Distribution law in the Czech Republic

Czech law on Agency Agreements is set out in Act No. 89/2012 Coll., the Civil Code, as amended (“Czech Civil Code”), which, in Section 2483 et seq., implements the requirements of EU law on Commercial Agents.

Under Czech law, an Agency Agreement must be executed in writing.

Under the Agency Agreement, 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.

Czech Civil Code does not provide for any specific information obligations regarding Agency Agreements.

Parties may stipulate a post-contractual non-compete clause. The non-compete clause may stipulate the relevant geographical area where the Commercial Agent cannot compete or group of customers in a geographical area towards which the Commercial Agent cannot act. The non-compete clause may be concluded for the duration of up to 2 years after the termination of the Agency Agreement. Non-compete clause not complying with these limitations is invalid.

The Commercial Agent may also seek protection of a court in case the non-compete clause is too excessive. The court may decide on limitation of the non-compete clause in the Commercial Agent's favor.

The Principal and the Commercial Agent are free to agree on the scope of the Commercial Agency. In particular, the parties may specify: (1) whether the Commercial Agent will operate globally or within a specific geographic region, (2) whether the Commercial Agent will represent all or only certain products of the Principal, and (3) whether the Commercial Agent will target all or only specific customers of the Principal.

Czech Civil Code provides for an option to establish exclusive or non-exclusive Commercial Agency. Exclusive Commercial Agency means that the Principal cannot appoint another Commercial Agent in the relevant geographical area or for the designated group of customers. Further, the Commercial Agent is, within the same scope, not entitled to exercise Commercial Agency for other parties or conclude business transactions on its own account or the account of others.

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

The Commercial Agent has primarily the following obligations:

• to acquire business for the Principal;
• to provide the Principal with the opportunity to enter into contracts with customers or even conclude such contracts on behalf 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.

The Principal has primarily the following obligations:

• to provide the Commercial Agent with the information necessary to fulfill its duties;
• 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 recommend specifying in the Agency Agreement the obligations of both the Commercial Agent and the Principal. Although statutory rules in this regard do exist, specifying these obligations in the Agency Agreement helps to prevent any unintended legal situations that may arise between the parties.

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

During the contractual term, in the absence of an agreement to the contrary, the Commercial Agent can request 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 geographical areas, 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 an 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 and may be modified by the parties. We recommend expressly stipulating in the Agency Agreement the precise method 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.

If the duration of the Commercial Agency has not been stipulated, nor does it follow from the purpose of the Agency Agreement, the Commercial Agency is deemed to have been stipulated for an indefinite term.

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

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 of whether the Principal or the Commercial Agent) cannot be reasonably required to be further bound by the Agency Agreement. In addition, if a party fundamentally breaches the Agency Agreement, the other party may withdraw from the Agency Agreement without undue delay.

If the Agency Agreement has been entered into for an indefinite term, it may be terminated by notice with minimum notice periods. Czech Civil Code 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.

If an exclusive Commercial Agency was agreed:

• each party has the right to terminate the Agency Agreement if the volume of business in the last twelve months has not reached the volume specified in the Agency Agreement; if no volume of business has been agreed upon, the volume appropriate to the sales possibilities shall prevail.
• the Commercial Agent may terminate the Agency Agreement without notice if the Principal uses another Commercial Agent.
• the Principal may terminate the Agency Agreement without notice if the Commercial Agent carries out the same activity for other persons.

In addition to the above, if a party fundamentally breaches the Agency Agreement, the other party may withdraw from the Agency Agreement without undue delay.

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 the special remuneration is equitable having regard to all the circumstances of the individual case, and particularly 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 received 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 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 against the Principal at the latest one year from the Agency Agreement's end.

Any claim arising from an Agency Agreement – except for the special remuneration claim (see 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 the 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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There are no specific statutory rules on Distribution Agreements and general provisions of the Czech Civil Code apply.

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

Czech Civil Code does not provide for any specific information obligations.

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

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). The EU Vertical Block Exemption Regulation (Commission Regulation (EU) 2022/720) plays a significant role. In particular:

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

• 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 products is admissible only under specific conditions which need to be assessed in each individual case;
• Preventing the effective use of the internet by the Distributor is prohibited.

Non-compete obligations may be agreed upon. However, as a general rule under EU Competition law and the Czech Civil Code, their duration may not exceed five years.

Usually, 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.

Usually, the Principal has the following primary obligations:

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

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

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 contractual autonomy and agree on additional remunerations such as minimum monthly payments.

There is no statutory regulation on the term of Distribution Agreements. The parties are free to agree on definite or indefinite term.

Unless stipulated otherwise by the parties, if the Distribution Agreement has been entered into for a definite 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.

There is no statutory regulation of special remuneration in Distribution Agreements.

Contrary to the 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.

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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In 2022, the Czech Supreme Court adjudicated that a dispute regarding the disclosure of documents between the Principal and the Commercial Agent is a “property dispute”. Therefore, if the Agency Agreement provides for an arbitration clause, the dispute must be resolved through arbitration proceedings (see judgment of the Supreme Court dated 29 March 2022, File No. 23 Cdo 645/2022).

In 2023, the Czech Supreme Court outlined a three-phase process for determining the special remuneration for a Commercial Agent upon termination of the Agency Agreement. In the first phase, a compensation is calculated based on the benefits the Principal will continue to receive from new or expanded business, with the last 12 months' commission used as a basis for projecting future earnings of the Commercial Agent. In the second phase, the compensation is adjusted for fairness, considering factors like the Commercial Agent’s commission structure, other Principals, non-compete clauses and any losses from unearned commissions. In the third phase, the final compensation amount is capped based on the average annual commission earned over the past five years or the entire duration of the Agency Agreement if shorter (see judgment of the Supreme Court dated 8 March 2023, File No. 23 Cdo 2374/2021).

In 2023, the Czech Supreme Court clarified that the Commercial Agent’s “lost commissions” in regard to calculating the special remuneration upon termination of the Agency Agreement are not commissions from transactions that have already been completed, to which the Commercial Agent is entitled under the Agency Agreement. Rather, they are commissions that the Commercial Agent would have received if the Agency Agreement had hypothetically continued, for transactions concluded after the termination of the Agency Agreement with customers that the Commercial Agent acquired for the principal, as well as with existing customers with whom the Commercial Agent developed significant business (see judgment of the Supreme Court dated 13 September 2023, File No. 31 Cdo 1774/2023).