Hidden between the lines of the Amendments to the Commercial Code, which will become effective from 1 January 2012, is one of the most important changes: the possibility to agree on limitation of liability for damages in case of breach of a contract.

The Czech Parliament has approved an amendment of the Czech Commercial Code ("Commercial Code") which will remove statutory prohibition of contractual limitation of liability relating to claims on compensation of damage prior to occurrence of the damage.

Under the new wording of the amended part of the Commercial Code it will be possible – in relationships governed by the Commercial Code – to agree on a waiver or limitation of liability for damages also prior to the occurrence of the damage, i.e. before an obligation from which damage may arise is breached. This would not, however, apply to any breach or damage caused intentionally.

The amendment reflects long-standing discussions about the possibility to contractually limit or even exclude liability. Up to now, neither Czech case law nor Czech jurisprudence has ever provided a consistent and clear answer on how to deal with these matters of law. Due to contradictory decisions of the Czech Supreme Court regarding this issue, it has been uncertain whether the parties could agree on limitation of one party's liability for damage incurred to the other party by or in connection with the performance of their duties under a certain contract. By limiting the potential claim to compensate damage the contractual parties always put themselves at the risk of invalidity of such provision in their contract. Such (in fact) unlimited liability represented serious uncertainty for doing business in the Czech Republic and was capable of complicating major transactions.

The Amendments to the Commercial Code will bring the Czech legal system closer to European legal standards and will increase flexibility for both foreign and Czech entrepreneurs. The extent to which it will be possible to limit the liability in future will, however, have to be carefully assessed in each individual case. Parties to commercial contracts governed by Czech law will have to be cautious while negotiating limits of their liability and have to carefully assess the potential impacts on their businesses in case such damage indeed occurs in the future. It will be also important to see how Czech courts will be assessing the limitations of liability, in particular in cases where an agreement would provide for absolute exclusion of potential future liability for damage of one of the parties to the contract.

Law: Act no. 513/1991 Coll, Commercial Code.

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The original publication date for this article was 06/12/2011.