Part 1: Legislative framework
Q1. Please specify the legislative framework generally applicable to the conclusion and execution of distribution agreements (a)? Please include a link to the official publication of the applicable rules (e.g., relevant link to the Official Gazette) (b) and, if available, to the English translation of the legislative framework (c).
a. Legislative framework:
Act No. 89/2012 Sb., Civil Code, as amended (the “Civil Code”), in particular:
- Book one, Title I, Chapter 1 – Private Law (contains in particular the basic principles of civil law);
- Book one, Title V, Chapter 1, Division 6 – Invalidity of Legal Acts;
- Book one, Title V, Chapter 3, Division 1 – Statute of Limitations;
- Book four, Title I, Chapter 2 – Contract;
- Book four, Title I, Chapter 7 – Extinction of Obligations;
- Book four, Title II, Chapter 2 – Purchase;
- Book four, Title II, Chapter 5, Division 5 – Commercial Agency;
- Book four, Title III, Chapter 1 – Compensation for Pecuniary and Non-pecuniary Harm;
- Book four, Title IV, Chapter 1 – Unjust enrichment.
Act No. 143/2001 Sb., on the Protection of Competition and on the Amendment of Certain Acts (Act on the Protection of Competition), as amended (the “Competition Act”), in particular, Art. 3 et seq.
Act No. 216/1994 Sb., on Arbitration and Enforcement of Arbitral Awards, as amended (the “Act on Arbitration”).
b. Link(s) to official publication:
The Civil Code is accessible via this link. Since the Official Collection of Laws of the Czech Republic does not contain consolidated texts of laws, amendments should be consulted separately – a complete overview is available on the DLC website. An unofficial consolidated version is also accessible via this link.
The Competition Act is accessible via this link. Amendments should be consulted separately – a complete overview is available on the DLC website. An unofficial consolidated version is also accessible via this link.
The Act on Arbitration is accessible via this link. Amendments should be consulted separately – a complete overview is available on the DLC website. An unofficial consolidated version is also accessible via this link.
c. Link(s) to English translation:
An English translation of the Civil Code is accessible via this link.
An English translation of the Competition Act is accessible via this link.
An English translation of the Act on Arbitration is accessible via this link.
Q2. Other than for agency agreements pursuant to Directive 86/653 (EEC) on the coordination of the laws of the Member States relating to self-employed commercial agents, are there specific rules depending on the distribution format (e.g. franchising, exclusive distribution)?
Q3. Other than general contract law and competition law, are there other rules which may generally restrict the parties when drafting and concluding distribution agreements (e.g., rules in relation to unfair contract terms in B2B contracts, specific requirements in the context of a prohibition of abuse of economic dependence)?
If yes, which general rules apply (a)? Where available, please also include a link to the official publication of the applicable rules (b) and to the English translation of the regulatory framework (c).
a. General rules:
Act No. 395/2009 Sb., on Significant Market Power in the Sale of Agricultural and Food Products and Abuse Thereof, as amended (the “SMPA”) regulates relations between buyers with significant market power and their suppliers in connection with the purchase of food for resale in Czechia or services related to the purchase or sale of food (e.g., marketing, logistics). Please note that even an abuse of significant market power conducted abroad, if its effects have occurred or are likely to occur in the Czech Republic, will be assessed under the SMPA.
The Czech Competition Authority is responsible for overseeing compliance with the SMPA.
Significant market power is the position of a buyer due to which the buyer may enforce an advantage on suppliers without just cause in relation to the purchase of food or the receipt or provision of services related to the purchase or sale of food. Significant market power is assessed particularly with regard to the market structure, barriers to entry and the financial strength of the buyer. However, the Czech Competition Authority primarily relies on the (rebuttable) presumption according to which a buyer is deemed to have significant market power if its turnover for the sale of food and related services in the Czech Republic exceeds CZK 5 billion (approx. EUR 194 million) for the last completed accounting period of 12 months (see, Art. 3 SMPA).
Please note that the SMPA also applies to a buyer who is a controlled entity when its turnover generated by the sale of food and related services together with the controlling entity exceeds the CZK 5 billion (approx. EUR 194 million) threshold, and to purchasing alliances (even free groups without legal personality) when the sum of the turnovers of their members for the sale of food and related services exceeds CZK 5 billion (approx. EUR 194 million). The attributability of the conduct of certain entities to a buyer with significant market power is also relevant. If the buyer is a business entity which ensures the purchasing of food or services related to the purchase or sale of food for another buyer under a mandate type contract, its significant market power is assessed together with the position of the buyer for which it ensures such activities. All these entities are deemed to be buyers within the meaning of the SMPA (see, Art. 2 in conjunction with Art. 3 SMPA).
Art. 3a SMPA sets out the essential elements of a contract concluded between a buyer with significant market power and a supplier of food or related services. Such a contract must be agreed in writing. Electronic conclusion of contracts by various means is also permissible, provided that the prescribed requirements ensuring the authenticity of the origin and the integrity of the content of the legal act are met. Please note that the requirement for a contract to be in writing applies to all stages of the contractual negotiations (an offer to contract, its acceptance or rejection, amendment, termination of the contract, etc.) and to the entire range of contracts concluded between the parties (i.e., including various types of partial agreements such as promotional agreements, changes to price lists, etc.). Regarding its content, in addition to the essential parts, the contract must also specify:
- the method of the payment of the purchase price and the period for its payment, the amount of any discount on the purchase price or the method of the determination thereof, if granted; the maturity period of the purchase price may not exceed 30 days from the invoice delivery date;
- the period (or method of the determination thereof) for the delivery of the purchased item(s) and the determination of the quantity thereof for a specified period or the determination of the quantity of an individual supply of the purchased item(s);
- in the event that services related to the purchasing or sale of food are received and provided, the method of co-operation in the receipt and provision thereof in terms of the subject matter, scope, method and time of performance, and price (or the method of the determination thereof);
- the period of the guaranteed validity of the purchase price, which may not exceed three months from the date of the first supply of the food for which the purchase price was agreed; and
- the method of assignment of a claim, which is governed by the relevant provisions of the Civil Code.
Art. 4(1) SMPA prohibits abuse of significant market power. Art. 4(2) then lists the various facts of offences consisting in abuse of significant market power, which are particularly as follows:
- negotiating or applying contractual terms which create a significant imbalance in the rights and obligations of the parties;
- negotiating or obtaining any payment or other performance for which a service or other consideration has not been provided, or is disproportionate to the value of the consideration actually provided;
- applying or obtaining any payment or discount where the amount, subject matter and scope of the consideration provided for that payment or discount has not been agreed in writing prior to the delivery of the food or the provision of the services to which the payment or discount relates;
- negotiating or applying price terms as a result of which the tax document for payment of the purchase price for the supply of food will not contain the final amount of the purchase price less all agreed discounts on the purchase price, except for pre-agreed quantity discounts;
- negotiating or applying payments or other consideration for the acceptance of food for sale;
- negotiating or applying the maturity period of the purchase price of food that is longer than the period set out in Art. 3a(a) SMPA;
- negotiating or exercising the right to return purchased food, except for a material breach of the contract;
- demanding compensation from the supplier for a penalty imposed by the inspection authority without any fault on the supplier’s part;
- discriminating against the supplier by negotiating or applying different contractual terms for the purchase or sale of services related to the purchase or sale of food at a comparable performance, without a just cause;
- carrying out an audit or other form of inspection of the supplier by the buyer or a natural party or legal entity authorised by the buyer at the supplier’s expense, including requesting food analyses at the supplier’s expense; or
- the buyer not respecting the results of an official food inspection carried out by state supervisory authorities.
Although the Czech Competition Authority has never applied the general prohibition on the abuse of significant market power as stipulated in Art. 4(1) SMPA, this possibility cannot be completely ruled out (similar principle as in the case of the regulation of abuse of dominance). Thus, conduct that cannot be classified under any of the special offences under Art. 4(2) SMPA may also be found abusive.
The obligations contained in Art. 3a and 4 SMPA are considerably general. Thus, to facilitate their interpretation, the Czech Competition Authority issues and regularly updates a series of interpretative opinions targeting potentially problematic issues. Nevertheless, it is one of the most problematic Czech laws in terms of its interpretation.
Violations of the SMPA are associated with very serious consequences. For a breach of the above obligations contained in Art. 3a and 4 of the SMPA, a buyer with significant market power may be fined up to CZK 10 million (approx. EUR 387 thousand) or 10% of the net turnover achieved by the buyer in the last completed accounting period of 12 months (see, Art. 8 SMPA). In addition, the Czech Competition Authority is obliged to prohibit a conduct that constitutes an abuse of significant market power (see, Art. 6(1) SMPA).
The harmed suppliers could also seek compensation for damage caused to them by the buyer with significant market power who has breached its obligations under the SMPA (according to the general rules on damages, see, Art. 2894 et seq. Civil Code).
The Czech Competition Authority updates its interpretative opinion relating to selected provisions of the SMPA from time to time. The current version is accessible via this link (only in Czech).
The prevention of abuse of economic dependence is also the subject of regulation contained in Act No. 526/1990 Sb., on Prices, as amended (the “Act on Prices”). The Act on Prices concerns the application, regulation, and control of prices of products, performances, works, and services intended for the Czech market, including prices of imported goods and prices of goods intended for export.
The Act on Prices provides for the possibility of sanctions for the sale of unregulated goods or services if a more advantageous economic position is abused by the seller or the buyer to gain disproportionate material benefit either by selling for a price including unjustified costs or unreasonable profit by applying a higher selling price than what is the usual price or purchasing for a price significantly below justified costs or lower than what is the usual price. This is a situation in which the seller or the buyer causes harm to the other party by applying a price that is higher or lower respectively than the price they would achieve in a situation of being exposed to substantial price competition (see, Art. 2 Act on Prices).
The usual price for the purposes of the Act of Prices is the price identical or, in terms of the use of comparable or mutually substitutable goods, freely negotiated between sellers and buyers who are independent of each other in economic, financial (capital) and personnel terms and operate on the market that is not threatened by the effects of restrictions on competition. If the usual price on the market cannot be established, the price to define the abuse of a more advantageous economic position is determined by calculating economically justified costs and a reasonable profit (see, Art. 2(6) Act on Prices).
The costs that are considered to be economically justified are the cost of acquiring the appropriate quantity of direct material, labour and other personnel costs, technologically necessary other direct and indirect costs and circulation costs. The assessment of economically justified costs is based on the long-term usual level of these costs in similar economic activities, considering the specific characteristics of the goods in question. A profit that is considered to be reasonable is the usual profit achieved on a long-term basis through comparable economic activities and ensuring reasonable return of the used capital within a reasonable period of time (see, Art. 2(7) Act on Prices).
Under Art. 2(4) Act on Prices, a seller or buyer who negotiates prices on the market without facing substantial price competition is in a more advantageous economic position. Its position is assessed in relation to a particular buyer or seller as the weaker contracting party (the ability to behave independently of other undertakings or consumers in general, as is usually the case when assessing dominance, does not need to be demonstrated). To prove abuse of a more advantageous economic position, it must be demonstrated that the seller or the buyer gained disproportionate material benefit to the detriment of the other party.
The supervisory authority (the Specialised Tax Office) may impose a fine of up to five times the amount of the disproportionate material benefit or up to CZK 10 million (approx. EUR 387 thousand) if it is impossible to determine the amount of the disproportionate material benefit (Art. 16 Act on Prices).
A harmed buyer or seller could also seek compensation for damage caused to them by the seller or the buyer committing the offence of abuse of a more advantageous economic position (according to the general rules on damages, see, Art. 2894 et seq. Civil Code).
Limits on damages which apply generally to any rights to damages mentioned in the Q&A):
Under Art. 2898 Civil Code, a stipulation which excludes or limits in advance the duty to provide compensation for harm caused intentionally or due to gross negligence is disregarded. In these cases, the right to compensation may also not be lawfully waived.
b. Link(s) to official publication:
The SMPA is accessible via this link. Since the Official Collection of Laws of the Czech Republic does not contain consolidated texts of laws, amendments should be consulted separately – a complete overview is available on the DLC website. An unofficial consolidated version is also accessible via this link.
The Act on Prices is accessible via this link. Amendments should be consulted separately – a complete overview is available on the DLC website. An unofficial consolidated version is also accessible via this link.
c. Link(s) to English translation:
An English translation of the SMPA is accessible via this link.
An English translation of the Act on Prices is accessible via this link.
Part 2: Pre-contractual phase
Q4. Are there mandatory provisions in relation to the disclosure of pre-contractual information prior to concluding and/or executing distribution agreements?
If yes, which mandatory provisions apply (a) and which information must be disclosed (b)? Where available, please also include a link to the official publication of the applicable rules (c) and, if available, to the English translation of the regulatory framework (d).
a. Mandatory provisions:
Art. 1728(2) Civil Code.
b. Information to be disclosed:
The so-called pre-contractual liability is based on the principle of good faith (Art. 7 Civil Code), good morals (Art. 1(2) Civil Code) and particularly on the principle of fairness (Art. 6 Civil Code). Accordingly, everyone is obliged to act fairly in legal relations, and no party may benefit from an unfair or unlawful act or from an unlawful situation which it caused, or over which it has control.
When negotiating the contract, the parties are obliged to consider the legitimate interests of the other party, not to conceal or misrepresent facts relevant to the other party’s decision. The parties are obliged to act in accordance with the expectations they have created by their previous conduct.
Art. 1728(2) Civil Code imposes general information requirements when negotiating all contracts, irrespective of their type, the method of their conclusion, the means used or the nature of the contracting parties. When negotiating a contract, the contracting parties must disclose to each other all the factual and legal circumstances (e.g., characteristics of a thing, legal impediments to disposal) of which they know or must know, so that each of the parties can verify the possibility to conclude a valid contract and the interest of each party in concluding the contract is evident to the other party. However, the provision does not imply an obligation to search information for the other party.
The extent of the information obligation is determined by the need of the other contracting party to ascertain the possibility of concluding a valid contract and its willingness to conclude the contract under the circumstances. If one of the parties has information about the reasons for invalidity or nullity of the contract being concluded or of the circumstances in which the other party would not have entered into the contract, it is required to disclose such information to the other party. There may be different reasons relating both to the subject matter of the contract being negotiated (e.g., prohibition of disposal, unsuitability of the thing for the previously communicated purpose), to the contract itself (e.g., incapacity of the contracting party to conclude the contract) or to the process of concluding the contract (e.g., need for prior consent). The reasons may be on both sides.
The information obligation is not fulfilled in cases in which information is not provided at all, or in which false or incomplete information is provided.
The information obligation may be fulfilled through any communication relating to the negotiation of the contract. Therefore, all required information does not necessarily have to be provided directly in the contract.
The information must be provided before the conclusion of the contract so that the other party can make an informed decision. Since the acceptance of the first offer cannot be ruled out, to avoid the risk of liability, the relevant information should be provided at the latest together with the offer.
c. Link(s) to official publication:
For information regarding the Civil Code, see, Q1.b) above.
d. Link(s) to English translation:
For information regarding the English translation of the Civil Code, see, Q1.c) above.
Q5. Is there a standstill obligation linked to the requirements imposed for the pre-contractual phase?
Q6. Does the relevant regulatory framework impose sanctions if the pre-contractual obligations are not (fully) respected?
If yes, which sanctions apply (e.g., nullity of contract, penalty payment)?
The Civil Code does not provide for any legal consequences related specifically to pre-contractual liability arising from breach of the information obligation. In general, however, the aggrieved party has the right to damages (Art. 2910 et seq. Civil Code). Both actual damage and loss of profits are covered.
Failure to comply with the information obligation, whether intentional or negligent, by which the other party to the contract was misled and the misleading information concerned a decisive circumstance (i.e., a circumstance where knowledge of the true state of affairs would have led the contracting party not to enter into the contract at all or to enter into it on substantially different terms), renders the contract void (Art. 583 Civil Code). It is a so-called relative invalidity of the contract which may be invoked by the party acting in error (Art. 586 Civil Code). A party who has caused a contract to be invalid is obliged to compensate the damage caused to the party who was not aware of the invalidity (Art. 579(2) Civil Code).
If an error concerns a secondary circumstance which neither party has declared decisive, the contract is valid, but the misled party is entitled to claim appropriate compensation from the party who caused the error (Art. 584(1) Civil Code). However, if a contract in error was entered into because of trickery, the contract is invalid, even if the error only concerns a secondary circumstance (Art. 584(2) Civil Code).
A breach of an information obligation does not necessarily result in damage, e.g., a party received adequate consideration, but would never have entered the contract if the information obligation had been fulfilled. The legal rules on error and the information obligation are therefore complementary.
In certain circumstances, Art. 2950 Civil Code, which provides for a right to compensation for damage caused by the provision of incomplete or incorrect information or harmful advice, may apply. This concerns information and advice provided for consideration by a party who offers professional performance as a member of a profession, or otherwise acts as an expert, in a matter related to his expertise or skill.
Q7. Can a party be held liable if it terminates the pre-contractual negotiations?
If yes, on what grounds (a); under what conditions (b); and what consequences are generally linked to such liability (c)?
a. Grounds for pre-contractual liability:
Art. 1728 and 1729 Civil Code.
b. Conditions for pre-contractual liability:
Under Art. 1729(1) Civil Code if contract negotiations between parties reach a point where the conclusion of the contract seems highly probable, the party which terminates the negotiations without a just cause despite reasonable expectations of the other party to conclude the contract acts unfairly.
The prerequisite for the right to compensation for damages is that the process of negotiating the contract has reached a stage where the other party to the contract can reasonably expect to conclude the contract – the conclusion of the contract is highly probable, de facto certain. A situation in which the parties have reached an agreement in substance on the content of the contract can be such a stage of negotiations. This will often be the case when the content of the contract is agreed and the last step remains to be fulfilled – achieving the required form, proving the fulfilment of a certain condition, with which the unfairly acting party associates its consent to the conclusion of the contract (e.g., proving an expert opinion, financial capacity).
For pre-contractual liability to arise, the party’s reasonable expectation that the contract will be concluded must be created by the other party. E.g., a reasonable expectation within the meaning of Art. 1729(1) Civil Code that a new contract will be concluded cannot be inferred from the mere fact that the previous contract is about to expire.
The refusal of further negotiations on the conclusion of the contract, the inaction of the unfairly acting party, but potentially also a proposal for a substantial change in the already agreed content of the contract is considered as the termination of the contract negotiations.
A party will only be acting unfairly if there is no just cause which, when objectively assessed in the light of previous conduct, justifies the termination of contract negotiations – the other party cannot expect to conclude the contract in the presence of such a reason. This will often involve a change in circumstances, e.g., loss of the ability of the contracting party to meet its obligations properly and on time (a plant burns down, serious quality deficiencies are discovered, doubts about the solvency of the other party).
Beyond the above-described liability related to the termination of pre-contractual negotiations, Art. 1728(1) Civil Code provides for the pre-contractual liability of a party who commences or continues to negotiate a contract without intending to enter into the contract. Such a party is acting unfairly.
The motives for such unfair conduct may be various, e.g., to expose the business (especially pricing) policy of a competitor, to prevent the conclusion of a contract with a competitor, to cause harm to a competitor, to view goods that a party intends to purchase elsewhere.
Liability arises when the party concerned (already) knows that it will not conclude the contract and yet negotiates or continues to negotiate it. The provision does not apply to situations where a party does not know whether it will eventually conclude a contract (it is common that the negotiations are conducted to see if the parties are able to find the consensus necessary to conclude a contract), but to situations where the party knows (and it is its intention) that it will not conclude a contract, but nevertheless negotiates it.
c. Consequences of pre-contractual liability:
Pre-contractual liability pursuant to Art. 1728(1) Civil Code is linked to the right to compensation for damages pursuant to the general provisions of Art. 2910 et seq. Civil Code associated with a breach of statutory obligations (i.e., also fault must be proven). Both actual damage and loss of profits (e.g., profit lost because of the aggrieved party’s failure to contract with another party because of unnecessary negotiations with the unfairly acting party) will be compensated.
In the event of a breach of the obligation provided for in Art. 1729(1) Civil Code, the special liability regime under Art. 1729(2) Civil Code applies. A party who acts unfairly will compensate the other party for the damage (both actual damage and lost profits), but only to an extent not exceeding the loss from failing to conclude a contract in similar cases. The claim can only be made for damage incurred from the time when the aggrieved party had a reasonable expectation of concluding the contract.
The reason for limiting the damages is that by not concluding the contract, the contracting party loses the performance of the other party, but at the same time it does not perform either. Thus, the loss from the non-execution of a contract should consist of the costs incurred in negotiating such a contract and the loss of profit from such a contract. The aggrieved party should not be in a better position than if it had concluded the contract. The provision prevents speculative inflation of the costs of negotiating the contract. Similar cases mean cases within a similar industry, between similarly situated entities, with similar subject matter and similar contractual arrangements.
Q8. Are there other relevant rules and/or restrictions that apply during pre-contractual negotiations between supplier and distributor?
If yes, what do these specific rules and/or restrictions entail?
Under Art. 1730(2) Civil Code, if a party obtains confidential information or communication about the other party during negotiations of a contract, it is required to take care that such information or communication is not unlawfully misused or disclosed. If a party breaches this obligation and is enriched thereby, it will surrender to the other party what constitutes such enrichment. Other damage will be compensated according to the general provisions (see, above on Art. 2910 et seq. Civil Code).
Part 3: Contractual phase
A. Form of distribution agreements
Q9. Must a distribution agreement be executed in writing to be valid and enforceable?
Only in certain instances.
If only in certain instances, please explain when a written agreement is required.
The written form of the contract, namely the form of a public instrument or the form of a private instrument with authenticated signatures, is necessary for the reservation of the right of ownership to be effective with respect to the buyer’s creditors. The reservation of the right of ownership means that if a seller reserves the right of ownership, the buyer is deemed to become the owner only upon the full payment of the purchase price. However, the risk of damage to the thing passes to the buyer as early as upon its takeover (see, Art. 2132 Civil Code).
A written form is also required for a licence agreement if the licence is exclusive or is to be registered in the relevant public register. A licence agreement means an agreement by which the licensor grants the licensee the right to exercise intellectual property rights (a licence) within the stipulated limited or unlimited extent and the licensee undertakes, unless otherwise stipulated, to pay remuneration to the licensor (see, Art. 2358 Civil Code).
The written form may also be required in other specific cases required by the Civil Code or special laws.
As for the sector-specific regulation, the written form is mandatory for contracts between a buyer with significant market power and a supplier in relation to the purchase of food for resale and related services, as regulated by the SMPA (see, Q3.a) above).
Q10. Are there any (other) requirements as to the form of the distribution agreement for it to be valid and enforceable?
B. Content of distribution agreements
Q.11 Other than restrictions imposed by EU competition law (including Regulation (EU) 330/2010), do specific rules and/or restrictions apply in distribution agreements with respect to
- the territory in which or the customers to whom the goods/services will be sold;
- an exclusivity granted to the distributor;
- (exclusive) sourcing/purchasing obligations;
- resale prices;
- non-compete clauses
Yes specific rules apply to non-compete clauses.
If yes, what do these specific rules and/or restrictions entail?
Art. 2975 Civil Code contains a general regulation of the non-compete clause. It provides that if a stipulation which prohibits another party from engaging in competitive activities does not determine the territory, range of activities or group of parties subject to such a prohibition, the non-compete clause will be disregarded. A non-compete clause stipulated for an indefinite period or for a period longer than five years is prohibited – if this prohibition is breached, the non-compete clause will be deemed to have been agreed for five years. A non-compete clause restricting the obligated party more than is required by the necessary protection of the beneficiary party is prohibited – if this prohibition is breached, a court may, on the application of the party affected, restrict or cancel the non-compete clause, or declare it invalid.
Q12. Do specific rules and/or restrictions apply in distribution agreements with respect to
- obligations of the supplier vis-à-vis the distributor, including in relation to the remuneration of the distributor;
- obligations of the distributor vis-à-vis the supplier or vice versa;
- a non-solicitation clause during and/or after the term of the distribution agreement;
- minimum sales quota imposed on the distributor;
- specific sector rules?
Yes specific rules apply to specific sectors.
If yes, what do these specific rules and/or restrictions entail?
The SMPA contains sector-specific regulation of relations between a buyer with significant market power and a supplier relating to the purchase of food for resale and related services, see, Q3.a) above.
C. Term and termination
Q13. Are there particular rules and/or restrictions in relation to the term (incl. renewal) of distribution agreements?
Q14. Are there any specific rules and/or restrictions with respect to the termination of distribution agreements (e.g. minimum notice period, statutory right to compensation (goodwill or other))?
If yes, what do these specific rules and/or restrictions entail (a)? Please include whether these specific rules and/or restrictions differ depending on whether the distribution agreement is of definite or indefinite duration (b) or whether the distribution agreement is terminated by one party for convenience or for breach by the other party (c).
a. What do these specific rules and/or restrictions entail:
There are no rules applicable specifically to distribution agreements. These distribution agreements are governed by the general rules set out in the Civil Code. However, the Civil Code lays down specific rules which apply to contracts of indefinite duration and to contracts which bind, without a serious reason, an individual for his lifetime or anyone for a period exceeding ten years. Specific rules also apply in the event of a material change of circumstances or subsequent impossibility of performance after the conclusion of the contract.
Under Art. 1999(1) Civil Code, if a contract concluded for an indefinite period obliges at least one party to perform a continuous or recurrent activity or obliges at least one party to tolerate such an activity, the obligation may be extinguished by the end of a calendar quarter by at least three months’ notice of termination. Put simply, the contract will terminate at the end of the calendar quarter following the delivery of the notice to the other party.
Notice period, form of notice, communication process or other requirements for exercising the right of termination may be modified or specified in the contract. However, the right to terminate the contract in accordance with this provision should not be effectively excluded in this way (e.g., the notice period should not be excessively long, e.g., many years, or the right of termination should not be subject exclusively to conditions whose fulfilment is beyond the control of the party entitled) as such an arrangement would be invalid.
Under Art. 1999(2) Civil Code, Art. 1999(1) Civil Code (see, above) does not apply to continuing obligations to refrain from a particular activity (e.g., an obligation not to disclose certain confidential information, or not to carry out certain activities). Unless a specific option to terminate this type of obligation is agreed upon in the contract, the obligated party is not able to unilaterally terminate it in any way. However, in extremely extensive commitments unreasonably restricting the conduct of a party for an unlimited period, the correctives relating to the validity of such an arrangement in general, particularly public policy and good morals, could apply.
According to Art. 2000 Civil Code, if a contract has been concluded without a serious reason for a definite period in a way that it binds an individual for his lifetime or anyone for a period exceeding ten years, the obligation may be sought to be rescinded after ten years from its creation. A court will also set aside the obligation if the circumstances on which the parties apparently relied when the obligation was created have changed to such an extent that the obliged party cannot be reasonably required to be further bound by the contract. The waiver of the right to claim rescission of the obligation in advance will be disregarded, except where the obliged party is a legal party.
Art. 1765 Civil Code concerns a change in circumstances so substantial that it creates a particularly gross disproportion in the rights and obligations of the parties by disadvantaging one of them either by disproportionately increasing the cost of performance or by disproportionately reducing the value of the subject of performance. In such a case, the party so affected has the right to demand renegotiation of the contract with the other party if it proves that it could neither have reasonably foreseen nor influenced the change and that the change occurred after the conclusion of the contract or became known to the party concerned after the conclusion of the contract. The exercise of this right does not entitle the party concerned to suspend performance. Please note that the right under Art. 1765(1) Civil Code does not arise if the party concerned has assumed the risk of a change of circumstances.
Under Art. 2006 Civil Code, if a debt becomes subsequently impossible to be discharged, the obligation is extinguished for that reason. A performance is not impossible if the debt can be discharged under worsened conditions, at higher costs, with the help of another party or only after a specified period.
b. If applicable, differences dependent on whether the distribution agreement is of definite or indefinite duration:
On the specific rules for termination of contracts of indefinite duration and certain types of long-term contracts of definite period, see, Q27.a) above.
c. If applicable, differences dependent on whether the distribution agreement is terminated by one party for convenience or for breach by the other party:
Under Art. 2002(1) Civil Code, if a party materially breaches the contract, the other party may withdraw from the contract without undue delay. A material breach means such a breach of which the breaching party, at the conclusion of the contract, knew or should have known that the other party would not have concluded the contract if it had foreseen such a breach.
According to Art. 2002(2) Civil Code, a party may withdraw from a contract without undue delay after the conduct of the other party undoubtedly indicates that the party is about to commit a material breach of the contract and if it fails to provide a reasonable security after being requested to do so.
Art. 1977 and 1978 Civil Code provide for the right to withdraw from the contract because of default by the other party. If, by its default, a party materially breaches its contractual obligation, the other party may withdraw from the contract if it notifies the party in default accordingly without undue delay after learning of the default. If a default of one of the parties constitutes a non-material breach of its contractual obligation, the other party may withdraw from the contract after the defaulting party fails to fulfil its duty within a reasonable additional time limit (grace period) expressly or implicitly provided by the other party. If a creditor notifies the debtor that he grants him an additional time limit to perform and that there will be no extension thereof, he is conclusively presumed to have withdrawn from the contract upon the expiry of the additional time limit within which the debtor fails to perform.
Unlike termination by notice, upon withdrawal from the contract, the obligation is rescinded from the outset (subject to certain exceptions – e.g., in relation to withdrawal with prospective effects only in the case of contracts involving continuous or repeated performance; see, Art. 2004 and 2005 Civil Code).
The parties may agree on different conditions for withdrawal, or exclude withdrawal altogether, unless this is excluded by the Civil Code in specific cases, usually irrelevant to distribution agreements (typically in entrepreneur-consumer relations, in connection with pre-emption rights, etc.). The impossibility to withdraw from a contract that could be relevant for distribution agreements is set, for example, in Art. 2110 Civil Code. It stipulates that a contract for the purchase of a movable thing cannot be withdrawn from or the supply of a new thing cannot be demanded if the buyer cannot return the thing in the same condition in which the buyer received it. This does not apply if:
- there has been a change in the condition because of an inspection to discover a defect of the thing,
- the buyer used the thing before the discovery of a defect,
- the buyer did not cause the impossibility to return the thing in the same condition by an act or omission, or
- the buyer sold the thing before the discovery of the defect, consumed it, or altered the thing during its normal use.
Under Art. 2111 Civil Code (concerning the purchase of movable things), if a buyer fails to notify the defect of a thing in time, the buyer loses the right to withdraw from the contract.
Q15. Is it possible to terminate the distribution agreement based on certain grounds for termination (breach or other) included in the distribution agreement?
If yes, is prior judicial intervention required in order for the termination of the agreement to take effect?
Part 4: Post-contractual phase
Q16. Is the supplier required to repurchase the stock that is still at the distributor’s disposal when the distribution agreement ends?
Q17. Are there other post-contractual obligations that generally apply to either of the parties in the context of the termination of the distribution agreement?
Part 5: Dispute resolution
Q18. Do specific rules and/or restrictions apply as regards the choice of forum and/or jurisdiction?
If yes, what do these specific rules and/or restrictions entail?
There is no general rule limiting the contractual freedom of the parties to choose a forum and/or a jurisdiction.
As regards the sector-specific regulation of relations between a buyer with significant market power and a supplier relating to the purchase of food for resale and related services, in its interpretative opinion, the Czech Competition Authority (see, the link in Q3.a) above) points out to clauses negotiated to the disadvantage of the supplier in relation to the choice of forum and/or jurisdiction. Such clauses are not unlawful by themselves. However, together with other terms of the contract, they may cause a significant imbalance in the rights and obligations between the parties within the meaning of Art. 4(2)(a) SMPA – see, Q3.a) above.
Q19. Can the parties opt for arbitration?
If yes, are there any rules and/or restrictions as regards the enforceability of arbitration clauses in distribution agreements?
If yes, what do these specific rules and/or restrictions entail?
For an arbitration agreement (clause) to be valid and enforceable, it must comply with the general rules set out in the Act on Arbitration. In particular, the arbitration agreement must be in writing and can only be concluded on the subject matter of the dispute, which is of a proprietary nature and on which the parties could reach an amicable settlement.
If an arbitration clause negotiated to the disadvantage of the supplier (possibly together with other terms of the contract) results in a breach of the SMPA, in particular in the form of a significant imbalance in the rights and obligations between a buyer with significant market power and a supplier relating to the purchase of food for resale and/or related services, the Czech Competition Authority will prohibit such an arbitration clause. For details, see, Q18, or Q3.a) above.
Q20. What is the statute of limitations applicable to claims regarding the performance of a distribution agreement?
The length of a limitation period is three years from the date on which the right could be asserted for the first time (general subjective limitation period). A right may be asserted for the first time once the entitled party became aware of the circumstances decisive for the start of the limitation period or when he/she should and could have learnt thereof (see, Art. 629(1) in conjunction with Art. 619 Civil Code).
Circumstances decisive for the commencement of a limitation period for a right to
- compensation for damage include knowledge of the damage and the party liable to provide the compensation for the damage (see, Art. 620(1) Civil Code);
- restitution of unjust enrichment includes knowledge of the occurrence of the unjust enrichment and of the party obliged to surrender it (see, Art. 621 Civil Code);
In the case of a right created because of a complete destruction or loss of a transported thing, the limitation period commences on the date the consignment was to be delivered to the recipient. However, if the transported thing was only damaged or if it was delivered late, the limitation period commences on the date on which the consignment was delivered (see, Art. 625 Civil Code).
A property right becomes time-barred no later than after ten years from the date on which it became due (general objective limitation period), unless a statute specifically provides a different limitation period (see, Art. 629(2) Civil Code).
Art. 636 and 638 Civil Code provide for special objective limitation periods for the right to compensation for damage or other harm, or restitution of unjust enrichment, respectively. These rights become time-barred no later than ten years after the date the damage or harm was incurred, or the unjust enrichment occurred. Where damage or harm has been caused, or unjust enrichment was acquired intentionally, the right to compensation becomes time-barred no later than fifteen years after the date on which the damage or harm, or the unjust enrichment, occurred.
Under Art. 639 Civil Code, if a debtor acknowledged his debt, the right becomes time-barred ten years after the date on which the debt was acknowledged. However, if the debtor specifies in the acknowledgement a period within which he will discharge his debt, the right becomes time-barred ten years after the last day of the period specified.
Under Art. 630 Civil Code, the parties may agree on a shorter or a longer limitation period commenced from the date on which the right could have been asserted for the first time than that provided for by the Civil Code, but with a minimum duration of one year and a maximum duration of fifteen years. A shorter limitation period in relation to a right arising from a wilful breach of obligation shall be disregarded.
The sector-specific regulation of relations between a buyer with significant market power and a supplier relating to the purchase of food for resale and related services may also be relevant in this respect. According to the interpretative opinion of the Czech Competition Authority (see, the link in Q3.a) above), a limitation period arrangement to the disadvantage of the supplier may (together with other terms of the contract) create a significant imbalance in the rights and obligations of the parties in violation of Art. 4(2)(a) SMPA – see, Q3.a) above.
Part 6: Additional comments
Compliance with EU competition law:
Czech competition law adheres to the principles established under EU competition law so that there are no specific deviations in the law or the case law to be reported.