Distribution law in the Czech Republic

Agency Agreements

Czech law on Agency Agreements is set out in the Czech Civil Code, which, in section 2483 and following, in particular implements the requirements of EU law on Commercial Agents.

Formation of Agency Agreement

Are there any formal requirements upon concluding an Agency Agreement?

Under Czech law, an Agency Agreement must be executed in writing. There are no special formalities to take into account.

The Principal undertakes to pay the Commercial Agent a commission. The provisions of the Czech Civil Code on Commercial Agency do not apply if the parties stipulate that the Commercial Agent receives no remuneration for its activities.

Are there any specific information obligations for concluding Agency Agreements?

Statutory law does not provide for any specific information obligations regarding Agency Agreements.

Under Czech law, a general obligation exists to correctly answer questions and to provide certain crucial information without special request prior to entering into an agreement (doctrine of culpa in contrahendo).

Are there any specific pitfalls which need to be borne in mind when concluding Agency Agreements?

Parties may stipulate a non-compete clause. However, if the clause is excessive, the Agent may seek protection of a court which may decide on limitation of the non-compete arrangement in the Agent's favor.

Scope of Commercial Agency

Are the parties free to agree on the scope of the Commercial Agency?

The Principal and the Commercial Agent are free to agree on the scope of the Commercial Agency. In particular, the parties may decide on instructing the Commercial Agent (1) worldwide or for a certain geographic region, (2) for all or only for certain products of Principal, (3) for all or only certain customers of the Principal.

Czech statutory law provides for an option to enter into a non-compete obligation (exclusive Commercial Agency). This means that the Principal is not entitled to use another Commercial Agent in the relevant geographical area or for the designated group of persons; further the Commercial Agent is, within the same scope, not entitled to exercise Commercial Agency for other persons or conclude business transactions on its own account or the account of another person (for a post-contractual non-compete obligation, see below).

Can the Commercial Agent bind the Principal?

The Agency Agreement can authorise the Agent to negotiate and conclude agreements in the name and for the account of the Principal.

What are the primary obligations of the Commercial Agent and the Principal?

As a general principle, the Commercial Agent has the following primary obligations based on statutory law:

  • to acquire business for the Principal;
  • to provide the Principal with the opportunity to enter into contracts with customers or even conclude such contracts itself in the name of the Principal;
  • to provide the Principal with relevant information regarding the market and (potential) customers;
  • to diligently safeguard the interests of the Principal in all business respects; and
  • to maintain confidentiality.

As a general principle, the Principal has the following primary obligations based on statutory law:

  • to support the Commercial Agent with respect to the Principal's business (for example in providing brochures, price lists etc.); and
  • to pay commission to the Commercial Agent (see below).

We strongly recommend detailing in the Agency Agreement the obligations of the Commercial Agent and the Principal. Although statutory rules in this regard exist, it is important to avoid a legal situation which the parties did not desire.

How is the Commercial Agent paid?

Generally, the Commercial Agent is entitled to a commission for business transactions between the Principal and customers within the scope of the Commercial Agent's instruction.

During the contractual term, in the absence of a contractual agreement to the contrary, the Commercial Agent can claim commission if:

  • the business transaction has been concluded as a result of its activities;
  • the business transaction has been concluded with a third person acquired by the Commercial Agent for the purpose of executing such a business transaction before the effective date of the Agency Agreement; or
  • in the case of exclusive Commercial Agency (see above), a Commercial Agent also has the right to a commission for business transactions executed with a third person coming from a geographical area, or from a group of persons, which are not covered by the exclusive Commercial Agency arrangement.

For business transactions which are concluded after the contractual term has ended, in the absence of a contractual agreement to the contrary, the Commercial Agent can claim commission if:

  • the business transaction was executed mainly as a result of its activities within a reasonable period after the end of the Agency Agreement; or
  • the customer's offer to enter into a contract with the Principal was received by the Commercial Agent or the Principal prior to the Agency Agreement's end.

The statutory rules on the Commercial Agent's remuneration are not mandatory. We recommend expressly stipulating in the Agency Agreement the precise way the Commercial Agent's commission will be calculated in order to avoid statutory law leading to a result which the Principal and/or the Commercial Agent did not desire.

Term and Termination of Agency Agreement

Term of the Agency Agreement

If the period of Commercial Agency has not been stipulated, and if it does not even follow from the purpose of the Agency Agreement, the Commercial Agency is conclusively presumed to have been stipulated for an indefinite term.

If a Commercial Agency has been stipulated for a fixed term and if the parties adhere to the Agency Agreement even after the expiry of the stipulated period, Commercial Agency is considered to have been stipulated for an indefinite period.

Termination of the Agency Agreement

Unless stipulated otherwise, if the Agency Agreement has been entered into for a fixed term, as a general principle, the Agency Agreement may not be terminated unless it binds a party for more than 10 years without a good cause. A court shall also extinguish an obligation if the circumstances on which the parties relied when the obligation was created have materially changed to the extent that the obligor (regardless whether the Principal or the Commercial Agent) cannot be reasonably required to be further bound by the Agency Agreement. During a fixed contractual term, no termination for convenience is admissible. If a party fundamentally breaches the Agency Agreement, the other party may withdraw from the contract without undue delay. During a fixed contractual term, no termination for convenience is admissible.

If the Agency Agreement has been entered into for an indefinite term, it may be terminated extraordinarily for good cause and for convenience by complying with certain minimum notice periods. Czech statutory law sets out the following minimum notice periods (depending on the actual duration of the Agency Agreement in question):

  • during the first contractual year, a minimum notice period of one month with effect to the end of the month must be complied with;
  • during the second contractual year, a minimum notice period of two months with effect to the end of the month must be complied with; and
  • during the third and further contractual years, a minimum notice period of three months with effect to the end of the month must be complied with.

If the parties stipulate a longer notice period, the period binding upon the Principal may not be shorter than the period which the Commercial Agent must observe.

Czech statutory law does not provide for a written form requirement with respect to the termination notice. For evidentiary purposes, we recommend setting out such requirement in the Agency Agreement and in any case terminating the Agency Agreement in writing with confirmation of receipt.

Special remuneration as the main consequence of the Agency Agreement's termination

The main consequence of the Agency's Agreements termination under Czech law is that – unless there are certain precluding circumstances – it triggers the Commercial Agent's entitlement to financial compensation in the form of a special remuneration.

The Commercial Agent is, upon the Agency Agreement's end, entitled to a special remuneration, if:

  • during the contractual term, the Commercial Agent has acquired business with new customers or significantly increased business with existing customers of the Principal and the Principal continues to derive substantial benefits from such business; and
  • payment of indemnity is equitable having regard to all the circumstances of the individual case and, in particular, the commission lost by the Commercial Agent.

The amount of the Commercial Agent's special remuneration is capped: it may not exceed the Commercial Agent's annual remuneration calculated from an annual average of the remuneration gained by the Commercial Agent over the previous five years. Where the Commercial Agency lasted less than five years, the amount of the special remuneration is calculated from the average of the remuneration for its entire duration; where it lasted less than a year, it may not exceed the sum of all commissions paid throughout its entire duration.

The special remuneration is precluded, if:

  • the Agency Agreement was terminated by the Principal for good cause which was attributable to the Commercial Agent;
  • the Agency Agreement was terminated by the Commercial Agent (unless the termination is justified by circumstances attributable to the Principal or the continuation of the Agency is unreasonable to the Commercial Agent due to its age or an illness);
  • the Commercial Agent, based on an agreement with the Principal, transfers the rights and duties arising from the Commercial Agency to a third person; or
  • The special remuneration claim was not invoked as against the Principal at the latest one year from the Agency Agreement's end.
Other consequences of the Agency Agreement's termination

The parties may stipulate that after the extinction of the Commercial Agency, the Commercial Agent may not, in a designated geographical area or with respect to a designated group of persons in this geographical area, pursue, on its own account or the account of another, activities of a competitive nature in relation to the Principal's business, including, but not limited to, the activities which he performed for the Principal under the Commercial Agency. A contradicting non-compete clause or one which is stipulated for more than two years from the extinction of the representation is invalid. If a non-compete clause limits a Commercial Agent more than required by the necessary level of protection of the Principal, a court may restrict the non-compete clause.

Any claim arising from an Agency Agreement – except for the special remuneration claim (above) – is subject to a three-year limitation period, starting from the date on which the right could be asserted for the first time provided that the creditor (e.g. the Commercial Agent) gained knowledge (or did not gain knowledge due to its gross negligence) of the debtor and the circumstances creating the obligation. In absence of such knowledge, there is a maximum limitation period of 10 years from the date on which the claim arose.

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Distribution Agreements

There are no specific statutory rules on Distributors and Distribution Agreements and general provisions of the Czech Civil Code shall thus apply.

Formation of Distribution Agreement

Are there any formal requirements for concluding Distribution Agreements?

A Distribution Agreement can be entered into both verbally or in writing. There are no distinct formalities. For evidentiary purposes, we recommend concluding the Distribution Agreement in writing.

Are there any specific information obligations on concluding Distribution Agreements?

The law does not provide for any specific information obligations.

Czech law generally requires fair conduct and providing certain crucial information about the subject matter of the contract (doctrine of culpa in contrahendo).

Are there any specific pitfalls which need to be borne in mind when concluding Distribution Agreements?

Generally speaking, the parties must avoid any restraints of competition. Applicable decisions of the ECJ and Czech Competition Office provide for a number of rules and restrictions which should be carefully observed.

Scope of Distributor's instruction

Are the parties free to agree on the scope of the Distribution Agreement?

There are statutory limits on the Principal's and the Distributor's freedom to agree on the scope of the Distribution Agreement (mainly based on EU Competition law).

In particular when it comes to limiting the geographic region in which the Distributor may (or may not) sell the products and the customers to which it may (or may not) sell them, the EU regulation on vertical restraints (Commission Regulation No 330/2010) plays a significant role: such limitations are admissible only under specific requirements which need to be assessed in each individual case.

Non-compete obligations may be agreed. However, as a general rule based on EU Competition law and Czech Civil Code, only for five years.

The Principal is generally not allowed to influence the Distributor's resale price of the products.

What are the primary obligations of the Distributor and the Principal?

As a general principle, it is assumed that the Distributor has the following primary obligations:

  • to distribute the products;
  • to provide the Principal with relevant information regarding the market, (potential) customers and requirements concerning the products;
  • to diligently safeguard the interests of the Principal in all business respects; and
  • to maintain confidentiality.

As a general principle, it is assumed that the Principal has the following primary obligations:

  • to apply reasonable efforts to deliver all products ordered by Distributor; and
  • to support the Distributor with respect to the Principal's business (for example in providing brochures, etc.).

We strongly recommend setting out in the Distribution Agreement the obligations of the Distributor and the Principal. As no specific statutory law on Distributors exists, this is important to avoid disadvantages.

How is the Distributor paid?

As a general principle, the Distributor is not entitled to a specific remuneration for its distribution activities. The remuneration of the Distributor consists in the profit margin it generates in purchasing the Principal's product (usually with a rebate) and selling them to its customers at a higher price. However, the parties are open to follow the principle of freedom of contract and agree on additional remunerations such as minimum monthly payments.

Term and Termination of Distribution Agreement

Term of the Distribution Agreement

There is no statutory law on the term of Distribution Agreements. The parties are generally free to set out the parameters of the contractual term, for example in agreeing on a fixed term or an indefinite term or a combination of both.

If the parties agree on a fixed term and, after the expiry of the fixed term, continue to perform the Distribution Agreement, the Distribution Agreement is considered to have been tacitly renewed for an indefinite term.

Termination of the Distribution Agreement

Unless stipulated otherwise by the parties, if the Distribution Agreement has been entered into for a fixed term, as a general principle, the Distribution Agreement may not be terminated unless it binds a party for more than 10 years without a good cause. If a party fundamentally breaches the Distribution Agreement, the other party may withdraw from the Distribution Agreement without undue delay.

If the Distribution Agreement has been entered into for an indefinite term, it may, unless stipulated otherwise by the parties, be terminated by the end of a calendar quarter by at least three months' notice of termination. If a party fundamentally breaches the Distribution Agreement, the other party may withdraw from the Distribution Agreement without undue delay.

Czech statutory law does not provide for a written form requirement with respect to the termination notice. For evidentiary purposes, we recommend setting out such requirement in the Distribution Agreement and in any case terminating the Distribution Agreement in writing with confirmation of receipt.

Special remuneration as the main consequence of the Distribution's termination

There is no statutory right to special remuneration - as is the case with Commercial Agency (above).

Contrary to practice in some other jurisdiction (for instance in Germany), Czech courts have followed the decision of the ECJ in case C-85/03, Mavrona, ruling that Council Directive No. 86/653/EEC does not apply to Commercial Agency, not even analogously.

Other consequences of the Distribution Agreement's termination

The parties may stipulate that after expiration of the Distribution Agreement, the Distributor may not, in a designated geographical area or with respect to a designated group of persons in this geographical area, pursue, on its own account or the account of another, activities of a competitive nature in relation to the Principal's business, including, but not limited to, the activities which he performed for the Principal under the Distribution Agreement. A contradicting non-compete clause is disregarded. A non-compete clause stipulated for an indefinite period or for a period longer than five years is prohibited; if the prohibition is breached, the non-compete clause is conclusively presumed to have been negotiated for five years.

If a non-compete clause limits a Distributor more than required by the necessary level of protection of the Principal, a court may restrict, cancel or declare invalid the non-compete clause.

Any claim arising from a Distribution Agreement is subject to a three-year limitation period starting from the date on which the right could be asserted for the first time provided that the creditor gained knowledge (or did not gain knowledge due to its gross negligence) of the debtor and the circumstances creating the obligation. In absence of such knowledge, there is a maximum limitation period of 10 years from the date on which the claim arose.

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Portrait ofTomáš Matĕjovský
Tomáš Matĕjovský
Partner
Prague
Portrait ofPetr Beneš
Petr Beneš
Senior Associate
Prague