ADVERTORIAL

Security obligations

In business relations, especially when starting business with new partners, it is important to choose both a reliable business partner (to get as much information and as many references as possible) and a suitable type of contract. Nowadays, with the ongoing consequences and effects of the economic crisis, it is particularly important to also incorporate satisfactory security obligations into business relations.

(Source: Peterka & Partners Law Offices)

In business relations, especially when starting business with new partners, it is important to choose both a reliable business partner (to get as much information and as many references as possible) and a suitable type of contract. Nowadays, with the ongoing consequences and effects of the economic crisis, it is particularly important to also incorporate satisfactory security obligations into business relations.

The use of security obligations is important mainly because it highly motivates a debtor to fulfill its primary obligations and serves as security for a creditor. In case of debtor’s default, the creditor may then use the security to obtain more advantageous position to settle its claims against the debtor.
The most frequently used security obligations in Slovakia are the contractual penalty, the retention of title (in Slovak: “výhrada vlastníctva”), the withheld deposit (in Slovak: “zádržné”), the guarantee or bank guarantee, the pledge or mortgage, the bank letter of credit and the bill of exchange (preferred by the banks).

1. CONTRACTUAL PENALTY
The contractual penalty is the security obligation most used by Slovak businessmen. This is particularly because the contractual penalty very often serves as lump-sum compensation. The biggest advantage of the contractual penalty, in comparison to “classical” compensation, is that a person entitled to a contractual penalty need not prove that it actually suffered any damage (or the amount) or that the breach of obligation caused the damage.

It is important to bear in mind that:
• a contractual penalty may be agreed only in writing and must relate to a certain violation
of contract or law,
• the right to compensation of the damage exceeding the penalty must be expressly agreed, otherwise the creditor is not entitled to claim compensation in addition to the contractual penalty,
• an excessive contractual penalty may be reduced by the court to the amount of damage actually suffered.

2. RETENTION OF TITLE
The retention of title is very often used in business contracts for delivering goods to secure a seller. The retention of title applies when goods are delivered to a purchaser before the purchase price is paid in full. The purchaser does not become the owner at this moment but only after the purchase price is fully paid. This can be of special importance if the purchaser goes bankrupt. It is also advisable to include in the contract an obligation not to sell the goods to a third party before the full payment of the purchase price. A breach of this obligation might be considered a criminal offence.

3. GUARANTEE
Guarantees are usually used in newly established companies with no financial or legal history. A personal guarantee of the company’s shareholders or members of its statutory body is the most often. A guarantee must be in writing to be valid.

4. BANK GUARANTEE
Bank guarantee is often considered as the best security by the creditors. However, it could
be costly for debtors and also difficult to obtain, in particular for a company with no financial or legal history. Bank guarantees are particularly used in long-term relationships, for example long-term leases. They are often preferred by lessees to cash deposits to cover potential claims under a lease or claims arising during a warranty period.

5. PLEDGE/MORTGAGE
A pledge over movable assets or a mortgage is also a very common security obligation.
Generally, a written contract is required to establish a pledge (except when the collateral is handed over to a pledge, though even in this case it is advisable to sign a written contract). The pledge contract must specify (i) the secured obligation (a pledge can secure both a monetary and a non-monetary obligation), (ii) the collateral and (iii) the maximum principal value secured by the collateral if the contract does not state the value of the secured obligation.
Not only real estate but also many movable assets can serve as collateral, especially appliances, technologies, industrial property rights, stocks or receivables, an enterprise or its part. Collateral does not have to exist at the time of executing the pledge contract.
The pledge is effective from its registration in the notarial central registry of pledges (in Slovak: “notársky centrálny register záložných práv”), or in a special register (such as the trade mark register, patent register, or commercial register). A mortgage of real estate, flats and non-residential premises must be registered in the land registry.
One of the biggest advantages of a pledge is that it is automatically effective against the acquirer of the collateral. It is also easy and quick to liquidate the collateral if the secured
obligation is not duly fulfilled, as the Slovak law recognizes the possibility of quick private
enforcement of pledge. The pledge also grants to the creditor the preferential position in case
of debtor’s bankruptcy or reorganization.

By Kristína Ňaňková, Attorney at Law, PETERKA & PARTNERS Law Offices


This article is of an informative nature only and under no account can it be considered to be a legal opinion. Should you need any further information on the issues addressed in this article, please contact our Law Office PETERKA& PARTNERS, Tel. +421 (02) 544 18 700, E-mail: office@peterkapartners.sk, www.peterkapartners.com

Founded in 2000, PETERKA& PARTNERS has grown into a full-service firm with 70 lawyers and seven offices in Prague, Bratislava, Kyiv, Sofia, Moscow, Katowice and Bucharest and has built up a highly regarded practice within the CEE region.
PETERKA& PARTNERS has been consistently ranked among the best practices in the leading publications on the legal services market, such as Chambers, Legal500 and IFLR1000.

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