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Czech Republic: Limitation of Damages Explicitly Possible since 1 January 2012
After years of uncertainty, in 2011 the Czech Republic finally passed an amendment to the Commercial Code explicitly allowing for the limitation of damages in agreements under Commercial Code between entrepreneurs and companies.
In the Czech Republic, the Commercial Code regulates, among other things, agreements between entrepreneurs and companies. In daily business, the limitation of damages is used worldwide in many types of agreements, such as SPAs, distribution agreements, and sale of goods agreements. It allows the contracting parties to limit exposure to damages in agreements.
Until the amendment, it was questionable whether a limitation of damages could be agreed in contracts under the Commercial Code. The code prohibited the waiving of a damages claim before a breach of the obligation from which damages may arise. It did not explicitly allow or prohibit the limitation of damages before a breach of the obligation from which the damages arose. Case law of the Czech Supreme Court both allowed and prohibited this limitation. In the worst case, the court would declare provisions limiting damages null and void and the losing party would have to pay the full damages without any limit. Legal advisors were thus cautious when agreeing on limitations of damages under Czech law. Agreements often included a contractual penalty instead of a limitation of damages.
Since 1 January 2012, the amended Commercial Code explicitly states that, in relations regulated by the Commercial Code, the right to compensation of damages may be waived or limited by agreement, even before a breach of the obligation from which damages may arise. However, the right to compensation f or intentionally caused damages may not be waived or limited before a breach of an obligation from which such damages may arise.
So the Commercial Code allows only unintentionally caused damages to be limited or waived. A limitation of damages is allowed only in agreements concluded after 1 January 2012.
When concluding new agreements under the Commercial Code, it is therefore recommended to assess whether a limitation of damages may be useful. For agreements concluded before 31 December 2011 that include a limitation of damages or where exposure to damages is high or highly possible, we recommend concluding an amendment or new agreements in which the limitation of damages is repeated. This would limit the risk of a clause limiting damages being declared null and void, and the negative consequences from such a decision.
"Since 1 January 2012, the Czech Commercial Code explicitly allows for the limiting of unintentional damages in agreements under Commercial Code between entrepreneurs and companies, even before a breach of the obligation from which damage may arise. This possibility was questionable in the past. It is recommended that this new possibility be assessed when concluding new agreements. Old agreements with high damages exposure and high risk should also be reviewed."