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01 February 2016
czech republic

Czech Republic: Financial Guarantee as a New Type of Corporate Guarantee

The new Civil Code has introduced a financial guarantee as a new type of guarantee similar to a bank guarantee, which may be provided by any natural or legal person.


Act No. 892012 Coll., of the Czech Civil Code, effective as of 1 January 2014 (“Civil Code”), has introduced a financial guarantee as a new type of guarantee. The concept and operation of the financial guarantee is similar to that of the bank guarantee, except that it may be granted by any natural or legal person.

Basic Concept

A financial guarantee is a non-accessory written undertaking, independent of the continuing validity of the secured obligation. The guarantor is obliged to pay to the lender a certain amount of money if the borrower fails to discharge the secured obligation, or if other conditions specified under the financial guarantee declaration are met. Unless agreed otherwise in the guarantee declaration, the lender does not have to call on the borrower to discharge the obligation first.

The financial guarantee is expected to be broadly used as a common type of corporate guarantee. The demand of lenders for financial guarantees shall follow from the fact that unlike a general guarantee, (i) the financial guarantee is independent of secured obligation; (ii) the financial guarantee is less complicated in terms of enforcement; (iii) the guarantor is usually unable to use all or some of the borrower’s, as well as its own defences and objections under financial guarantee, unless agreed otherwise; and (iv) the lender may directly call on the guarantor instead of the borrower.

On the other hand, financial guarantees (unlike general guarantees) must stipulate the exact amount of money being secured. Furthermore, a financial guarantee must be called on in writing.

Discharge of secured obligation by guarantor

The financial guarantee is usually a first demand guarantee, which means that the lender is not obliged to require any performance under the secured obligation from the borrower first, and may call on the guarantor if all requirements under the respective financial guarantee declaration are met. It is sufficient when the lender declares to the guarantor that the secured obligation has not yet been discharged. However, the parties may contract out of this rule.

Calling the financial guarantee may be conditioned by the presentation of particular documents (documentary financial guarantee). In such a case, the lender must present required documents together with or without undue delay after the call upon the guarantor.

Defences and objections of guarantor against lender

The guarantor may raise only those defences and objections against the lender that were stipulated under the guarantee declaration in favour of the guarantor, and may not use any defences or objections against the lender unless agreed otherwise in the guarantee declaration.

Claims of guarantor

If the guarantor discharges the obligation, it subrogates into the secured obligation or its discharged part, and the borrower is then obliged to satisfy the guarantor in the same manner as the guarantor was obliged to satisfy the lender; ie, the borrower can use only those objections that were agreed under the guarantee declaration.

Consequences of subrogation

From the lender’s perspective, issues may arise when the guarantor subrogates into the lender’s claims. Especially in case of the guarantor’s performance under a guarantee which does not cover the whole secured obligation. In such a case, the lender is obliged to enable the guarantor to enforce its subrogated rights against the borrower simultaneously with the enforcement of its own rights. Therefore, it is highly advisable to subordinate guarantor’s rights to full discharge of the lender’s own claims against the borrower.

Duration and termination of a financial guarantee

A financial guarantee is concluded for an indefinite period, unless agreed otherwise. If this is the case, the respective financial guarantee ceases to exist only upon mutual agreement of the parties, or if the guarantor discharges the obligation pursuant to the financial guarantee in question.

The law expressly permits to limit the duration of the financial guarantee for a definite period or to stipulate other events causing its termination. From the guarantor’s perspective, limiting the duration to a certain time period or to the occurrence of any other event is highly advisable. Such terms must be explicitly stated under the financial guarantee declaration.

Financial guarantees are expected to be broadly used as a common type of corporate guarantee

authors: Natálie Rosová, Miroslav Gejdos


Attorney at Law

czech republic