How Irish companies should handle commercial contracts with Czech partners: Mistakes to avoid

Your Irish company is expanding into the Czech Republic. You sign what looks like a simple commercial contract with a Czech partner—but you've just made a €50,000 mistake you didn't see coming. This article contains specific answers to the legal traps foreign companies face when doing business in the Czech Republic, and how ARROWS, a leading Czech law firm based in Prague, helps clients avoid costly errors every single day.

The hidden legal divide: Why your Irish contract won't work in Prague

When Irish companies begin negotiating with Czech business partners, most assume that a contract is a contract. After all, both Ireland and the Czech Republic are European Union member states. Surely the legal frameworks are broadly similar? This assumption has cost countless foreign businesses dearly.

The reality is fundamentally different, as your Irish company operates under common law principles where a contract is viewed as a self-contained document. The Czech Republic, by contrast, operates under a civil law system. Every commercial contract is deeply embedded in the Czech Civil Code, a comprehensive framework that automatically fills in gaps and imposes mandatory principles.

This chasm between the two legal traditions is the primary source of disputes between Irish and Czech companies. An Irish executive, accustomed to the principle of caveat emptor ("let the buyer beware"), expects that if something is not explicitly written in the contract, it does not create an obligation.

A Czech court, however, will apply statutory provisions from the Civil Code that operate silently in the background—provisions you never explicitly agreed to but are now legally bound by. This legal culture shock creates what experienced practitioners call "the visibility trap." Many rules are simply invisible because they are embedded in Czech law itself.

The consequences are not academic, as a penalty clause that seemed reasonable in Dublin might trigger catastrophic financial liability in Prague. A verbal agreement that would hold up in Irish courts may be completely unenforceable in the Czech Republic. A contract termination you believed was proper may expose your company to a damages claim.

ARROWS lawyers handle these agenda items daily for international clients and can significantly reduce your risk. We represent over 150 joint-stock companies and 250 limited liability companies across the EU. We understand the precise legal pressure points that create liability for foreign firms in the Czech Republic.

Mistake #1: Underestimating the smluvní pokuta – Contractual penalty risks

Of all the legal traps waiting for Irish companies in the Czech Republic, the most financially dangerous is misunderstanding the Czech contractual penalty, known as the smluvní pokuta . This legal instrument has no direct equivalent in Irish law regarding its scope and enforcement.

It can transform a minor contractual breach into a devastating financial liability. Many Irish executives encounter this clause for the first time in a Czech company's standard terms and conditions. They often glance over it and assume it functions like the penalty clauses they know from home, but this assumption has proven catastrophically wrong.

In Irish law, a penalty clause is designed to be compensatory, estimating the damage likely to result from a breach. Irish courts actively police such clauses and will refuse to enforce them if they appear to be purely punitive or vastly disproportionate to any genuine loss.

The Czech smluvní pokuta, by contrast, is a far more flexible and potent tool for the creditor. Under the Czech Civil Code, it can be used to secure any contractual obligation, including purely monetary ones such as a delay in payment. This represents a fundamental departure from Irish legal thinking.

Consider a concrete scenario that plays out regularly in ARROWS' Prague office. An Irish supplier signs a contract with a Czech buyer to deliver goods by a specified date. The contract contains a clause stating that for each day of delay in performance, a penalty of 0.1% of the total contract value will be assessed.

In a Czech court, this clause is likely to be upheld because the Czech buyer does not need to prove they actually suffered any financial loss. The mere breach of the obligation triggers the full penalty automatically. This principle extends far beyond simple delays.

Penalties can be imposed for poor quality of work, breach of confidentiality, or unauthorized use of intellectual property. While Czech courts have the authority under the Civil Code to moderate "unreasonably high" penalties, relying on a court to reduce a penalty after the fact is an expensive and uncertain litigation strategy.

ARROWS drafts, reviews, and negotiates penalty clauses daily and can advise you on which provisions are reasonable and which expose you to unacceptable risk. Every penalty clause in a Czech contract must be reviewed by someone with deep knowledge of Czech law before you sign.

Mistake #2: Ignoring formal requirements – When your agreement is not a contract

Irish business culture values pragmatism and flexibility. In Ireland, a binding agreement can arise from a handshake, an exchange of emails, a purchase order, or even implied conduct between parties. This flexibility has served Irish businesses well in domestic dealings.

However, this approach is a legal landmine in the Czech Republic. Czech law imposes strict formal requirements for certain types of contracts. A failure to observe these requirements does not merely make the contract "less enforceable"—it often renders the contract invalid.

The most critical formal requirement applies to commercial agency agreements. Under Section 2483 of the Czech Civil Code, a commercial agency agreement must be executed in writing ( písemná forma ) to be legally valid. This is not a guideline or a best practice; it is an absolute legal requirement.

An Irish principal company might establish a relationship with a Czech commercial agent based on an oral understanding, believing that a valid contractual relationship is in place. In the eyes of Czech law, the contract is invalid for lack of form. This creates a catastrophic legal position regarding remedies and exclusivity.

This scenario plays out with disturbing regularity. An Irish company appoints a Czech agent to represent its products in the Prague market via email. The agent begins cultivating customers, but when a dispute arises, the Irish company discovers the documentation is insufficient.

Even where written form is not strictly required, Czech courts will look to written documentation as the primary evidence. While the Civil Code instructs courts to determine the "true intention" of the parties, in practice, parties who relied on oral understandings often find themselves unable to prove what was agreed.

Every commercial relationship with a Czech partner must be documented in a clear, written agreement. For agency relationships, this requirement is non-negotiable. For other commercial arrangements, written documentation is essential not merely for legal validity, but to create a clear record.

ARROWS prepares and reviews commercial contracts with Czech partners daily and can ensure your agreement complies with all formal requirements. We coordinate translations, notarization where required, and registration in applicable public registers.

Mistake #3: Misunderstanding the principle of good faith (dobré mravy & poctivost)

One of the most important principles in Czech contract law is the mandatory obligation to act honestly ( poctivost ) and in accordance with good morals ( dobré mravy ). This principle is not merely a general ethical aspiration, but an enforceable legal standard that permeates all transactions.

A Czech court can refuse to enforce a contractual right if exercising that right would violate these principles. For an Irish company accustomed to common law traditions, this concept creates significant uncertainty, as Irish law generally prioritizes freedom of contract and the explicit text.

The practical implications are profound. Imagine an Irish company has negotiated an exclusive distribution agreement and decides to terminate it strictly according to the text. However, a Czech court might assess whether the termination was exercised in a manner consistent with honest dealing.

This principle extends to the negotiation of contracts themselves through the doctrine of culpa in contrahendo . If one party engages in negotiations without a genuine intention to conclude a contract, or terminates advanced negotiations without a "just cause," they can be held liable for losses.

What does "good faith" actually mean in a Czech contract? It requires parties to act honestly and fairly. A court can refuse to enforce a contractual right if the manner of exercising that right is deemed to be an abuse, or invalidate clauses contrary to good morals.

ARROWS can help you avoid legal risk by ensuring that the agreement includes clear definitions of what constitutes material breach. During contract performance, ensure that you communicate regularly with your Czech partner and document your reasons for major decisions to demonstrate that you acted fairly.

Mistake #4: Assuming Irish courts will have jurisdiction

An Irish company signing a contract with a Czech partner often overlooks a critical question: Where will disputes be litigated, and which country's law will govern the contract? Many Irish companies assume that if they are the "party in power," they can unilaterally insist on Irish jurisdiction.

The governing law question is crucial, as failing to specify it triggers default EU rules. Under Rome I Regulation, if your contract with a Czech service provider lacks a "governing law" clause, the dispute will likely be governed by Czech law—even if you are an Irish company and the contract is in English.

The jurisdiction question is equally important. Under the Brussels I bis Regulation, the default rule is that disputes must generally be heard in the courts of the Member State where the defendant is domiciled. For a dispute where you sue a Czech partner, this means the Czech courts have default jurisdiction.

The interaction between these two EU regulations is critical and can lead to complex scenarios. Even if your contract states that disputes shall be heard in Irish courts, if the governing law clause is absent or ambiguous, the Irish court may have to apply Czech law to the dispute.

Every contract with a Czech partner must include three explicit clauses: a governing law clause, a jurisdiction clause (or arbitration clause), and language defining the scope of these clauses. These must be in clear, specific language to avoid ambiguity.

ARROWS can guide you on selecting the optimal governing law and jurisdiction provisions for your specific business relationship. A pragmatic alternative that many international companies adopt is a Prague-seated arbitration clause, which can be conducted in English and provides a faster resolution.

Mistake #5: Overlooking the three-year statute of limitations

One of the most devastating surprises for Irish companies doing business in the Czech Republic is the difference in time limits to file a legal claim. In Ireland, you generally have six years to bring an action based on a simple contract.

The Czech Republic's legal framework is far more restrictive, with a general subjective limitation period of three years. If you wait longer than three years from the date the right could first be exercised, your claim becomes "time-barred." If the debtor raises this objection in court, you will lose your money permanently.

The practical implications are severe. An Irish company might negotiate for months with a Czech partner who is slow to pay. By the time the Irish company decides to litigate, the three-year mark may have passed.

While the Civil Code states that the limitation period does not run while parties are seriously negotiating, relying on this is legally dangerous. It is often difficult to prove exactly when "serious negotiations" began or ended. Once negotiations break down, the clock resumes, often leaving you with very little time.

From the moment a Czech partner owes you money or breaches a contract, you must track the three-year deadline. Do not assume that informal arrangements or generic email chitchat pause the clock indefinitely.

ARROWS can provide an immediate legal opinion on your specific limitation period. If you intend to litigate, you must initiate proceedings before the statute of limitations expires. For an urgent analysis, write to us.

Mistake #6: Failing to properly translate and apostille documents

An often-overlooked requirement in the Czech Republic is the formal translation and certification of documents submitted to Czech government authorities and commercial registers. Failure to comply can result in your documents being rejected.

Czech law requires that documents submitted to the Commercial Register in a foreign language be accompanied by a certified translation. This translation ( soudní překlad ) must be prepared by a certified court interpreter registered in the Czech Republic. A simple English translation is insufficient.

Additionally, for certain public documents originating in Ireland, the Czech authorities typically require an apostille or a qualified electronic signature verification. This applies to documents like extracts from the Irish Companies Registration Office used to prove the existence of your company.

ARROWS handles these formalities daily and coordinates with Irish entities to obtain apostilles where necessary. We engage certified Czech translators and ensure all documents are submitted to Czech authorities in the correct format to prevent administrative rejections.

The role of arbitration: Strategic alternative to litigation

For many Irish companies, Czech court litigation is an unappealing option due to language barriers and timelines. International arbitration offers significant advantages and should be considered during contract negotiation.

Arbitration in the Czech Republic is governed by Act No. 216/1994 Coll., on Arbitration Proceedings. An arbitration clause can specify that disputes will be resolved by arbitration seated in Prague, governed by the Rules of the Arbitration Court attached to the Czech Chamber of Commerce.

The advantages are substantial, including confidentiality and speed. Furthermore, you can agree on English as the language of proceedings, avoiding the need for constant translation in state courts.

ARROWS has extensive experience in representing clients in arbitration and can guide you through the process. When negotiating a Czech contract, consider proposing an arbitration clause, as it is far easier to agree upon upfront than after a dispute has emerged.

FAQ – Most common legal questions about commercial contracts

1. What is the single biggest mistake an Irish company can make in a Czech contract?

The most dangerous mistake is underestimating the Czech contractual penalty ( smluvní pokuta ). This penalty is enforceable even for monetary breaches like late payment and requires no proof of actual damage. To review your penalty clauses and renegotiate if necessary, get tailored legal solutions by writing to office@arws.cz.

2. Is a verbal agreement with my Czech partner legally binding?

It depends on the contract type. For commercial agency agreements ( obchodní zastoupení ), a written form is mandatory for validity. For other contracts, while oral agreements may be valid, they are difficult to prove. Assuming a verbal deal is secure is a significant risk. For certainty about your specific situation, contact us at office@arws.cz.

3. What if we don't specify the governing law in our contract?

This creates significant uncertainty. The applicable law will be determined by EU Regulation Rome I, often resulting in the application of Czech law by default if the service provider is Czech. It is a critical mistake to omit a governing law clause. Our lawyers are ready to assist you – email us at office@arws.cz.

4. How long do I have to sue for a breach of contract in the Czech Republic?

The general statutory limitation period for commercial claims is three years. In Ireland, it is generally six. This means that if Czech law applies and you wait too long, your debt becomes legally unenforceable. Seek legal advice promptly – contact office@arws.cz for an urgent analysis.

5. Can we include an arbitration clause in our Czech contract?

Yes, and we often recommend it. An arbitration clause can specify Prague as the seat of arbitration and English as the language of proceedings. Arbitration is typically faster and more confidential than state court litigation. For assistance drafting an effective arbitration clause, write to office@arws.cz.

6. What happens if my Czech partner breaches a contract and I want to enforce it?

Your options depend on the jurisdiction clause. If Czech law applies and litigation is necessary, proceedings will likely be in Czech courts (unless arbitration was agreed). This requires Czech legal representation. ARROWS represents clients in both arbitration and court proceedings. For an assessment of your enforcement options, contact office@arws.cz.

Why ARROWS is your strategic partner for Czech commercial contracts

Drafting, negotiating, and managing commercial contracts with Czech partners is complex. Individual steps often contain hidden exceptions and procedural requirements that laypeople and even experienced Irish lawyers may not fully appreciate. The Czech legal system operates on civil law principles different from English common law.

ARROWS is a leading Czech law firm based in Prague that handles cross-border commercial contracts daily. We represent over 150 joint-stock companies and 250 limited liability companies operating in the Czech Republic. We understand the precise pressure points where Irish companies create legal vulnerability.

Our international capabilities span 90 countries, and we are insured for damages up to CZK 500,000,000. This means that our legal advice carries substantial professional insurance backing. We are also regular partners of in-house counsel for handling specialized Czech law matters.

Our services include comprehensive contract drafting, review, and negotiation with Czech partners. We also handle the preparation of all required documentation, coordination of apostilles, and representation in contract disputes and arbitration.

The cost of engaging ARROWS to properly structure your Czech commercial contracts is minimal compared to the risk of contractual disputes. An afternoon of legal consultation can save you tens of thousands of euros in avoided penalties and litigation costs.

Contact ARROWS today at office@arws.cz and let us ensure that your Czech business relationships are protected. Do not proceed with any significant commercial relationship in the Czech Republic without having your contracts reviewed by a Czech legal expert.