Limitation of liability in commercial contracts finally permissible under Czech law (February 2012)

Limitation of liability for damage that may be caused under a particular contract is a key element of many contractual relationships and a matter of frequent negotiations between contracting parties.

For many years, there have been endless discussions in the professional legal community whether or not a limitation of liability under commercial contracts is permissible under Czech law, and if permissible, to what extent. This created significant uncertainties for businesses when assessing financial risks of a contract, often to the extent that they were discouraged from entering into certain contractual relationships.

The doubts whether or not a limitation of liability is permissible stemmed from a provision of the Czech Commercial Code expressly forbidding the absolute waiver of the right to claim damages prior to a breach of the contract. This provision remained, however, silent about whether or not a reasonable restriction of liability is permissible. The jurisprudence of Czech courts was inconclusive and a long-awaited ruling of the Supreme Court that would once for all give an unambiguous and satisfactory answer to this particular legal issue has not been rendered.

As from 1 January 2012, the Czech Commercial Code explicitly introduces the possibility to waive or to restrict the right to claim damages in commercial contract, and such waiver can be validly made even before the breach of the relevant obligations.

The contractual freedom, however, is not boundless as it does not cover cases where the damage was caused deliberately. Furthermore, one needs to bear in mind that in specific situations the courts may disregard such waiver as invalid, if, for example, such waiver were found to be in contradiction to the principle of fair business conduct.

The new statutory provision is applauded by the legal and business community and will make contractual relationships more predictable and efficient.