Have you heard the term settlement contract or settlement agreement and would like to know what it means? Our article explains it.
Contract vs. agreement
In practice, we often come across the terms contract and agreement. Is there any difference between them?
These terms are often used interchangeably and in the same context. Lawyers, for example, sometimes call documents an agreement and sometimes a contract, but they mean the same act of concluding a contract between two or more contracting parties. Strictly according to the law, however, we should say that a contract is created by agreement.
An agreement is the consent of all contracting parties who decide to enter into an obligation with each other, and the contract is its physical record. An agreement is therefore the way a contract comes into being.
So how does this work with a settlement?
Settlement of an obligation
What is a settlement?
Put simply, a settlement is one of the ways an obligation ends. The parties use it when they want to clarify or specify certain provisions of an existing contract that are disputed between them. A settlement ends the original obligation and replaces it with a new obligation, which is the subject of the settlement.
An example of a settlement in practice: person A borrows 50,000 CZK (about 2,300 USD) from person B, due on 31 December. During the year, person A pays person B 25,000 CZK (about 1,100 USD) on the understanding that this amount goes towards the debt and that the rest will be paid at the end of the year. At the end of the year, however, person B demands the full amount, because they believed the money received from person A during the year was a gift, as the contract set an exact date for repaying the loan. Person A naturally disagrees, because they understood the exact date as the latest date for repaying the money. In the end, the parties agree on a settlement of the obligation in which they set the due date for the end of the year, but on the basis that person A has already repaid half of the obligation and therefore only owes 25,000 CZK (about 1,100 USD).
Settlement of an obligation is governed by the Civil Code (občanský zákoník) in Section 1903 et seq.
The subject of a settlement can be only some or all of the rights and obligations arising from the contract. However, these rights and obligations must be disputed. If they are not disputed and the parties still adjusted them between themselves, this would be a so-called novation.
Settlement agreement
If the parties already disagree about contract provisions that each of them interprets differently, they should settle these obligations as soon as possible. A settlement agreement can prevent later disputes, including court cases.
A settlement has these advantages:
- the main benefit is that rights are settled and all disputed points of the original obligation are clarified;
- the original obligation ends and is replaced by a new obligation with settled rights;
- signing a settlement contract starts the limitation period running again;
- a settlement agreement helps resolve disputes out of court and therefore saves you a great deal of time and money.
Settlement contract
A settlement contract records the settlement agreement in physical form, most often on paper. The terms themselves are not interchangeable, even though they are often used that way. Put simply, a settlement contract is the expression of the agreement.
Requirements of a settlement contract
The law only requires a written contract for obligations that were originally recorded in writing, if the contract concerns a right that is already time-barred, or if the law requires the written form for the act in question. However, it never hurts to conclude a written contract, so that all parties are certain that what they agreed on is valid.
The contract should include the following:
- identification details of the contracting parties: name or company name, registered office or home address, business ID number (IČO) or date of birth;
- information about the agreement concluded: above all, mention the purpose of the settlement and the date the original contract was concluded;
- the reason for drawing up the settlement contract: this should list all the disputed matters contained in the original contract;
- arrangement of rights and obligations: the actual definition of the newly agreed matters;
- final provisions: how the parties can change the contract, when it comes into effect and so on;
- the date and a handwritten signature at the end of the contract.
Even so, we recommend consulting a lawyer when drawing up the contract. A lawyer can save you further uncertainty and give you the best advice. You can find a list of lawyers on the website of the Czech Bar Association (Česká advokátní komora, ČAK).
Effect of a settlement on the security of an obligation
A settlement of an obligation does not affect the security of the original obligation. The security therefore does not end and also covers rights arising from the settlement agreement. In this case, however, only to the extent that it secured the original obligation. If the newly created relationship is to be secured in full, the consent of the person who provided the security is needed, or rather their accession to the settled obligation. This is because the new obligation may have different content from the original one. If you would like to learn more about securing an obligation with a lien, this article of ours is just what you need.
USD amounts are approximate, converted at the Czech National Bank rate of 21.83 CZK per USD on 27 October 2026.