Doing Business with Czech Partners

For British companies expanding into Central Europe, the Czech Republic offers a stable and strategic base. However, assuming that business contracts operate under the same principles as UK common law is a frequent and costly mistake. This article outlines the critical legal differences that can expose your business to unforeseen risks and explains how to navigate them effectively with the help of a knowledgeable Czech law firm.

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 Legal Culture Shock: Common Law vs. Czech Civil Law

The most fundamental error is failing to appreciate the gap between the UK’s common law system and the Czech Republic’s continental civil law system. While English law relies on judicial precedents and the explicit text of a contract, Czech law is based on a comprehensive Civil Code that actively shapes and supplements every agreement. This creates several hidden traps for the unprepared.

In the UK, the principle of caveat emptor (“let the buyer beware”) means that what is not explicitly written in the contract generally does not exist as an obligation. This leads to lengthy, detailed agreements. Czech contracts, by contrast, are often shorter because they operate within the framework of the Civil Code, which fills in the gaps. A UK company might view a brief Czech contract as simple, when in reality it is layered with statutory provisions that are not immediately obvious.

A core pillar of Czech contract law is the principle of good faith and fair dealing (dobré mravy). This is not just a vague aspiration; it is an enforceable legal standard that permeates all legal transactions. Czech courts can, and do, invalidate contractual clauses or even entire agreements that are found to be contrary to good morals, a concept far broader than the English doctrines of unconscionability or duress.

Furthermore, Czech law recognizes the doctrine of pre-contractual liability (culpa in contrahendo). Under Section 1728 of the Czech Civil Code, parties are expected to negotiate in good faith. If one party engages in negotiations without a real intention to conclude a contract, or terminates advanced negotiations without a just cause, they can be held liable for the other party’s losses. This is a significant departure from English law, where walking away from a deal before a contract is signed rarely creates liability.

FAQ – Legal tips about Czech Contract Principles

• What does "good faith" actually mean in a Czech contract?
  It is a mandatory legal principle requiring parties to act honestly and fairly. A court can refuse to enforce a contractual right if its exercise is deemed to be in bad faith or contrary to good morals. To ensure your contract is fully compliant, get tailored legal solutions by writing to office@arws.cz.
• Can I be sued just for walking away from negotiations in the Czech Republic?
  Yes. If negotiations have reached an advanced stage where the conclusion of the contract seems highly likely, and you terminate them without a "just cause," you could be liable for damages under the principle of culpa in contrahendo. For immediate assistance with your negotiations, write to us at office@arws.cz.

Top 3 Costly Contractual Mistakes for UK Companies

Our experience advising over 150 joint-stock companies and 250 limited liability companies shows that foreign companies, including those from the UK, repeatedly fall into the same expensive traps.

Mistake #1: Underestimating Contractual Penalties (Smluvní Pokuta)

This is arguably the most dangerous pitfall for a British company. In English law, a "penalty clause" designed to punish a party for a breach, rather than compensate for a genuine pre-estimate of loss, is generally unenforceable.

Czech law is fundamentally different. The contractual penalty (smluvní pokuta) is a powerful and fully enforceable tool. Crucially, it can be applied to secure any contractual obligation, including monetary ones like timely payment. A Czech partner can legally include a clause imposing a substantial daily penalty for a simple delay in payment, and this penalty is due regardless of whether the creditor suffered any actual damage.

A UK manager might glance over such a clause, assuming it is either a minor issue or legally invalid, as it would be at home. In reality, they could be agreeing to a punitive financial sanction that far exceeds statutory interest and can quickly escalate to a crippling sum. While Czech courts have the power to moderate an "unreasonably high" penalty, this requires litigation and does not invalidate the principle itself.

Risks and penalties	How ARROWS helps
Agreeing to a large penalty for late payment, which is unenforceable in the UK but fully valid in the Czech Republic.	Contract review and negotiation to identify and renegotiate punitive smluvní pokuta clauses before you sign. Need your contract reviewed? Write to office@arws.cz.
The penalty amount is disproportionate to the contract value, but you are unaware of the legal standard for challenging it.	Legal analysis to assess whether a penalty is "unreasonably high" under Czech case law and advise on the merits of a legal challenge. Want to understand your legal options? Email us at office@arws.cz.
Not realising a penalty clause replaces the right to claim actual damages by default.	Drafting documentation to ensure your contract explicitly preserves the right to claim both the penalty and full compensation for damages. Do you need a contract prepared? Contact us at office@arws.cz.

Mistake #2: Ignoring Formal Requirements for Validity and Termination

While English law values substance over form and often upholds verbal agreements, Czech law imposes strict formal requirements for certain contracts to be valid. For example, an agency agreement is legally void unless it is made in writing. A British company relying on a handshake deal or an exchange of emails for such a relationship would find it has no enforceable rights in the Czech Republic.

Termination of contracts also follows different rules. In the UK, termination rights are primarily governed by the express terms negotiated by the parties. In the Czech Republic, the Civil Code provides a framework for termination, including statutory notice periods and grounds for withdrawal, which may apply even if not detailed in the contract. Improperly terminating a contract can lead to a successful claim for damages by your Czech partner.

Mistake #3: Outdated Approaches to Dispute Resolution

Before Brexit, a clause granting exclusive jurisdiction to the English courts was straightforward to enforce across the EU under the Brussels Regulation. That automatic system is now gone. Enforcing a UK court judgment in the Czech Republic is now more complex, relying on international conventions like the Hague Convention on Choice of Court Agreements (which applies only to exclusive jurisdiction clauses) or navigating local Czech enforcement laws.

This uncertainty makes dispute resolution a critical strategic decision. For many international contracts, international arbitration is now a more reliable and efficient choice. An arbitral award is readily enforceable in the Czech Republic and over 160 other countries under the New York Convention, a system entirely unaffected by Brexit.

FAQ – Legal tips about Practical Clauses

• Does my contract with a Czech partner need to be in Czech?
  No, the contract can be in English. However, if it is governed by Czech law, the principles of the Czech Civil Code will apply to its interpretation, regardless of the language used. Our lawyers are ready to assist you – email us at office@arws.cz.
• Is an oral agreement for distribution in the Czech Republic valid?
  It is extremely risky. While a simple sales contract might be verbal, more complex relationships like commercial agency require written form to be valid under Czech law. Always insist on a written agreement. For help drafting one, contact us at office@arws.cz.

ARROWS: Your Legal Bridge to the Czech Republic

Navigating these legal differences requires local expertise. As an international law firm operating from Prague, European Union, ARROWS combines deep knowledge of the Czech legal environment with a clear understanding of the expectations of foreign clients. For over a decade, our ARROWS International network has provided seamless cross-border legal services in 90 countries worldwide.

We understand the pressures of international business and pride ourselves on delivering high-quality, swift advice. Our team supports over 400 corporate clients and is adept at everything from drafting bilingual contracts and providing legal opinions on enforceability to representing clients in Czech courts and international arbitration proceedings. We are not just lawyers; we are business partners who can even connect clients with mutual investment opportunities.

Risks and penalties	How ARROWS helps
A key contract clause is ruled invalid for violating Czech principles of "good faith" or "good morals".	Legal consultations to prevent penalties, ensuring your contract is fully compliant with all mandatory provisions of Czech law. Need legal help? Contact us at office@arws.cz.
A dispute arises, and you discover your UK court judgment is difficult or impossible to enforce in the Czech Republic.	Drafting effective dispute resolution clauses, including robust international arbitration clauses that guarantee enforceability. For immediate assistance, write to us at office@arws.cz.
A contract is terminated incorrectly, exposing your company to a lawsuit for damages from your Czech partner.	Providing legal opinions on the correct procedures for contract termination under the Czech Civil Code to minimise legal risk. Do not hesitate to contact our firm – office@arws.cz.
You are held liable for failing to disclose information during negotiations under Czech pre-contractual liability rules.	Professional training for management on the specifics of Czech business negotiations and legal duties. Get tailored legal solutions by writing to office@arws.cz.

Conclusion: Secure Your Czech Business with Proactive Legal Strategy

Doing business in the Czech Republic offers immense opportunities, but success depends on navigating a legal landscape that is fundamentally different from that of the UK. Assuming that principles from common law will apply can lead to unenforceable agreements, unexpected liabilities, and costly disputes. Proactive legal advice is not a cost—it is a crucial investment in protecting your company’s interests.

As a leading Czech law firm in Prague, EU, ARROWS has the expertise to guide your business safely. Our English-speaking lawyers are ready to review your contracts, advise on your legal strategy, and ensure your commercial relationships are built on a solid and enforceable foundation.

Don’t let a simple legal misunderstanding derail your business in Central Europe. Contact us today for a consultation at office@arws.cz.

FAQ – Most common legal questions about Czech Commercial Contracts

1. What is the biggest difference between a UK and a Czech contract?
The biggest difference is reliance on the underlying legal code. A UK contract aims to be a self-contained universe, while a Czech contract is always supplemented by the extensive provisions of the Czech Civil Code, which implies terms and imposes mandatory principles like good faith. If you are unsure about your contract, contact us at office@arws.cz.

2. Can I really be forced to pay a huge penalty for being one day late on an invoice?
Yes. If a smluvní pokuta (contractual penalty) is included in a contract governed by Czech law, it is fully enforceable for monetary breaches like late payment, and the amount is due even if no actual damage was caused. For a review of your penalty clauses, email us at office@arws.cz.

3. Is English law a good choice for a contract with a Czech company?
It can be, but post-Brexit, enforcing a UK court judgment in the Czech Republic has become more complicated and uncertain. Choosing Czech law combined with an international arbitration clause often provides greater certainty and easier enforcement. For advice on the best approach, write to us at office@arws.cz.

4. What happens if we don't specify the governing law in our contract?
This creates significant uncertainty. A court or arbitral tribunal will have to determine the applicable law based on complex "conflict of laws" rules, leading to delays and high legal costs. It is a critical mistake to omit a governing law clause. Our lawyers are ready to assist you – email us at office@arws.cz.

5. My Czech partner’s contract is only two pages long. Is that normal?
It can be. Czech contracts are often shorter because many rights and obligations (e.g., regarding termination, liability for defects) are already set out in the Civil Code. However, this brevity can hide major risks if you are not familiar with the Code’s provisions. For a thorough contract review, contact us at office@arws.cz.

6. How long do I have to sue for a breach of contract in the Czech Republic?
The general statutory limitation period for claims arising from a breach of contract is three years from the date the right could have been exercised for the first time. However, the rules can be complex, so it is vital to seek legal advice promptly. If you are facing a potential dispute, get tailored legal solutions by writing to office@arws.cz.

Don't want to deal with this problem yourself? More than 2,000 clients trust us, and we have been named Law Firm of the Year 2024. Take a look HERE at our references.