Legal Risks and Options for Contractors When Clients Stop Paying under Czech Law

31.7.2025 | ARROWS law firm

You find yourself in the middle of an ongoing project and payments from your client have stopped. Suspending work may seem like a logical step, but it could cost you more than the outstanding invoice. In this article, our Prague-based legal team will show you the real options available to you as a contractor under Czech law, the risks you face when acting prematurely, and the steps you must take to protect your business and recover your funds.

The illustration depicts an attorney analyzing outstanding payments from a client.

Do you need legal advice on this matter? Contact our law firm in Prague, ARROWS, via email at office@arws.cz or by phone at +420 245 007 740. Your inquiry will be handled by Mgr. Daniela Sobotková, an expert on the Czech legal system and this specific topic.

Article Contents

Every entrepreneur's nightmare: A client in default and a project at risk
Can I just stop working? The legal reality of suspending work in the Czech Republic
The power of a quality contract: Your first and most important defense
A stronger and more certain step: Withdrawal from the contract
Right of retention: Your ace in the hole, if you hold the right cards
Don't handle payment issues alone; protect your business with experts

Every entrepreneur's nightmare: A client in default and a project at risk

Unfortunately, too many entrepreneurs and managers are familiar with this scenario. Your company is fulfilling its obligations under a contract for work, you are investing time, materials, and human resources, but there is silence from the other side. An advance invoice intended to cover initial costs was never paid. Partial invoicing for a completed stage of the project remains overdue weeks after the deadline. Communication with the client is stalling, and you find yourself in an uncomfortable and dangerous situation.

The impact on your business can be immediate and devastating. Unpaid invoices directly threaten your cash flow and your ability to meet your own obligations – employee wages, payments to subcontractors, or the purchase of further materials. The entire project plan collapses, deadlines are at risk, and stress within the company's management grows. The natural reaction is to ask: "If they aren't paying me, why should I perform for them? Can I just stop working until they pay?"

While this reasoning is logical from a business perspective, it is full of hidden risks from a legal standpoint in the Czech Republic. Prematurely stopping work can paradoxically put you in the role of the party breaching the contract, opening the door to counterclaims, contractual penalties, and damages. Before you take any step, it is absolutely crucial to know your actual legal options and proceed strategically. Our experts in Commercial Litigation & Arbitration in the Czech Republic can help you navigate these complex disputes.

Can I just stop working? The legal reality of suspending work in the Czech Republic

The direct answer to whether you can simply suspend work due to unpaid invoices is, unfortunately, negative in most cases. Unless a well-drafted contract for work explicitly allows it, a unilateral suspension of work due to the client's default on payment is highly risky. The Czech Civil Code is quite treacherous for contractors in this regard and does not offer the simple solution that entrepreneurs might expect.

Many mistakenly believe they can suspend work based on the provisions of Section 2627 of the Czech Civil Code. However, this provision addresses a completely different situation – it allows for the suspension of work only if the contractor encounters a hidden obstacle concerning the place where the work is being performed (e.g., unsuitable geological conditions) that makes it impossible to continue in the agreed manner. Non-payment of invoices is not considered such an obstacle under Czech law. Learn more in our article on how Portuguese companies can recover debts in Czechia: Comprehensive legal guide.

Another common misconception is the argument that payment is a form of necessary cooperation by the client under Section 2591 of the Czech Civil Code. Here, too, practice and especially Czech case law are relentless.

A key ruling in this regard is the decision of the Supreme Court of the Czech Republic (File No. 32 Cdo 3334/2010), which clearly stated that: "The non-payment of partial invoices in itself cannot objectively and physically cause the contractor's inability to fulfill their obligations under the contract for work." Czech courts therefore view the obligation to perform the work and the obligation to pay for it as two separate commitments, unless the contract stipulates otherwise. You might be interested to know that ARROWS offers comprehensive Development & Construction Law services to help draft such contractual safeguards.

If you decide to suspend work unjustifiably despite this, you yourself fall into default regarding the completion of the work. The client, even if they owe money, thus gains a powerful weapon. Find details on how to handle similar cross-border issues in our article on how Irish companies should handle commercial contracts with Czech partners: Mistakes to avoid. They can begin charging you contractual penalties for delay and, in extreme cases, even withdraw from the contract and demand compensation fo For more practical advice, read our guide on how Finnish companies can collect debts in the Czech Republic: Tools and procedures.r damages caused by your suspension of work.

Our Prague-based attorneys can help you conduct a detailed analysis of your contract and assess whether a secure legal basis for suspending work exists in your specific case. Our expert legal opinion will protect you from the risk of counterclaims and the loss of the entire contract.

The power of a quality contract: Your first and most important defense

How then can you avoid the stalemate described above? The answer lies in careful preparation and prevention, the foundation of which is a high-quality and thoughtfully drafted contract for work under Czech legislation. It is the contractual arrangements that can provide you with rights that the law does not automatically grant. A well-constructed contract is your best protection and most important tool for risk management.

It is crucial to anchor a clause in the contract that expressly entitles you to suspend the performance of work if the client is in default with the payment of any due invoice (whether an advance or partial payment) for a certain number of days. Such an arrangement clearly links your obligation to work with the client's obligation to pay and gives you a legal and safe tool to respond to non-performance by the client.

It is equally important to precisely define in the contract what the parties consider a material breach of contract. This definition should include the default on payment of the price of the work or a part thereof for a specified period (e.g., 15 or 30 days). By doing so, you open the way to a more decisive step – withdrawal from the contract, which is legally much more certain than a mere suspension of work under the Czech legal system.

A high-quality contract should also include a detailed payment schedule linked to clearly defined project milestones or stages, provisions for advance invoices, and precise conditions for the handover and acceptance of the work, which trigger the right to payment. This minimizes the room for disputes and ambiguities under Czech law.

At ARROWS, we daily handle the preparation and review of contracts for work for our clients, including construction firms, IT companies, and manufacturing enterprises. We know which clauses are crucial for your protection in the Czech Republic. Investing in a quality contract at the beginning is a fraction of the costs it will save you during dispute resolution.

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Dangers of hasty action

Before taking any steps, it is essential to realize the specific threats you face if you act without solid legal support in your contract. The following table summarizes the most common risks and shows how our Prague-based legal team can help you prevent or resolve them.

Risk to address	Potential problems and sanctions	How ARROWS helps:
Unjustified suspension of work	The client may withdraw from the contract due to your breach. You face a lawsuit for damages (e.g., costs for a new supplier, lost profit) in Czech courts.	We will draft a legal opinion assessing the legitimacy of the work suspension based on your contract and minimizing your risk.
Occurrence of your own default	By suspending work, you may fall into default regarding the completion deadline. The client may claim contractual penalties.	We will ensure professional legal communication with the client, including a formal demand for performance, which can lead to a remedy without the need to suspend the work.
Loss of right to payment	In the event of a dispute, a court may rule that you breached the contract and dismiss your claim for payment of the price (or part thereof).	We will represent you in court and defend your right to payment of the price even when a counterclaim is threatened.
Damage to business reputation	A dispute with a client that ends in court due to an incorrect step can damage your reputation in the Czech market.	We will propose an out-of-court settlement strategy and mediation aimed at reaching an agreement, protecting your finances and good name.
Invalid withdrawal from the contract	If you attempt to withdraw from the contract without meeting statutory or contractual conditions, your withdrawal will be invalid and the contract will remain in effect.	We will prepare a legally flawless withdrawal that will stand up to potential judicial review and ensure its proper delivery.
Escalation of the dispute	A hasty step can lead to a breakdown in communication and escalate the dispute into a costly and lengthy legal battle.	We provide expert legal consultations to help you choose the right strategy and timing for individual steps for maximum efficiency.
Liability for subcontractors	If you suspend work, you may also fall into default toward your subcontractors, who may claim contractual penalties and damages from you.	We will perform a review of your subcontracting agreements and advise on how to proceed to minimize impacts on the entire supply chain.

A stronger and more secure step: Withdrawal from the contract

If the contract does not allow for a safe suspension of work and the client continues to fail in their payment obligations, a more decisive but often legally more secure alternative is withdrawal from the contract. This step definitively terminates your obligation to continue the work but requires strict adherence to statutory and contractual procedures under the Czech Civil Code.

The basic prerequisite for withdrawal is a material breach of contract by the other party, as stipulated in Section 2002 of the Czech Civil Code. As previously mentioned, it is ideal if your contract precisely defines what constitutes such a breach – for example, a payment delay exceeding a specified number of days.

If such a definition is missing, Czech law considers a breach to be material if the breaching party knew or must have known at the time the contract was concluded that the other party would not have entered into the contract had they foreseen such a breach. Long-term non-payment of a significant part of the price is typically considered a material breach.

The withdrawal process has its formal rules. You must deliver the notice of withdrawal to the client. Crucially, you must provide this notice without undue delay after learning of the material breach. Missing this deadline may result in the loss of the right to withdraw for that specific reason.

In the case of a non-material breach, you must first provide the client with an additional reasonable period for remedy and may only withdraw after this period has expired in vain.

The consequences of a valid withdrawal are significant: the contract is cancelled from the very beginning (so-called ex tunc). This means the contractual relationship ceases to exist, and the parties are obliged to return everything they have provided to each other. Since returning already performed construction work or other parts of the project is often impossible, you gain a claim for financial compensation under the title of unjust enrichment for the value of the work you have already performed.

The process of withdrawing from a contract has strict rules. Our Prague-based attorneys will not only prepare a legally watertight withdrawal for you but will also guide you through the entire settlement process to ensure you receive fair payment for work already completed. We will represent you in negotiations with the counterparty and in any potential litigation in Czech courts.

Right of Retention: Your Ace in the Hole, If You Hold the Right Cards

In certain specific cases, you have another very effective tool at your disposal – the right of retention (lien) regulated under Section 1395 et seq. of the Czech Civil Code. This is the right to retain a third party's movable property that you lawfully have in your possession to secure your due debt. A correctly applied right of retention can exert significant pressure on a debtor.

However, it is absolutely crucial to know what you can retain and under what conditions. Czech law allows for the retention of movable property only. This could be, for example, a machine you repaired, furniture you manufactured to order, or a car after servicing. Conversely, you cannot retain real estate, i.e., a building, a part thereof, or land. This is a major limitation, particularly for companies in the Czech construction industry.

The conditions for exercising the right of retention under Czech legislation are very strict:

Due debt: Your claim against the client must already be past its due date. Exceptions include situations where the debtor declares they will not fulfill the debt or is clearly insolvent.
Notification of the debtor: You must immediately notify the debtor that you have retained the item and for what reason.

Care of the item: You must not use the retained item and must look after it with the care of a prudent businessman, i.e., protect it from damage or destruction.

The greatest strength of the right of retention is its position relative to other creditors. In the event of, for example, an execution or sale of the retained item, you as a creditor with a right of retention have a priority right to satisfy your claim, even ahead of a pledgee.

Exercising the right of retention is an effective but technically demanding step. Our Prague-based attorneys will assess whether all legal conditions are met in your case and prepare all necessary documentation, including the notification to the debtor, to ensure you avoid mistakes that could lead to the invalidity of this step.

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The risks you face when a client fails to pay

In addition to the risks associated with your own actions, it is necessary to consider the broader dangers arising from the insolvency or unwillingness of your business partner to pay. Ignoring these risks can lead to the total loss of your claim.

Risk to Address	Potential Problems and Sanctions	How ARROWS helps:
Insolvency of the client	If the client enters insolvency, you must register your claim in time. Otherwise, you will lose it. Recovery is then very complex.	We monitor the Czech Insolvency Register. In the event of your partner's bankruptcy, we will inform you immediately and ensure the timely and correct registration of your claim in the insolvency proceedings.
Statute of limitations	If you do not actively enforce the debt, it may become time-barred (generally after 3 years under Czech law). After a limitation plea, the court will not grant the claim.	We monitor limitation periods for you. By filing a lawsuit in time or taking other steps, we interrupt the limitation period and thus protect your investment.
High costs of litigation	Litigation in Czech courts can be lengthy and expensive (court fees, legal representation costs, expert opinions).	We always strive for out-of-court settlements first. Our negotiation experience often leads to faster and cheaper agreements. We represent clients in court with maximum efficiency.
Obstructions and quality disputes	The client may start purposefully questioning the quality of the work to create a pretext for non-payment.	We will prepare robust contractual documentation for you with clear acceptance criteria and protocols that minimize the room for purposeful complaints.
Inability to enforce rights abroad	If the client is a foreign entity, you may have concerns about the difficulty and cost of enforcement in a foreign country.	Thanks to the ARROWS International network, we ensure effective debt recovery and enforcement of court decisions abroad, directly in the debtor's country.
Obligation to pay VAT on unpaid invoices	Even if the client has not paid you, the obligation to pay VAT to the Czech state remains, further worsening your cash flow.	We provide comprehensive advice including tax aspects. We will help you set payment terms (e.g., advances) to minimize this negative impact.
Lack of evidence for litigation	Without properly maintained documentation (construction log, email communication, handover protocols), it can be difficult to prove your claim in court.	We provide professional training for your management and employees focused on the correct maintenance of project documentation and communication to strengthen your position in any potential dispute.

When the problem is across borders: International disputes and the ARROWS International network

Do you do business within the European Union and is your non-paying client based, for example, in Germany, Poland, or Slovakia? Many Czech companies fear complex and expensive enforcement in a foreign legal system. However, thanks to European regulations, your position is often much stronger than you think.

Which law governs the dispute? Unless you have explicitly agreed on the law of another state in your contract, the EU Regulation known as Rome I applies. For contracts for work, which are considered service contracts, this regulation sets a very favorable rule: the contract is governed by the law of the country where the service provider has its registered office—meaning you as the contractor. This means that even if your client is from Germany, your dispute will most likely be assessed under Czech law.

Which court will handle the dispute? Jurisdiction within the EU is governed by Brussels I bis Regulation. While the general rule is that a lawsuit is filed in the country of the defendant's domicile, there is an advantageous exception for you. In the case of disputes arising from service contracts, you can also file a lawsuit with the court in the place where the work was or should have been performed. Therefore, if you are executing a project in the Czech Republic, you can sue your foreign client in a Czech court.

How to enforce a Czech judgment abroad? The greatest advantage of the unified European area is the ease of enforcing court decisions. If you obtain a final judgment from a Czech court, thanks to the Brussels I bis Regulation, this judgment is directly enforceable in all other EU member states without the need for a complex and lengthy recognition process (so-called exequatur). With a Czech judgment in hand, you can easily target the debtor's assets in Germany, for example.

Our Prague-based attorneys handle these situations with international elements practically every day. Thanks to our ARROWS International network, built over ten years, we have experts directly in the relevant countries and can effectively secure your rights, whether it involves filing a lawsuit abroad or enforcing a Czech judgment against a debtor's property anywhere in the EU.

Don't handle payment issues alone; protect your business with experts

A situation where a client fails to pay for work in progress is critical for any company. As we have shown, hasty steps based on business logic can lead to serious legal problems. The key to a successful resolution is a strategic and informed approach under Czech legislation.

Remember the basic principles:

Do not act hastily – suspending work without contractual support is extremely risky.
The key to your protection is a precisely drafted contract for work.
You have powerful legal tools at your disposal (withdrawal from the contract, right of lien), but their use requires a professional and flawless procedure.
Even international disputes within the EU have clear rules that often work in favor of the Czech contractor.

If you are facing a similar situation, do not wait for the problem to deepen and your losses to grow. Contact us to arrange an initial consultation. Our Czech legal team will assess your situation and propose the best strategy to protect your interests and recover your funds.

We provide long-term care for more than 150 joint-stock companies, 250 limited liability companies, and 51 municipalities and regions in the Czech Republic. Our experience and speed are a guarantee of quality service. At ARROWS, we also pride ourselves on building a community. We are happy to listen to your business ideas and often connect our clients when we see interesting investment or business opportunities.

Our assistance does not end with resolving a single dispute. For our clients, we provide comprehensive legal services, from drafting internal project management guidelines to obtaining necessary licenses and permits, and providing professional certified training for your management to help prevent future problems. Contact us to find out how we can help your business.

Disclaimer: The information contained in this article is for general informational purposes only and serves as a basic guide to the issue. Although we ensure maximum accuracy of the content, legal regulations and their interpretation evolve over time. To verify the current wording of regulations and their application to your specific situation, it is essential to contact ARROWS law firm in Prague directly (office@arws.cz). We bear no responsibility for any damages or complications arising from the independent use of information from this article without our prior individual legal consultation and professional assessment. Every case requires a tailored solution, so please do not hesitate to reach out to us.

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