Under Czech Supreme Court judgment File No. 23 Cdo 3894/2015 handed down on June 7, 2017, a contractual penalty cannot be based on a breach of contract combined with the subsequent exercise of contractual withdrawal rights. Such an arrangement would belie the legal definition of contractual penalty under Section 544 of the Civil Code, i.e. as a sanction for a breach of duty. Such a requirement cannot be valid. Contractual penalties must be strictly tied to a breach of contract and not to any ensuing withdrawal from the contract, which is the exercise of a right.
