How to Negotiate Business Contracts with Czech Partners as a Swiss Company:

For Swiss companies entering the Czech market, the shared European context can create a deceptive sense of legal familiarity. However, relying on the principles of good faith and contractual freedom that define Swiss business can lead to significant financial and legal liabilities. This guide provides clear answers to your concerns, highlighting critical differences in Czech commercial law.

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.

The Formality Trap: Why Swiss "Good Faith" Can Be a Liability in Prague

Swiss contract law is renowned for its principle of party autonomy, allowing maximum freedom to structure agreements. It is built on a foundation of good faith, where courts will consider the parties' actual intent and negotiation history to interpret a contract. This allows for efficient, straightforward agreements.

The Czech legal system, particularly after the comprehensive recodification with the new Civil Code in 2014, operates on a different philosophy. Here, the written agreement is not merely a reflection of the parties' relationship; it is the legally recognized relationship itself. Any ambiguity, omission, or vaguely worded clause will be interpreted strictly, creating a system that prioritizes certainty, sometimes at the expense of what might be considered fairness in other jurisdictions.

What is the risk of an informal agreement?

This philosophical divergence creates a critical "validity trap" for Swiss companies. A business practice that is a strength in Switzerland—relying on established relationships and mutual understanding—can become a direct legal vulnerability in the Czech Republic. The most significant risk lies in the Czech requirement for a mandatory written form, or písemná forma, for certain types of contracts to be legally valid.

A prime example is the Agency Agreement. A Swiss principal might engage a Czech sales agent based on a series of meetings and detailed email exchanges, believing a binding relationship has been formed. However, under Section 2483 of the Czech Civil Code, an Agency Agreement is legally void—non-existent—unless it is executed in writing. A verbal agreement is not merely difficult to prove; it has no legal standing whatsoever.

The consequences are severe. Your company could invest significant resources in a Czech agent, only to discover you have no enforceable contract. If the agent underperforms, breaches confidentiality, or begins working for a competitor, your legal recourse is virtually non-existent. The time and money invested are lost, leaving you with no mechanism to protect your market position.

Risks and Penalties	How ARROWS Helps
Void Agency Agreement: Investing resources in a sales agent only to find the verbal agreement is legally non-existent, resulting in total loss of investment and market access.	Drafting Legally Required Documentation: We ensure your agency, distribution, and other key contracts meet the strict písemná forma requirement of the Czech Civil Code. Need a compliant contract? Email us at office@arws.cz.
Unenforceable Confidentiality: Sharing sensitive trade secrets with a partner under an informal agreement that a Czech court will not recognize, exposing your intellectual property.	Contract Drafting and Review: Our experts draft robust contracts with enforceable confidentiality clauses tailored to Czech law. Protect your business secrets by writing to office@arws.cz.
Disputes over Key Terms: Relying on email exchanges to define crucial terms like price or delivery, leading to costly litigation when your Czech partner disputes the agreement.	Legal Opinions: We provide clear legal opinions on the validity of your existing arrangements and help formalize them into binding contracts. Want to understand your legal position? Contact us at office@arws.cz.

The Smluvní Pokuta: A Contractual Penalty Unlike Any in Swiss Law

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 powerful legal instrument has no direct equivalent in the Swiss Code of Obligations and can turn a minor contractual breach into a major financial liability. Assuming it functions like a standard penalty clause is a mistake that can cost your company dearly.

How does the Czech penalty differ from the Swiss approach?

Under the Swiss Code of Obligations, penalty clauses are generally seen as a way to pre-estimate and compensate for damages arising from a breach. The Czech smluvní pokuta, by contrast, is a far more flexible and potent tool for the creditor. Its primary purpose is not just to compensate but to be preventive and punitive. It is designed to create a powerful motivation for the other party to comply strictly with all terms.

This difference manifests in two critical ways:

1. It applies to monetary breaches. A Czech company can legally include a clause imposing a substantial penalty for a simple delay in payment. This is a fundamental departure from many legal systems where penalties are reserved for non-monetary obligations.
2. No proof of damage is required. The penalty is enforceable even if the creditor suffered no actual financial damage from the breach. The mere fact of the breach is enough to trigger the full penalty.

This asymmetry of understanding can be weaponized in negotiations. A knowledgeable Czech party can insert a smluvní pokuta clause that appears standard to a Swiss counterpart but carries disproportionate financial power. A minor, common operational issue, such as an administrative delay in payment, can trigger severe consequences.

Imagine a contract with a clause stipulating a penalty of 0.5% of the total contract value for each day of delay in payment. A short, ten-day delay could trigger a penalty equivalent to 5% of the entire deal—far exceeding any statutory interest and potentially erasing the project's profit margin. In a Czech court, this clause is likely to be upheld.

Can an excessive penalty be challenged?

While Czech law allows for judicial moderation of "disproportionally high" penalties, relying on this corrective measure is a risky and expensive litigation strategy. A landmark 2023 decision by the Czech Supreme Court further complicated this by ruling that courts can now consider circumstances that arose after the breach when assessing a penalty's fairness, adding a layer of unpredictability to any legal challenge. Proactive, expert contract drafting is the only reliable protection.

FAQ – Legal tips about Czech Contractual Penalties

• What is the biggest financial risk in a Czech contract?
  The most dangerous risk is underestimating the Czech contractual penalty (smluvní pokuta). It can apply to late payments and does not require the other party to prove they suffered any damage, leading to severe financial loss. To review your penalty clauses, contact our experts at office@arws.cz.
• Can a Czech court reduce an excessive penalty?
  Yes, courts have the power of moderation, but relying on this is a risky and expensive litigation strategy with an uncertain outcome. Proactive contract drafting is the best protection. Get tailored legal solutions by writing to office@arws.cz.

The Battle of the Forms: Whose Contract Terms Win?

A common scenario in international trade is the "battle of the forms": a Swiss company sends a purchase order with its standard terms and conditions (T&Cs), and the Czech supplier replies with an invoice referencing their own, different T&Cs. In this situation, whose terms govern the contract? The Czech answer may surprise you and silently erase your company's standard legal protections.

What is the "Knock-Out Rule"?

Prior to 2014, the Czech Republic followed the "Last-Shot Rule," where the last set of terms sent before performance was deemed accepted. However, the new Civil Code introduced a more modern approach: the "Knock-Out Rule".

Under this rule, a contract is considered formed based on the terms that the parties agree on. However, any conflicting provisions in both sets of T&Cs are "knocked out"—they are considered null and void and do not become part of the contract. The resulting gap is then filled by the default provisions of the Czech Civil Code.

This creates a hidden danger. Your company’s carefully drafted T&Cs containing crucial clauses on liability limitations, specific warranty disclaimers, or payment deadlines can simply vanish, replaced by statutory rules that are often far less favorable and expose you to unforeseen risks. For example, your liability cap could be replaced with unlimited statutory liability.

Fortunately, the application of the Knock-Out Rule can be contractually excluded. However, this must be done explicitly in the main body of the agreement, not just within the T&Cs themselves, requiring proactive and knowledgeable legal drafting.

Our experts on the topic:

Risks and Penalties	How ARROWS Helps
Loss of Liability Caps: Your standard T&Cs limiting total liability to the contract value are nullified, exposing your company to potentially unlimited damages under Czech statutory law.	Contract Drafting: We draft master agreements that expressly exclude the "Knock-Out Rule" and establish clear, enforceable terms that protect your interests. Need legal help? Contact us at office@arws.cz.
Unfavorable Warranty Terms: Your specific warranty disclaimers are voided, subjecting you to the default (and often broader) warranty provisions of the Czech Civil Code.	Review of T&Cs: Our lawyers can review your standard terms and conditions to ensure they are effective in the Czech legal environment. For immediate assistance, write to us at office@arws.cz.
Disappearing Payment Deadlines: Your net-30 payment terms are knocked out by a conflicting clause, potentially defaulting you to stricter statutory payment deadlines and triggering penalties.	Representation in Negotiations: We can represent you in negotiations to ensure that critical commercial terms are agreed upon in the main contract, avoiding the "battle of the forms" entirely. Our lawyers are ready to assist you – email us at office@arws.cz.

Navigating Liability, Termination, and Deadlines

Beyond the major doctrinal traps, several other critical differences in Czech commercial law can expose Swiss companies to risk if not properly managed. These relate to how liability is defined, how contracts are terminated, and the deadlines for taking legal action.

How is liability for damages different in the Czech Republic?

A particularly dangerous area of divergence lies in the treatment of damages. Swiss companies often include clauses in their contracts excluding liability for "consequential" or "indirect" losses. In the Czech Republic, such a clause is legally meaningless and offers no protection.

Czech law does not recognize the concepts of "consequential loss" or "indirect loss." To claim damages for a breach of contract, a party must prove a direct causal link between the breach and the harm suffered. This means that a standard limitation of liability clause drafted under Swiss or Anglo-American principles will fail to exclude the very risks it was designed to cover.

How long do you have to file a claim?

The time limit for taking legal action—the statute of limitations—is another critical area. Swiss companies may be accustomed to longer periods for bringing claims. In the Czech Republic, the clock ticks much faster. The general subjective limitation period for many commercial claims is only three years from the date the right could first have been exercised. Missing this deadline means your right to claim is forfeited entirely, regardless of the merits of your case.

What are the requirements for contract termination?

Reinforcing the theme of formalism, Czech law generally requires a higher degree of formality for contract termination than Swiss law. While Swiss law can be flexible, even permitting verbal termination of some contracts if not otherwise specified, terminating a commercial relationship in the Czech Republic typically requires clear, written notice delivered to the other party to be effective. Relying on informal communications to end a contract can lead to disputes and findings that the contract remains in force.

Your Strategic Partner in the Czech Republic

The Czech legal system is modern, reliable, and fully integrated with the EU framework. However, as this guide demonstrates, it contains specific rules and concepts that can pose significant risks for foreign companies operating under different legal assumptions. Navigating this landscape successfully requires expert local counsel.

For over a decade, ARROWS has been the trusted partner for foreign companies doing business in the Czech Republic. As an international law firm operating from Prague, European Union, we combine deep knowledge of local law with a keen understanding of the challenges faced by international clients. Our ARROWS International network, built over 10 years and active in 90 countries, ensures we can handle the most complex cross-border matters.

Our experience is extensive; we support over 150 joint-stock companies and 250 limited liability companies in their operations. Our dedicated team provides comprehensive support, from the initial drafting of legally required documentation and contract review to prevent fines, to providing formal legal opinions on your legal standing and, if necessary, representation in court or before public authorities. 

We also offer professional training for employees and management to ensure your team is aware of local compliance requirements. Don't let unforeseen legal differences derail your business success in the Czech Republic. For expert guidance and tailored legal solutions, contact our team today. Get tailored legal solutions by writing to office@arws.cz.

FAQ – Most Common Legal Questions About Czech-Swiss Commercial Contracts

• Is my verbal agreement with a Czech sales agent legally binding?
  No. Under Czech law, an Agency Agreement is legally void unless it is in writing (písemná forma). Relying on a verbal understanding offers you no legal protection. For assistance with drafting legally required documentation, email us at office@arws.cz.

• 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 and unexpected financial liability. Do not hesitate to contact our firm for a contract review – office@arws.cz.

• My company's standard T&Cs conflict with my Czech partner's. Which ones apply?
  Under the Czech "Knock-Out Rule," likely neither. The conflicting clauses will be nullified and replaced by default provisions of the Czech Civil Code, which may be unfavorable to you. Need legal help? Contact us at office@arws.cz.

• How long do I have to file a lawsuit for a contract breach in the Czech Republic?
  The time limit is much shorter than you might expect. The general limitation period for many commercial claims is only three years. Missing this deadline means you lose your right to claim completely. For immediate assistance with a potential claim, write to us at office@arws.cz.

• Can I choose Swiss law to govern my contract with a Czech partner?
  Yes, parties are generally free to choose the governing law. However, certain mandatory provisions of Czech law may still apply regardless of your choice. A well-drafted choice of law and jurisdiction clause is critical to ensure predictability. Our lawyers are ready to assist you – email us at office@arws.cz.

• Are judgments from Swiss courts enforceable in the Czech Republic?
  Yes. As a signatory to the Lugano Convention, the Czech Republic recognizes and enforces judgments from Swiss courts. This makes the choice of jurisdiction in your contract a key strategic decision that requires careful legal advice. Get tailored legal solutions by writing to office@arws.cz.

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