How Latvian businesses can strengthen commercial deals with Czech partners Key steps to secure stronger commercial contracts with Czech partners

When Latvian companies enter the Czech market or establish long-term business relationships with Czech partners, they often assume that commercial law operates similarly across the European Union. This assumption frequently leads to expensive disputes, contract enforceability problems, and financial losses that could have been prevented with proper legal preparation. Understanding the specific requirements and pitfalls of Czech commercial law is essential for protecting interests while building sustainable partnerships.

Understanding the Czech legal framework and why it differs from Latvian law

Latvian entrepreneurs operating in the Czech market face a critical challenge: Czech law operates under specific principles defined primarily by the Civil Code. These principles may differ from Latvian commercial law practices even though both countries are EU member states.

The Czech legal system applies an extensive civil code that regulates contractual relationships in detail, whereas Latvian practice may rely on different default rules. This structural difference creates a hidden trap for many foreign companies who fail to adapt their contracting practices.

The Czech Civil Code contains over 3,000 sections covering contractual relationships. Unlike many Anglo-Saxon legal systems where parties must explicitly agree on every term, Czech law presumes certain obligations and protections automatically. However, this also means that Czech law imposes mandatory principles—such as good morals and the protection of the weaker party—that courts enforce even when parties have not explicitly written them into their contracts.

For Latvian businesses accustomed to more explicit, detailed agreements, understanding the interplay between the contract text and statutory provisions is crucial. ARROWS Law Firm, a leading Czech law firm based in Prague, works regularly with foreign companies entering the Czech market. The firm's lawyers understand the nuances of Czech law and can help Latvian businesses navigate these complexities.

The principle of good faith and pre-contractual liability

Czech law recognizes the doctrine of pre-contractual liability, known as culpa in contrahendo . This means that if you engage in negotiations without a genuine intention to conclude a contract, you can be held liable for the other party's losses.

The practical consequence is stark. A Latvian company that enters into detailed negotiations with a Czech partner and then withdraws without valid justification could be sued for damages in Czech courts.

These damages would cover the Czech partner's documented losses, which usually include costs incurred during negotiations or preparation expenses, and in some cases, lost opportunities.

microFAQ – Legal tips on negotiating with Czech partners

1. Can I withdraw from business negotiations with a Czech partner without consequences?
Generally yes, freedom of contract applies. However, if negotiations have reached a stage where the conclusion of the contract appears highly likely, and you withdraw without "just cause," you may be liable for damages. "Just cause" includes genuine business obstacles or significant changes in circumstances. For advice on structuring your negotiations safely, contact office@arws.cz.

2. What counts as "advanced negotiations" in Czech law?
Czech courts assess this based on whether the parties have agreed on the essential terms of the contract and whether the behavior of the parties created a legitimate expectation that the contract would be concluded. Each case is unique, which is why professional guidance matters. If you need clarity on your specific situation, write to office@arws.cz.

The dangerous power of Czech contractual penalties

One of the most significant financial risks Latvian companies face when contracting with Czech partners is misunderstanding the enforcement and scope of contractual penalties. This represents a critical area of Czech contract law that frequently causes substantial financial losses to unprepared foreign businesses.

Under Czech contract law, a contractual penalty is a powerful and fully enforceable tool that can be applied to secure virtually any contractual obligation. This includes simple monetary breaches such as late payment.

How Czech contractual penalties work in practice

The critical difference is that a Czech company can legally include a clause imposing a substantial daily or monthly penalty for a simple delay in payment or performance. The creditor does not need to prove that the delayed payment caused them harm; the penalty is due simply because the breach occurred.

A Latvian company reviewing a Czech contract might glance over such a clause and assume it is either a minor issue or merely compensatory. In reality, under Czech law, contractual penalties function separately from statutory late payment interest.

Consider a practical example: a contract worth EUR 100,000 with a contractual penalty of 0.1% per day of delayed payment. This means you can be charged both statutory interest and the contractual penalty.

The primary purpose of the Czech smluvní pokuta is preventive and creates a lump-sum compensation for damages. By default, if a contractual penalty is agreed upon, the creditor cannot claim damages exceeding the penalty amount. However, contracts often stipulate that the creditor is entitled to damages in addition to the penalty.

Moderation of unreasonably high penalties

Czech courts do retain authority to moderate a penalty that is deemed "unreasonably high," considering the value and importance of the secured obligation. However, this moderation requires you to initiate litigation and does not invalidate the penalty clause entirely—it only reduces the amount to what is considered just.

The threshold for what courts consider "unreasonably high" varies, but courts generally uphold penalties of roughly 0.05% to 0.1% per day for monetary debts. Relying on court moderation as your protection strategy is insufficient.

The time, cost, and uncertainty of litigation far exceed the risk management benefits. ARROWS Law Firm's lawyers regularly review Czech contracts for Latvian and other foreign clients, identifying problematic contractual penalty clauses before their clients sign. We can help you negotiate more balanced penalty terms or add conditions that limit when penalties apply.

Real-world impact: why this matters for your business

A Latvian manufacturing company once contracted with a Czech supplier on the supplier's standard terms. The contract included a contractual penalty of 0.05% of the invoice amount per day of late payment, plus a provision that damages could be claimed in full.

The Latvian company experienced a cash flow delay and made a payment 45 days late. The Latvian company believed the penalty was excessive, but given the rate was within standard judicial limits, litigation would have been risky.

This outcome could have been prevented through proper contract review and negotiation before signing. ARROWS Law Firm would have identified this risk and negotiated either a lower percentage, a grace period before penalties apply, or a maximum aggregate penalty cap.

Common financial risks in Czech commercial contracts

Risks and Sanctions	How ARROWS Helps (office@arws.cz)
Contractual penalty for late payment: A contract clause imposing daily penalties for payment delays can result in amounts far exceeding statutory interest.	Contract negotiation and review: ARROWS reviews penalty clauses before you sign, identifies clauses that pose excessive financial risk, and negotiates modified terms with caps on aggregate penalties.
Cumulation of Penalty and Damages: By default, the penalty covers damages. However, contracts often explicitly allow claiming damages on top of the penalty.	Liability limitation strategy: ARROWS ensures that the relationship between penalties and damages is clearly defined, ideally negotiating that the penalty is the sole remedy for the specific breach.
Unenforceability of payment terms: If payment terms or other essential contract conditions are not properly documented, statutory defaults apply.	Contract drafting and validation: ARROWS ensures all payment terms comply with Czech law requirements, including the 30-day statutory standard and valid contractual extensions.
Liability for indirect damages and lost profits: Without clear limitation of liability clauses, you may be exposed to claims for the other party's lost profits ( ušlý zisk ).	Liability limitation strategy: ARROWS negotiates clear exclusions or caps on damages (where legally permissible), and defines the scope of "foreseeable damage."
Strict liability: A broadly worded penalty clause might apply even when the breach was caused by force majeure if not explicitly excluded.	Force majeure protection: ARROWS ensures force majeure clauses specifically excuse performance and protect you from penalty claims when circumstances beyond your control intervene.

Formal requirements and contract validity

Latvian companies frequently operate through commercial agents in the Czech market. This is a sensible business model—using a local representative to handle sales and customer relationships. However, Czech law imposes strict formal requirements on commercial agency agreements.

Written form requirement for commercial agency agreements

Under Section 2484 of the Czech Civil Code, a commercial agency agreement must be in writing to be legally valid. A verbal agreement regarding commercial agency in the Czech Republic is invalid.

This creates a significant risk for foreign entities. This means a Latvian principal relying on a verbal agreement would have no legal recourse to enforce exclusivity or protect confidential information.

A Latvian company operating under different assumptions might establish a relationship with a Czech agent based on a verbal understanding. In the eyes of Czech law, the specific protections and obligations of commercial agency would not apply.

Additional mandatory requirements

Beyond the written form requirement, Czech law imposes other provisions in commercial agency agreements that parties cannot avoid. Agency agreements concluded for an indefinite period must include statutory notice periods for termination.

According to Section 2515 of the Civil Code, the notice period is one month for the first year of the agency, two months for the second year, and three months for the third and subsequent years.

Under certain conditions, the agent is entitled to a special indemnity upon termination. This applies if they have brought new customers or significantly increased business with existing customers, and the principal continues to derive substantial benefits.

microFAQ – Legal tips on Czech agency and distribution agreements

1. Is a verbal commercial agency agreement legally binding?
No, the Civil Code explicitly requires written form for a commercial agency agreement. Without a written contract, the specific statutory regime of commercial agency does not apply, creating legal uncertainty. Write to office@arws.cz to have a proper written agency agreement prepared.

2. Can I use my Latvian agency agreement template in the Czech Republic?
Not without modification. Latvian templates often do not comply with specific Czech law requirements, particularly regarding notice periods, termination indemnity, and non-compete clauses. ARROWS Law Firm will review your existing template and adapt it to Czech law. Contact office@arws.cz for assistance.

3. What happens if my Czech agent breaks exclusivity?
If you have a properly drafted written agency agreement, you can sue for damages and terminate the agreement. If your agreement is invalid due to lack of form, proving the breach of exclusivity becomes significantly harder. For help protecting your agent relationships, contact office@arws.cz.

Payment terms and the risk of missing statutory deadlines

Czech law imposes statutory requirements on payment terms based on the implementation of the EU Late Payment Directive.

The 30-day standard payment term

The standard payment term in Czech law is 30 days from the date of invoice or the date of delivery of goods/services, whichever is later. Parties can extend payment terms beyond 30 days by mutual agreement.

However, if an obligation involves a public corporation, the payment term generally cannot exceed 60 days unless justified by the nature of the obligation.

For B2B transactions, parties can agree on terms longer than 60 days only if such an arrangement is not "grossly unfair" to the creditor. If a Czech court determines a payment term is grossly unfair, it may declare the term ineffective and apply the statutory 30-day term instead.

Late payment interest

If a payment is late, the creditor is entitled to statutory late payment interest. For obligations in CZK, the statutory rate corresponds to the repo rate of the Czech National Bank plus 8 percentage points.

For obligations in foreign currencies, the rate usually follows the repo rate of the central bank issuing that currency plus 8 percentage points. Crucially, as mentioned above, this interest applies in addition to any contractual penalty, unless the contract states otherwise.

Limitation periods: the deadline you cannot afford to miss

A critical procedural aspect in Czech commercial law is the statute of limitations. Failing to act within these periods can result in the total loss of enforceability for your claims.

Limitation periods in Czech law

The general limitation period in Czech law is three years. This is the subjective limitation period, which begins to run from the moment the right could be exercised for the first time and the plaintiff learned about the circumstances.

There is also an objective limitation period of ten years from the moment the right could first be exercised regardless of knowledge.

For commercial disputes, it is vital to calculate these periods correctly. A common mistake is assuming that sending a reminder stops the clock. It does not; only filing a claim with the court interrupts the limitation period.

ARROWS Law Firm's lawyers working with international clients ensure that claims are filed well before these deadlines expire. Contact us to ensure your receivables do not become unenforceable due to expired deadlines.

microFAQ – Legal tips on limitation periods for Czech contract claims

1. How long do I have to sue for unpaid invoices in the Czech Republic?
The general subjective period is three years. The period usually starts running from the original due date. Do not wait—contact office@arws.cz immediately if you have unpaid receivables.

2. Does sending a formal warning letter stop the limitation period?
No. Under Czech law, sending a pre-litigation notice ( předžalobní výzva ) is a procedural requirement to claim reimbursement of legal costs, but it generally does not pause or interrupt the statute of limitations. Only initiating formal legal proceedings does that.

3. Can we agree on a different limitation period?
Yes, parties can agree to extend the limitation period up to 15 years or shorten it (but not to less than 1 year), to the extent permitted by law. This must be agreed in writing. Write to office@arws.cz for a precise calculation or modification of your limitation period.

Choosing your dispute resolution forum: Czech courts versus arbitration

When a dispute arises between a Latvian company and its Czech partner, the jurisdiction is a key factor. Both options have distinct advantages depending on the nature of the contract.

Czech state courts

Czech state courts generally have jurisdiction if the defendant is domiciled in the Czech Republic. As both Latvia and the Czech Republic are EU member states, the Brussels Ia Regulation applies.

Judgments issued by Czech courts are recognized and enforceable in Latvia without a special procedure, making cross-border enforcement relatively smooth.

Czech courts are generally reliable, but proceedings can be lengthy depending on the complexity of the case and the specific court's backlog.

Arbitration

Arbitration is a common alternative. Parties can agree to resolve disputes before the Arbitration Court attached to the Economic Chamber of the Czech Republic and Agricultural Chamber of the Czech Republic.

Advantages include confidentiality, speed, and the expertise of arbitrators. However, there are higher upfront costs and limited grounds for appeal compared to state courts.

Many Latvian companies do not carefully review arbitration clauses. A poorly drafted clause can lead to jurisdiction disputes.

Mandatory arbitration

If your contract includes a valid arbitration clause, Czech courts will generally decline jurisdiction. It is crucial to decide strategically at the contracting stage whether you prefer court litigation or arbitration. ARROWS Law Firm can help you draft valid and effective dispute resolution clauses.

Additional formal and procedural mistakes

Choosing the correct legal form for your Czech business

Foreign companies entering the Czech market typically choose between a limited liability company ( s.r.o.) or a branch office. An s.r.o. is a separate legal entity, whereas a branch is an organizational unit of the foreign parent.

Delayed tax and VAT registration

If you engage in business activities in the Czech Republic, you must comply with tax registration rules. The mandatory registration threshold for VAT in the Czech Republic is CZK 2,000,000 in turnover over 12 consecutive calendar months.

Foreign entities may also incur registration obligations when supplying goods or services with the place of supply in the Czech Republic. This can sometimes occur regardless of the turnover threshold.

Beneficial owner registration

All legal entities in the Czech Republic must register their ultimate beneficial owners (UBO) in the Register of Beneficial Owners. Failure to do so can result in fines and, crucially, a prohibition on the payment of profit shares.

Procedural and formal risks in Czech commercial transactions

Risks and Sanctions	How ARROWS Helps (office@arws.cz)
Void agency agreement due to lack of written form: A verbal agency relationship creates no enforceable commercial agency contract.	Agency agreement documentation: ARROWS prepares formal written agency agreements that comply with Czech law requirements.
Contract voidness due to improper execution: A contract signed by an unauthorized person may be invalid.	Execution verification: ARROWS verifies the signatory's authority (checking the Commercial Register) before contracts are executed.
Loss of claims due to expired limitation periods: Missing the 3-year deadline to file a lawsuit results in the defendant successfully claiming the statute of limitations.	Limitation period management: ARROWS calculates precise limitation periods and takes protective legal actions.
Defaulting on UBO registration: Failure to register beneficial owners blocks dividend payments and voting rights.	Registration compliance: ARROWS arranges UBO registration and ensures ongoing compliance.

Executive summary for management

The following points summarize the key findings for business decision-makers:

• Contractual penalties are independent of damages: In Czech law, you can often be charged both a penalty and statutory interest. Check if the penalty covers damages or if damages can be claimed on top.
• Agency agreements require written form: Never rely on verbal agreements for commercial agency in the Czech Republic.
• Limitation periods: The standard subjective period is 3 years. Filing a lawsuit is necessary to stop the clock; a letter is not enough.
• VAT Threshold: The turnover threshold for mandatory VAT registration is CZK 2,000,000.
• Enforcement: Czech judgments are directly enforceable in Latvia under EU regulations, but obtaining them requires navigating Czech procedural law.

Conclusion

For Latvian businesses entering the Czech market or maintaining ongoing relationships with Czech partners, the stakes are high. A single poorly drafted contract or missed procedural deadline can lead to significant financial loss.

ARROWS Law Firm brings together extensive experience in Czech commercial law and international transactions. We are insured for damages up to CZK 400,000,000, providing protection and peace of mind.

If you are a Latvian company with Czech business relationships, we encourage you to contact ARROWS Law Firm before signing major contracts. Reach out to office@arws.cz.

FAQ – Frequently asked legal questions

1. Can I use my Latvian contract template for a transaction with a Czech partner?
It is risky. Latvian templates may not comply with mandatory Czech provisions regarding penalties, warranty periods, or agency termination. We recommend a review by a Czech lawyer. Contact office@arws.cz.

2. What happens if my Czech partner refuses to pay and I cannot find assets in Czech Republic?
If you have a judgment, it is enforceable across the EU. However, locating assets requires investigation. ARROWS Law Firm can assist with asset searches and enforcement proceedings.

3. Is arbitration always better than Czech court litigation?
Arbitration is faster and private but more expensive. Litigation is cheaper but slower and public. The best choice depends on the contract value and sensitivity.

4. My Czech partner claims a contractual penalty on a late payment. Can I challenge this?
You can ask the court to moderate an "unreasonably high" penalty, but the penalty itself is generally valid even without proof of damage. Prevention via contract negotiation is far better.

5. How do I ensure my Czech agent does not violate non-compete obligations?
You must have a written non-compete clause in the agency agreement, limited to a maximum of 2 years after termination, and usually, you must pay a reasonable compensation for this restriction.

6. What is the difference between an agency agreement and a distribution agreement in Czech law?
An agent acts on behalf of the principal . A distributor buys and resells in their own name. Agency agreements have strict statutory protections; distribution agreements are freer but must still comply with competition law.

Notice

Disclaimer: The information contained in this article is for general informational purposes only and serves as a basic guide to the issue. Although we strive for maximum accuracy in the content, legal regulations and their interpretation evolve over time. To verify the current wording of the regulations and their application to your specific situation, it is therefore necessary to contact ARROWS Law Firm directly (office@arws.cz). We accept no responsibility for any damage or complications arising from the independent use of the information in this article without our prior individual legal consultation and expert assessment. Each case requires a tailor-made solution, so please do not hesitate to contact us.