When One Contract Falls, Others May Follow

Czech Supreme Court Clarifies the Risks of Interdependent Agreements

Complex transactions rarely rely on a single contract. Share acquisitions, joint ventures and financing arrangements commonly involve several documents signed as one package, such as a share purchase agreement, shareholders’ agreement, and security documents. A recent decision of the Czech Supreme Court shows that terminating one agreement may also affect the others, even where some of them have already been performed.

A Dispute Over a Transaction Package

The case concerned a transaction involving a share purchase agreement, a shareholders’ agreement and an option agreement. The buyer acquired shares for more than CZK 73 million and paid the purchase price. The option agreement was intended to allow the buyer, subject to agreed conditions, to sell the shares back for the same amount.

A dispute later arose over the exercise of the option and the required corporate approvals. The buyer also withdrew from the shareholders’ agreement and argued that the share purchase agreement was dependent on it. According to the buyer, withdrawal from the shareholders’ agreement therefore also terminated the share purchase agreement, creating a claim for repayment of the original purchase price.

The appellate court rejected this argument. It considered the share purchase agreement to have been fully “consumed” once the shares had been transferred and the purchase price paid. In its view, an agreement that had already been performed could no longer be affected by a later withdrawal from another agreement.

The Supreme Court’s Approach

The Supreme Court disagreed with this reasoning. Under Section 1727 of the Czech Civil Code, contracts concluded during the same transaction may be legally interdependent where their nature or purpose indicates that the parties intended them to operate together. If one such contract terminates without the relevant creditor being satisfied, the termination may produce comparable effects in relation to the other dependent contracts.

The fact that the principal obligations under one agreement have already been fulfilled does not, by itself, prevent this result. The Supreme Court emphasized that Czech law recognizes situations in which withdrawal remains possible even after the main contractual performance has taken place. Treating performance as an automatic barrier would therefore be inconsistent with both the wording and purpose of the statutory rule.

However, the Supreme Court did not conclude that the agreements in this particular case were necessarily interdependent or that the purchase price had to be returned. Instead, it overturned the appellate judgment and instructed the appellate court to examine the transaction properly. This includes interpreting the agreements, considering their commercial purpose and determining whether the parties would have entered into each agreement independently of the others.

What This Means for Transactions

The decision is particularly relevant for transactions documented by several interconnected agreements. Merely placing contracts in separate documents does not ensure that each will survive independently.

To avoid unpleasant surprises, parties to a transaction have to consider these aspects beforehand. Transaction documents should therefore state clearly:

• whether individual agreements are legally independent or form one interconnected package;

• which agreements are affected if another agreement is terminated;

• whether completed transfers and payments may be unwound;

• which provisions survive termination; and

• whether the statutory rules on dependent contracts are modified or excluded.

The judgment is not a general rule that every failed transaction document brings down the entire contractual structure. Economic connection alone is insufficient. Nevertheless, where agreements serve a common purpose and would not make commercial sense in isolation, termination risk may extend across the entire transaction package. Careful drafting can prevent that result from being determined only after years of litigation.

By Mgr. Radek Werich LL.M.

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