In a recent decision (7 Cmo 21/2024), the High Court in Prague delivered a landmark ruling on the invalidity of contractual representations and warranties in a share transfer agreement, with significant implications for M&A practice across the CEE region. The case revolved around whether certain boilerplate declarations of the transferor about the status of the company (target), not linked to clearly defined contractual obligations, could give rise to a contractual penalty.

The claimant sought payment of CZK 400,000 (approx. EUR 16,000) as a contractual penalty for the alleged breach of representations concerning the target company’s legal and financial standing. These included broad statements such as the company not having any outstanding loans or legal impediments, and its compliance with Czech employment laws. The representations were contractually linked to specific penalties in case of breach.

The defendant (seller) disputed both the factual basis and the legal enforceability of these declarations. The Prague High Court ultimately sided with the defendant, ruling that such statements were too vague and insufficiently defined to constitute legally binding contractual obligations. Specifically, the court held that:

This ruling underscores the importance of precision and legal certainty in drafting representations and warranties. Courts will not accept and enforce penalties for breach of vague or overly generic statements, especially when they are detached from measurable or verifiable obligations.

Relevance for Slovak Practice

While the case was adjudicated under Czech law, the decision is of high relevance for Slovak legal practitioners. Slovak courts frequently draw inspiration from Czech jurisprudence, particularly in civil and commercial matters where the legal frameworks remain conceptually aligned post-recodification.

In Slovak M&A transactions, it is common to see similar sweeping representations mirrored from foreign templates. This decision serves as a warning: absent a clear connection between a representation and a defined legal duty or factual basis, such clauses may be deemed void or unenforceable. Slovak law similarly recognises the concept of contractual penalty (§ 544 et seq. of the Slovak Civil Code) but, like Czech law, requires a breach of a concrete obligation for enforcement.

As transactional structures become more complex and cross-border in nature, legal certainty in documentation becomes indispensable. Parties must carefully tailor their representations and remedies, ensuring that any penalties are enforceable under Slovak law.

Conclusion

This decision by the Prague High Court adds to a growing body of case law stressing the need for clarity and specificity in transaction documents. For clients planning acquisitions or divestments in Slovakia, this is an important reminder to revisit boilerplate language and seek local legal guidance.

At G. Lehnert, our corporate and transactional team has deep experience advising international and domestic clients on acquisitions across sectors. If your transaction involves Slovak assets or entities, we are ready to assist in ensuring your documents are not only commercially sound but legally enforceable.

Contact us to discuss how this decision may impact your next deal in Slovakia.

Lehnert s.r.o., Bratislava, Slovakia

Norbert Smaho

[email protected]