Terminating Distribution Agreements in Czech Law: Structuring and Risk Mitigation (2026)

12.3.2026 | ARROWS law firm

Termination of a distribution agreement is one of the most challenging legal issues that businesses encounter. Incorrect procedures or poorly drafted terms can lead to costly arbitration proceedings. In this article, you will learn how to structure the agreement correctly and how to minimise the legal risks associated with ending a commercial relationship under Czech legislation applicable for 2026.

The importance of properly terminating a distribution agreement
Common mistakes in distribution agreements
Risks and penalties in distribution disputes
Elements of a properly structured distribution agreement
Arbitration clause versus state courts
Compensation for the distributor and the risk of reclassification
Practical steps for safely terminating the agreement
International elements and a distributor abroad

Quick summary

Distribution agreements require careful drafting: Missing or vaguely worded termination rights in a distribution agreement can force you to continue an unfavourable contractual relationship or lead to costly disputes under Czech law.
Arbitration costs can be high: Arbitration in distribution agreement disputes can reach tens of millions of Czech crowns (CZK). Moreover, a misstep when negotiating the arbitration clause may shift the dispute to the state courts in the Czech Republic.
Prevention is cheaper than resolution: A properly structured agreement with clear termination conditions, minimum purchase volumes, contractual penalties and an arbitration clause will protect you from unplanned financial exposure under Czech legislation.
Experts from ARROWS advokátní kancelář regularly handle complex commercial disputes: We have experience in drafting, reviewing and protecting rights in relation to distribution agreements and arbitration proceedings involving vertical agreements and competition law in the Czech Republic.

The importance of properly terminating a distribution agreement

Distribution agreements are among the most common contractual relationships in modern commerce. As a rule, they are innominate contracts under the Czech Civil Code, intended to give the supplier certainty of distribution and the distributor the right to sell. It may seem like a simple business relationship, but in practice it is not.

When cooperation breaks down, conflicts often escalate very quickly. The distributor complains about late deliveries, while the supplier insists that the distributor is not meeting the minimum sales volume. One party wants to terminate the agreement, the other enforces contractual penalties. Before anyone has time to realise what is happening, both parties find themselves in arbitration or in litigation in Czech courts.

Our Czech legal team at ARROWS advokátní kancelář deal with these situations every day and see what mistakes are made when drafting agreements. That is why we have prepared this article to show you what to watch out for before signing the agreement and how to terminate it properly.

Differences between withdrawal, termination by notice, and termination by agreement

To understand how to properly terminate a distribution agreement, we first need to clarify which legal tools are available under Act No. 89/2012 Coll., the Czech Civil Code. There are three basic methods: withdrawal, termination by notice, and a termination agreement. Each has different legal effects.

Withdrawal from the agreement

Withdrawal from the agreement is possible if the agreement provides for it or if the other party breaches the agreement in a material manner. A material breach is one where the breaching party knew or must have known at the time of concluding the agreement that the other party would not have entered into the agreement.

A common myth is that withdrawal always cancels the agreement “from the beginning” and everything is returned. However, for agreements with continuous or repeated performance—which distribution agreements typically are—withdrawal applies only to performances that have not yet been rendered, provided that partial performances already received are of value to the creditor.

You therefore do not necessarily have to return margins for the past three years, but deliveries and obligations stop immediately. The risk, however, lies in assessing whether it was truly a material breach. If a court or arbitrator determines that it was not, your withdrawal is invalid and the agreement continues, including the obligation to compensate damages.

Termination by notice as the standard method

Termination by notice is a way of ending an obligation that takes effect exclusively for the future. For obligations for an indefinite period, the law allows termination even without stating a reason, typically with a notice period.

The key is how it is set out in the agreement. If you have a fixed-term agreement, you generally cannot terminate it early unless you expressly agree this in the contract. If such a clause is missing, you are bound until the end of the agreed term.

Termination by agreement

The cleanest method is a written agreement to terminate the obligation. In it, the parties clarify when the relationship ends, how inventory will be handled, and whether anything is owed between them. In practice, however, an agreement is often impossible once relations have already deteriorated and a dispute is looming.

Common mistakes in distribution agreements

Our Prague-based attorneys at ARROWS advokátní kancelář review distribution agreements that often contain errors leading to disputes in Czech courts. Below are the most common ones.

Vaguely defined obligations and minimum volumes

A common mistake is a provision on a “minimum annual sales volume” or “reasonable efforts” that does not specify concrete numbers or metrics.

If sales slow down, each party interprets the “minimum volume” differently. The distributor argues “best efforts”, while the supplier insists on fixed numbers. In arbitration, arbitrators then often have to rely on expensive expert opinions to interpret the parties’ intent and industry practice. The agreement should clearly state a specific purchase volume for a calendar period.

Insufficiently formulated grounds for termination

Relying only on the statutory definition of a “material breach” is risky. It is much safer for the parties to clearly agree in the contract on specific grounds for withdrawal, for example:

failure to reach the minimum turnover in two consecutive quarters,
delay in payment of an invoice for more than 30 days,
breach of rules for handling intellectual property (the brand),
loss of business authorisation or the distributor’s insolvency.

Incorrect or absurd contractual penalties

A contractual penalty reinforces an obligation, but it must be proportionate. If the penalty is manifestly disproportionate, a court (or arbitrator) may, upon the debtor’s request, reduce it (moderate it) under Czech law. This creates uncertainty as to the final amount of the claim.

Even more problematic is the so-called “termination penalty.” Czech case law concludes that the exercise of a right cannot be sanctioned. If the penalty is designed as a sanction for a party exercising its statutory or contractual right to terminate the agreement, such a clause may be found invalid.

Risks and sanctions in distribution disputes

Risks and sanctions	How ARROWS helps (office@arws.cz)
Unjustified withdrawal from the agreement: If you withdraw without legal grounds, the agreement remains in force and you may fall into default. The other party may claim damages (lost profit).	We will assess whether the conditions for withdrawal or termination are met. We will prepare the legal notice so that it complies with Czech law and the contract.
Invalid arbitration clause: If the clause is drafted incorrectly, the dispute will end up before the general courts, which may mean years of proceedings instead of months in arbitration.	We will draft a valid clause referring to a permanent arbitral institution. We will ensure a reference to clear ad hoc arbitration rules or a permanent arbitral tribunal.
Reduction (moderation) of a contractual penalty: A court may reduce a disproportionate penalty down to the amount of the actual damage incurred.	We will set up enforcement and penalty mechanisms so they are defensible. We will tailor penalties so they correspond to the seriousness of the secured obligation.
Competition law and the VBER: Restrictions on territory or pricing may breach the Czech Competition Act and EU law (VBER Regulation 2022/720), exposing you to a fine of up to 10% of turnover imposed by the Czech Competition Authority (ÚOHS).	We conduct a competition-law audit of agreements. We will ensure that vertical agreements comply with EU block exemptions.
Compensation claims: For agreements showing characteristics of commercial agency, an entitlement to a special indemnity for the customer base generated may arise.	We analyse the nature of the relationship and help minimise the risk. We will help structure the agreement to avoid unexpected claims.

Elements of a properly structured distribution agreement

In addition to termination itself, it is crucial to set the parameters of cooperation in a way that prevents conflicts.

Defining the contractual territory and rights

The contractual territory must be clearly defined, as well as whether the arrangement is exclusive or non-exclusive distribution. Pay attention to competition rules, as an absolute ban on sales outside the territory may conflict with EU law and the VBER. Exclusivity protects the distributor, but it also obliges the supplier not to sell in the territory itself or through other parties.

Minimum sales volume and KPI metrics

KPIs (Key Performance Indicators) should not be limited to volume. You can track the number of active points of sale, marketing spend and activities, or compliance with brand standards. If the distributor fails to meet the KPIs, the agreement should give the supplier the option either to withdraw or to remove exclusivity and convert the relationship to non-exclusive.

Termination, withdrawal, and applicable notice periods

For agreements for an indefinite term, the standard notice period under Czech law is 3 months, but the parties may agree on a different period. A longer period provides certainty but reduces flexibility if a rapid change is needed.

Start of the notice period – in practice, disputes arise as to when the period begins to run. The statutory rules for quarterly terminations set the end of the calendar quarter. In the agreement, it is better to stipulate that the notice period begins on the first day of the month following delivery of the notice of termination.

Arbitration clause versus state courts

An arbitration clause must be agreed in writing and must clearly identify the arbitrator or the method of appointment. A common mistake is referring to non-existent tribunals or using vague wording such as “an arbitrator will decide.” We recommend referring to permanent arbitral institutions (institutional arbitration), e.g. the Arbitration Court attached to the Czech Chamber of Commerce and the Agricultural Chamber of the Czech Republic. Ad hoc arbitration is possible, but it carries risks related to procedural obstruction when selecting the arbitrator.

Arbitration is not always cheaper; the fees of permanent arbitral institutions may be higher than the court fee in state courts in the Czech Republic. The main advantage is speed, typically single-instance proceedings, and confidentiality. In state courts, appeals and extraordinary remedies can prolong a dispute for several years.

Compensation to the distributor and the risk of reclassification

It is necessary to consistently distinguish between a purchase agreement (distribution) and a commercial agency agreement. A commercial agent acts in the supplier’s name, receives commissions, and has a statutory right under Czech law to a special indemnity upon termination. A distributor, by contrast, buys goods into its own ownership and resells them for profit.

The risk arises if the distributor is, in fact, in the position of a dependent agent—for example, where it is fully integrated into the network and has no independent pricing policy. In that case, a Czech court may assess the relationship as agency and award compensation. These risks must be addressed in the agreement.

Practical steps for a safe termination of the agreement

Legal audit of the agreement: Verify with an attorney whether you have grounds to withdraw or whether you must give notice of termination.
Securing evidence: If you withdraw due to a breach, you must prove it (reminders, invoices, emails).
Written request to remedy: Before withdrawal, it is often necessary and strategically advisable to provide an additional reasonable period for performance.
Service: Deliver the notice of termination or withdrawal in a provable manner (data box, registered mail with return receipt).
Settlement of stock: Decide whether you are obliged to repurchase stock or whether the distributor may sell it off.

Relevant legal regulations

Act No. 89/2012 Coll., the Civil Code: Core regulation of obligations, termination, withdrawal, and damages under Czech law.
Act No. 143/2001 Coll., on the Protection of Competition: Regulates agreements that distort competition in the Czech Republic.
Commission Regulation (EU) 2022/720 (VBER): Block exemption for vertical agreements, key for setting exclusivity and pricing.
Act No. 216/1994 Coll., on Arbitration Proceedings: Rules for arbitration.

International elements and a distributor abroad

If one party is foreign, it is critical to determine the governing law and jurisdiction. Within the EU, the Rome I Regulation (law) and Brussels I bis Regulation (jurisdiction) apply unless otherwise agreed. We recommend an explicit choice of Czech law and a specific dispute resolution mechanism. For major international disputes, ICC arbitration or a Czech arbitral institution may be appropriate.

Conclusion

Terminating a distribution agreement is a legally and commercially demanding process. Proper contract preparation and a well-thought-out termination strategy can save you significant financial resources and years of litigation in Czech courts.

If you are currently preparing a new distribution agreement, need to terminate a non-functioning relationship, or are facing the risk of a dispute with a distributor in the Czech Republic, do not hesitate to seek professional assistance. Contact ARROWS advokátní kancelář at office@arws.cz; we will provide expert legal advice under Czech law and review your agreement, or represent you in proceedings.

Most common legal questions on terminating an agreement

1. Can I terminate a distribution agreement without stating a reason?
For agreements for an indefinite term, yes—by giving notice with a notice period. For fixed-term agreements, generally only if the agreement allows it, or by withdrawal in the event of a material breach of obligations by the other party.

2. What is a typical notice period?
As a default rule, Czech law provides for 3 months to the end of a quarter, but in practice 1 to 6 months is commonly agreed. What matters is what is stated in your agreement.

3. Do I have to buy back the goods after the agreement ends?
This obligation does not arise automatically under Czech law, unless it concerns specific cases such as consignment stock or commission arrangements. It is a matter of contractual agreement, where the supplier’s right to repurchase goods is often agreed to prevent clearance sales below cost.

4. Is an arbitration clause always advantageous?
For commercial disputes, often yes due to speed and expertise, but it must be drafted correctly. A poorly drafted clause is worse than none, and for smaller disputes a state court may be a cheaper option.

5. Am I at risk of a penalty for terminating the agreement?
A penalty for the act of giving notice itself is typically considered invalid by Czech courts, but a termination fee can be agreed. If you terminate the agreement without entitlement—for example, by immediate withdrawal without a valid reason—you may be required to compensate the other party for damages.

Notice: The information contained in this article is of a general informational nature only and is intended to provide basic guidance based on the legal position as of 2026. Although we strive for maximum accuracy, legal regulations and their interpretation evolve over time. We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client protection we maintain professional liability insurance with a limit of CZK 400,000,000. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information in this article without prior individual legal consultation.

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