How Swedish Companies Can Avoid Contract Mistakes in the Czech Republic:

As a Swedish company expanding into the Czech Republic, you’re entering a stable, high-potential market—but familiarity can be deceptive. Assuming Czech law is “close enough” to Swedish law just because both are EU civil law systems is a costly mistake. This article explains key legal differences and how to avoid financial and contractual risks. Based in Prague, ARROWS is a leading Czech law firm with English-speaking experts ready to secure your contracts and protect your investments.

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.

Mistake #1: Underestimating the Smluvní Pokuta (The Contractual Penalty)

Of all the legal traps awaiting foreign companies, the most financially dangerous is the misunderstanding of the Czech contractual penalty, known as the smluvní pokuta. This is the single biggest financial risk in any Czech contract. It may look like a standard penalty clause, but it functions in a far more punitive way than Swedish law anticipates.

Swedish law, under the Contracts Act (Avtalslagen), provides a general provision (Section 36) to modify or set aside "unconscionable" terms. A Swedish manager might see that Czech law also allows a court to moderate an "unreasonably high" penalty and assume the principles are the same. This assumption is a critical error. The real danger isn't just the amount of the penalty; it's the type of breach it can be applied to.

Key Trap 1: It Applies to Late Payments

The most critical difference is this: Czech law allows a smluvní pokuta to be applied to any breach, including purely monetary ones like a late payment.

A Czech partner can legally include a clause imposing a penalty of 0.5% of the entire contract value for each day an invoice is late. A Swedish company, expecting only statutory interest for a delay, might overlook this. A simple ten-day administrative delay could trigger a penalty equivalent to 5% of the entire deal, potentially erasing your profit margin.

Key Trap 2: It Requires No Proof of Financial Damage

The second trap is the penalty's purpose. The smluvní pokuta is primarily punitive and preventative, not compensatory.

This means the penalty is enforceable even if the creditor suffered no actual financial damage from the breach. The mere fact of the breach—such as being one day late—is enough to trigger the full, severe penalty. Czech partners are often aware that foreigners misunderstand this clause and may use it as a powerful negotiation lever.

Relying on a Czech court's "power of moderation" to save you after the fact is a risky, uncertain, and expensive litigation strategy. The only solution is proactive contract review and drafting documentation before you sign.

Dangers of the Smluvní Pokuta

Risks and Penalties	How ARROWS Helps
Catastrophic financial loss: Paying a penalty of 0.5% of the total contract value per day for a minor payment delay.	Contract review: We analyze your draft contracts to identify and neutralize punitive smluvní pokuta clauses. Need a contract reviewed? Write to office@arws.cz.
Penalty without harm: Being forced to pay 100% of a penalty even if your breach caused zero financial damage to your partner.	Contract drafting: We draft balanced, compliant contracts that protect your interests and use penalties fairly. Get your contract prepared by emailing office@arws.cz.
Costly litigation: Relying on a Czech court to "moderate" an excessive penalty after the fact.	Legal opinions: We provide clear legal opinions on the enforceability of your existing clauses under Czech law. Need legal help? Contact us at office@arws.cz.

FAQ – Legal tips about Czech Contractual Penalties

• What is the single biggest financial risk I should look for in a Czech contract?
  The contractual penalty clause (smluvní pokuta). It can be applied to late payments and is enforceable even without proof of damage, leading to severe financial liability. Do not hesitate to contact our firm for a contract review – office@arws.cz.

• My Swedish contract just has a 'reasonableness' standard. Is that enough in Czechia?
  No. While Czech courts can moderate "unreasonably high" penalties, the fundamental rules are different. You cannot rely on a vague "reasonableness" standard to protect you from a specifically worded smluvní pokuta that is legally permitted for late payments. Get tailored legal solutions by writing to office@arws.cz.

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Mistake #2: Relying on Verbal Agreements and Foreign Templates

This is a common trap for Swedish businesses. In Sweden, under the Avtalslagen, verbal agreements are generally valid and legally enforceable. This creates a cultural expectation that a "deal is a deal."

In the Czech Republic, this assumption is extremely risky. While a simple sales contract might be verbal, more complex agreements, such as commercial agency, require a written form to be valid at all. Your verbal distribution agreement could be legally void from the start, leaving you with no rights to enforce.

Why using a Swedish contract template is a high-risk strategy

Many foreign companies correctly learn that a commercial contract in the Czech Republic can be in English. They then use their standard Swedish template, translate it, and assume it's secure. This is a critical mistake.

The danger lies in the different philosophies of civil law. A Swedish or common-law contract is often long, attempting to cover every possibility. A Czech contract, by contrast, is often shorter because it operates within the framework of the comprehensive Czech Civil Code (občanský zákoník), which automatically "fills in the gaps".

Your Swedish template is dangerous in two ways:

1. It may contain clauses that directly conflict with mandatory principles of the Czech Civil Code and will be ruled invalid.
2. It may be missing key protections that are not automatically supplied by the Civil Code, which a local Czech firm would have included.

A profound difference is the mandatory principle of "good faith" (dobré mravy). In Czech law, this is not just an aspiration; it is an enforceable legal standard. A Swedish company might aggressively pursue a clearly written contractual right, but a Czech court could rule that the way it was exercised violates "good faith," creating an unexpected liability.

Risks of Invalid and Unenforceable Contracts

Risks and Penalties	How ARROWS Helps
Void agreement: Relying on a verbal "handshake deal" for a commercial agency, only to find it's legally void in the Czech Republic.	Drafting legally required documentation: We ensure your contracts meet all mandatory written form requirements under Czech law. Email us at office@arws.cz.
Unenforceable clauses: Having your key liability or termination clauses struck down by a Czech court for conflicting with the Civil Code or "good faith" principles.	Legal opinions: We review your foreign templates and provide a clear legal opinion on what is valid, what is invalid, and what is high-risk. Contact us at office@arws.cz.
"Invisible" obligations: Being held liable for breaching a statutory obligation from the Civil Code that was not written in your contract.	Professional training for management: We can train your Swedish management team on the key differences in Czech contract law and negotiation. Write to office@arws.cz for details.

Mistake #3: Ignoring the Personal Liability of Swedish Directors

What is the "Datová Schránka" (Data Box) and why is it mandatory?
This is a critical operational detail that creates massive personal risk. The Datová schránka (data box) is a mandatory, official electronic mailbox for every Czech legal entity. It is not optional.

All official communication from Czech authorities—the tax office, courts, and administrative bodies—is sent exclusively through this system. A document is legally considered "delivered" the moment it enters the data box, or after a very short 10-day "fiction of delivery" period, whether you have read it or not.

This system is a digital ticking time bomb for a foreign director. A Swedish jednatel (executive director) of a Czech subsidiary, based in Stockholm, may not even have the login. A tax query arrives with a strict 8- or 15-day response deadline. By the time the Prague office mentions it, the deadline has passed. This is not a minor issue; it is a legal default that can lead to fines, frozen bank accounts, and automatic negative decisions being issued without your participation.

How can you be held personally liable?

This administrative failure connects directly to a director's core duties. Under Czech law, a director has a duty of péče řádného hospodáře (due managerial care). This liability is personal, unlimited, and cannot be limited by a contract.

Consider this chain reaction:

1. Your company signs a bad contract with a huge smluvní pokuta (Mistake #1).
2. The penalty is triggered, creating a massive, unexpected debt.
3. This debt pushes the company toward insolvency.
4. The Swedish director, who is not monitoring the Datová schránka (Mistake #3), is unaware of critical legal notices and the company's true financial state.
5. The director fails to file for insolvency in time, which is a clear breach of "due managerial care".
6. The insolvency administrator or a creditor can then sue the Swedish director personally for the company's debts.

A simple contractual problem has now become a personal financial catastrophe. ARROWS provides urgent legal consultations for foreign directors to ensure they are fully compliant with these duties.

Mistake #4: Choosing the Wrong Dispute Resolution Strategy

A rozhodčí doložka, or arbitration clause, is a provision in your contract that removes any future dispute from the public court system and sends it to a private arbitrator. Arbitration is extremely common and reliable in Czech B2B contracts.

Swedish companies are very familiar with arbitration, as Stockholm is a leading global hub. However, in a contract with a Czech partner, you might be tempted to agree to the "District Court in Prague" to seem agreeable. This is often a strategic error.

By agreeing to local courts, you risk slower proceedings that may be conducted entirely in the Czech language. Inserting a well-drafted rozhodčí doložka—naming a respected neutral body like the Arbitration Court of the Czech Chamber of Commerce and specifying English as the language of the proceedings—is a critical protective measure. ARROWS has extensive experience in representation in court or before public authorities, including arbitration.

FAQ – Legal tips about Czech Dispute Resolution

• My Czech partner wants to use the "courts in Prague." Is this a problem?
  It can be. Public court proceedings can be slower than arbitration and may be conducted in Czech, putting you at a disadvantage. You lose control over the process. We generally recommend a well-drafted arbitration clause (rozhodčí doložka) for B2B disputes. Our lawyers are ready to assist you – email us at office@arws.cz.
• Is arbitration in the Czech Republic reliable?
  Yes. The Czech Republic is a modern, pro-arbitration country and a signatory to the New York Convention, which ensures arbitral awards are enforceable. The Czech Arbitration Court is a highly respected institution for commercial disputes. For immediate assistance with drafting your clause, write to us at office@arws.cz.

Mistake #5: Misunderstanding Cross-Border Enforcement

A common concern for a Swedish legal department is: "If we win a judgment in Stockholm, can we even collect the money in Prague?" This uncertainty can weaken your negotiating position.

Here is the good news: because both Sweden and the Czech Republic are EU members, enforcement is streamlined by the EU Brussels I Regulation (recast). This regulation abolishes the old, slow "exequatur" procedure that required a foreign judgment to be "recognized" by a local court.

Today, a final, enforceable judgment from a Swedish court is recognized in the Czech Republic automatically. The process is simple: you take your Swedish judgment, obtain a certified translation, and present it directly to Czech enforcement authorities (a court or a bailiff) to seize your partner's assets. The process is fully reciprocal, making Czech judgments just as easy to enforce in Sweden.

This also reinforces the benefit of arbitration (Mistake #4). An arbitral award is enforced under the 1958 New York Convention, providing a universally predictable enforcement path in over 160 countries, including the Czech Republic.

Pitfalls in Enforcement and Litigation

Risks and Penalties	How ARROWS Helps
Paralysis by fear: Fearing that a Swedish court judgment is worthless in the Czech Republic, leading to a weak negotiating position.	Legal consultations: We explain your full rights under EU regulations (like Brussels I) for cross-border enforcement. Get tailored legal solutions by writing to office@arws.cz.
Choosing the wrong forum: Agreeing to a vague jurisdiction clause that leads to expensive "conflict of laws" disputes before the real case even begins.	Drafting documentation: We draft precise dispute resolution clauses (arbitration or court) that guarantee a clear, predictable, and enforceable path. Do not hesitate to contact our firm – office@arws.cz.
Enforcement delays: Making procedural errors when trying to enforce a foreign judgment or arbitral award in the Czech Republic.	Representation in court: Our litigation team handles the entire enforcement process, from registering the judgment to coordinating with bailiffs. For immediate assistance, write to us at office@arws.cz.

Your Secure Partner in the Czech Republic

The mistakes outlined—from punitive smluvní pokuta clauses and void verbal agreements to the personal liability of directors—are serious, but they are all avoidable with expert local counsel.

As an international law firm operating from Prague, European Union, ARROWS combines deep knowledge of Czech law with a clear understanding of the expectations of Swedish and other foreign clients. Our ARROWS International network, built over 10 years, provides seamless cross-border legal services in 90 countries. Our team in Prague supports over 150 joint-stock companies and 250 limited liability companies, many of them foreign-owned.

We are not just lawyers; we are business partners who protect you by:

• Drafting and reviewing all commercial contracts to eliminate risks.
• Providing clear legal opinions on your existing contractual obligations.
• Offering professional training for your directors on their duties, including managing the Datová schránka.
• Representing you in all dispute resolution forums, from Czech courts to international arbitration.

Do not let a simple contractual error jeopardize your investment in the Czech Republic. Contact our expert team of English-speaking lawyers today. Get tailored legal solutions by writing to office@arws.cz.

FAQ – Most common legal questions about Swedish-Czech Contracts

1. What is the smluvní pokuta and why is it so dangerous for my Swedish company?
It is a Czech contractual penalty. It is extremely dangerous because, unlike in many other jurisdictions, it is fully enforceable for monetary breaches (like late payment) and requires no proof of actual damage. A poorly reviewed clause can create a catastrophic, unexpected liability. For a full review of your contracts, email us at office@arws.cz.

2. Does my commercial contract with a Czech partner have to be in Czech?
No, the contract can be in English. However, if it is governed by Czech law, all the "invisible" rules and mandatory principles of the Czech Civil Code (like "good faith") will apply to its interpretation, regardless of the language. Need help drafting a bilingual contract? Contact us at office@arws.cz.

3. As a Swedish director of a Czech company, what is a Datová Schránka?
It is a mandatory official "data box". All legal and tax documents from the Czech government will only be sent to this electronic box. Deadlines are short (often 8-15 days), and ignoring it can lead to fines, frozen bank accounts, and a breach of your personal duties as a director. Our lawyers are ready to assist you with compliance – email us at office@arws.cz.

4. Is it better to choose Czech courts or arbitration for a B2B dispute?
For most B2B contracts, we recommend a well-drafted arbitration clause (rozhodčí doložka). Arbitration is generally faster, more flexible, and allows you to choose an expert arbitrator and the English language, avoiding the complexities of the local court system. Get tailored legal solutions by writing to office@arws.cz.

5. I won a court case in Sweden. Is it hard to enforce the judgment in the Czech Republic?
No. Because both countries are in the EU, enforcement is streamlined by the Brussels I Regulation (recast). The old "exequatur" process is abolished. Your Swedish judgment is recognized automatically and can be taken directly to Czech enforcement authorities to seize assets. For immediate assistance with cross-border enforcement, write to us at office@arws.cz.

6. Is a "handshake deal" for distribution valid in the Czech Republic?
It is extremely risky. While Swedish law is flexible on verbal deals, Czech law is not. Complex agreements like commercial agency must be in writing to be valid. Relying on a verbal agreement is a serious mistake that can leave you with no enforceable rights. For help drafting a secure contract, contact us at office@arws.cz.

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