A framework agreement helps you to regulate relationships for future contracts

What is a framework agreement?

In simple terms, we could say that a framework contract tells you the rules under which another specific contract will be concluded.

A framework agreement is a legal document that regulates the essential terms of cooperation between two or more entities. A framework agreement is often used in business relationships to set the ground rules for future specific contracts. Because individual subcontracts (called implementation or performance contracts) or purchase orders are subsequently concluded on the basis of a framework agreement without the parties having to renegotiate all the terms between themselves each time. The implementation contracts are then governed by these pre-established conditions, unless otherwise agreed in the specific contract.

A framework contract is not a separate type of contract defined by law, but is an unnamed contract governed by the general provisions of the Civil Code. As a result, the contracting parties have considerable freedom to regulate their mutual rights and obligations.

So what is the difference between an ordinary contract and a framework contract? While a standard contract binds both parties to immediate performance, a framework contract only defines the terms of future cooperation. In this case, concrete performance only occurs on the basis of purchase orders or implementing contracts.

Typical examples of the use of a framework contract

Framework contracts are often used in situations where the parties expect to jointly carry out a longer-term business relationship with recurring performance (= the same process will be repeated between the parties). They allow the parties to establish the general terms of cooperation in advance, which simplifies and speeds up the process of concluding specific contracts. This minimises the risk of misunderstandings and disputes over the terms of individual performance

The framework contract is an absolutely common instrument in many sectors. Here, then, are some examples.

• Trade and manufacturing: a manufacturing company enters into a framework contract with a material supplier and then orders specific quantities each month according to actual needs.
• IT services: a company that provides software support enters into a framework agreement with a client, who orders service interventions from the company on a regular basis as needed.
• Construction projects: a construction firm may enter into a framework agreement with subcontractors for certain types of work. When a specific project is undertaken, implementation contracts are then entered into on the basis of the framework agreement.
• Financial sector: a bank may enter into a framework agreement with a firm to arrange individual loans as required.
• Public administration and public procurement: Public institutions can enter into framework agreements with suppliers for recurring services, so for example for regular supplies of office supplies or for infrastructure maintenance.

What are the advantages and disadvantages of a framework agreement?

One of the biggest advantages for which business partners use framework agreements is the saving of time and administration. They do not have to negotiate all the terms and conditions for each individual order. Furthermore, it is the stability of the contractual relationship, because a framework agreement ensures long-term cooperation. In addition, it is flexible, so it allows you to adapt your deliveries or services to current needs.

Unlike a traditional contract, a framework agreement does not usually impose a direct performance obligation. Its purpose is to define the terms of future cooperation. If the parties set the wrong conditions, they may be disadvantageous for one of them. Also, if not clearly and precisely formulated, it can easily lead to litigation. That is why we recommend that you have a lawyer prepare a framework agreement.

How does a framework agreement differ from the terms and conditions?

You may have thought that what we have been describing all along is actually quite similar to commercial terms. However, this is not quite the case, as there is a distinction to be made between a framework agreement and commercial terms.

While a framework agreement is a separate contract between the parties, commercial terms are unilaterally prepared terms that become part of the contract by reference in the main contract document. A framework contract is therefore a bilateral legal act, whereas commercial terms and conditions may be unilaterally prepared by one of the parties

What does a framework contract contain?

It is always advisable to have a framework agreement drafted by a specialist who knows what needs to be included in the framework agreement and what cases need to be addressed. If you would like to draw it up yourself or check it, the following information should definitely not be missing:

• Identification of the contracting parties: precise identification of all the parties involved.
• Subject matter of the contract: A general description of the activity or supplies covered by the contract.
• Pricing terms: Fixed prices, price bands, options for price changes.
• Payment terms: Due date of invoices, method of payment, advance payments.
• Delivery terms: Method of delivery, terms, acceptance of goods or services.
• Rights and obligations of the parties: Obligations of both parties.
• Method of concluding individual contracts or orders: Conditions for the performance of specific supplies or services.
• Duration and termination of the contract: Notice periods, conditions for termination.
• Contractual penalties and sanctions: For delay in performance or breach of contract.
• Dispute resolution: Agreement on how you will resolve any disputes between the parties.
• Other provisions: For example, provisions on confidentiality, penalties for breach of contract, or the terms for amending the contract.

You should always word the framework agreement clearly and understandably to avoid possible disputes in the future. If you need to draw up a framework agreement with one of your business partners, just contact us and we will be happy to help you draw it up.

The Supreme Court’s Position on the Framework Agreement

In practice, there have been several important cases concerning framework contracts. As can be seen from the individual judgments, framework contracts do not create an obligation relationship per se, but always depend on the other contracts that arise from the framework contract.

The Supreme Court of the Czech Republic has repeatedly addressed the nature and purpose of framework agreements in its decisions. In one of its judgments, it emphasised that a framework contract does not establish an obligation relationship per se, but sets out the basic rules for future implementation contracts. Those implementation contracts then create specific rights and obligations for the parties.

Furthermore, the Supreme Court has stated that the importance of a framework contract is that the parties envisaging a longer-term commercial relationship lay down, by means of the framework contract, the basic rules to which all specific implementation contracts concluded on the basis of the framework contract will be subject, unless otherwise agreed in a specific contract.

Another case that reached the Supreme Court concerned the question of whether a claim arising under a framework agreement is enforceable. The Court held that a framework agreement itself does not create an enforceable claim unless a specific implementation contract has been concluded on the basis of the agreement.

How can a framework agreement be terminated?

A framework agreement is always concluded for either a fixed or an indefinite period. It can be terminated by notice, as the parties can agree a notice period (for example 3 months) in the contract. But it can also end by rescission, because if there is a breach of the terms, one of the parties can rescind the contract with immediate effect. Most often, however, a framework contract ends after the expiry of the agreed period, as it is usually concluded for a certain period, after which it automatically expires. Of course, it can also be terminated by mutual agreement of both parties.

A framework contract is therefore an effective tool for setting up long-term business relationships with recurring performance. Although it is not explicitly regulated as a separate contract type in the Czech legal system, its use is widespread and supported by case law. A properly drafted framework agreement will help you to make a significant contribution to the efficiency and predictability of business relations.

Summary

A framework agreement sets out the basic terms and conditions for future contracts between the parties. It does not create an obligation to perform per se, but it facilitates and expedites repeat cooperation by eliminating the need to renegotiate key terms. It is common in business, IT, construction and the public sector. Its main advantages are stability, flexibility and reduced administrative burden, but if set up badly it can lead to ambiguity and disputes.