written form.	Formal contract documentation : ARROWS ensures agency agreements meet mandatory written form requirements, making them legally enforceable.
Expired claims due to missed deadlines : Missing the 3-year subjective limitation period results in successful objections by the debtor and loss of enforceability.	Limitation period management : ARROWS advises on extending limitation periods up to 15 years in contracts and tracks deadlines.
Conflicting standard terms enforcement failures : The knock-out rule eliminates contradictory Ts&Cs, replacing them with default statutory rules.	Terms and conditions optimization : ARROWS drafts Ts&Cs compliant with Czech law and advises on proper incorporation mechanisms to avoid the battle of forms.
Unintended liability from good faith breaches : Abusive exercise of rights may be deemed unenforceable by courts based on the principle of poctivost .	Good faith compliance advice : ARROWS provides strategic guidance on business conduct to ensure enforceability of your rights.

Executive summary for management

Key Points for Decision-Makers:

• Contractual penalty exposure : The Czech smluvní pokuta is strict. It applies even without damages. Ensure your contract clarifies whether penalties replace damages or are cumulative.
• Formal documentation : Agency agreements (Commercial Representation) must be in writing. Verbal agreements are void.
• Statute of limitations : The default subjective period is 3 years. Consider negotiating a longer period (e.g., 5 years) in your contract for better protection.
• Litigation costs : Czech court proceedings require certified translations and local counsel. Arbitration may be a more efficient alternative for B2B disputes.
• Professional legal support : The differences between Lithuanian and Czech law are structural. Handling Czech contract disputes independently creates unacceptable risk.

Conclusion

Commercial contracts between Lithuanian and Czech companies are fraught with legal pitfalls. The differences between Lithuanian and Czech law affect how contracts are interpreted, enforced, and litigated. From the strict smluvní pokuta to the mandatory written form for agency agreements and the complex statute of limitations, each issue presents genuine financial risk.

The ARROWS Law Firm, a leading Prague-based law firm, has extensive experience representing foreign companies. The lawyers at ARROWS combine in-depth knowledge of the Czech Civil Code with experience in international cases. This expertise reduces the time your company must spend managing legal matters and minimizes the risk of costly errors.

If you want to avoid the costly mistakes that other companies have made, the sensible approach is to have the ARROWS Law Firm review your Czech contracts before you sign them. The firm is insured for damages up to CZK 400,000,000, protecting your interests. To have your Czech contracts reviewed or to discuss your business situation, write to office@arws.cz.

FAQ – Frequently asked legal questions about avoiding mistakes in commercial contracts with Czech partners

1. My Lithuanian company has been operating in the Czech Republic with only verbal agreements with agents. Are these valid?
If these are Commercial Representation (Agency) agreements, they are likely invalid ( neplatné ) for lack of written form. You should formalize these relationships immediately in writing to ensure legal certainty. Contact office@arws.cz.

2. I signed a contract with a penalty clause. Am I liable for the full amount if I am late?
Generally, yes. The penalty is payable upon breach. However, if the penalty is manifestly excessive, a court may moderate it. Also, check if the contract allows the creditor to claim damages in addition to the penalty. If not, paying the penalty might settle the liability.

3. How long do I have to file a legal claim?
The standard subjective limitation period is 3 years from when you learned of the claim. However, deadlines for notifying defects (complaints) can be much shorter. It is crucial to act fast.

4. If my Ts&Cs conflict with my partner's, whose apply?
If they conflict, the conflicting parts cancel out (knock-out rule), and statutory law applies. This is often unfavorable. It is better to negotiate a specific agreement than rely on conflicting forms.

5. Should I choose Czech courts or Arbitration?
Arbitration is often faster and confidential for B2B disputes, but requires a valid arbitration clause. Czech courts are reliable but formal and public. The choice depends on the specific deal.

6. Can I file a claim for a breach from 2021 in 2024?
You are likely on the edge of the 3-year subjective limitation period. If more than 3 years have passed since you could have exercised the right, the claim may be time-barred if the debtor raises an objection. Immediate legal analysis is required. 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).