Termination of guaranty using Article 559 of the Civil Code of Ukraine
This page contains an information about procedure of guarantee termination in Ukraine, description of our legal service of termination guarantee support is available on this page.
According to Section 1 of Article 559 of the Civil Code of Ukraine guaranty is terminated along with obligation that it supports as well as in case when obligation is changed without consent of guarantor as the result of which the amount of his liability increases.
This regulation protects guarantor’s interest since he assumes responsibility of a set amount for non-fulfillment or improper fulfillment of obligation by the main borrower in accordance with credit agreement. Thereafter the guarantor assumes financial risks on the terms he agrees with. Thus it makes sense that when obligations change and it leads to increase of financial liability that had not received consent of the guarantor the guaranty is terminated.
The key terms for the interpretation of regulation stipulated by Section 1 of Article 559 of the Civil Code of Ukraine are “change of obligation” and “consent of guarantor” since they define its content and application.
Termination of guaranty based on Section 1 of Article 559 of the Civil Code of Ukraine is possible only when such changes resulted in growth of guarantor’s liability without his prior consent. In this regard in accordance with legal practice provision of tax exemptions or completed restructuring while being changes of obligation do not terminate guaranty since they do not enlarge the amount of guarantor’s liability. At the same time analysis of judicial practice allows to say that change of the amount of responsibility does not only cause enlargement of interest rate for use of borrowed money but also prolongation of credit agreement, enlargement of credit amount, levying of penalties or extension of penalties.
Another important aspect of guaranty termination based on Section 1 of Article 559 of the Civil Code of Ukraine is the form of consent for change of guaranty terms. Based on its legal nature change of guaranty obligations is nothing but change of guaranty terms. In accordance with Section 1 of Article 651 of the Civil Code of Ukraine change of terms of agreement is acceptable only after consent of the parties if the agreement or the law do not stipulate otherwise. Thus consent of guarantor is to be received through his entry into supplemental agreement to the contact of guaranty or through active actions that are equal to such way of obligations change (exchange of letters, fax messages). But based on principle of freedom of contract which means that parties are free to choose terms of contractual relations, an agreement may stipulate other form of consent. This may be done in the form of acquiescence or in the form of guarantor’s consent for change of main obligation in future. In such case guarantor’s consent for change of particular terms is not obligatory. So called abstract consent of guarantor for any changes to main obligation in future is included into the agreement serving creditor’s interest.
Therefore the guaranty can be terminated only if there was no consent of the guarantor expressed by his active actions which have documental proof and if the agreement does not provide abstract expression of consent for change of guaranty obligations.
Thus termination of guaranty on the ground of Section 1 of Article 559 of the Civil Code of Ukraine is possible only when the following facts are altogether:
- Change of circumstances under credit agreement (change of main obligation);
- Absence of guarantor’s consent for such change;
- Increase of guarantor liability amount;
- Causation between change of circumstances and increase of guarantor liability amount.
Mechanism of guaranty termination on the ground of Section 1 of Article 559 of the Civil Code of Ukraine is also a relevant issue. Practice of this regulation application is quite contradictory since its content is basically a presumption. Thus if all the above mentioned facts are present guaranty obligations must be terminated in accordance with the law and a bank basically have no grounds for litigation to collect debt from a guarantor as a solidary debtor under credit agreement. But in practice the bank a priori cannot agree with automatic termination of guaranty and when main debtor does not fulfill his obligations under credit agreement the bank forecloses assets of guarantor. Such actions of the bank violate guarantor’s rights and cause financial damages.
In accordance with Section 7 of Article 16 of the Civil Code of Ukraine termination of legal relations is a measure violated rights and interests protection. Thus for the purpose of rights violation termination a guarantor can terminate guaranty on the ground of Section 1 of Article 559 of the Civil Code of Ukraine by filing a claim about recognition of guaranty as terminated if the bank has already demanded the recovery of debt under credit agreement or in order to avoid such rights violation in future.
Judicial practice of such claims satisfaction is quite contradictory but there is a tendency of guarantors’ interests satisfaction. The Supreme Court of Ukraine in its Resolution dated December 19, 2012 states the following: “Obligations in which guarantors participate and under which credit interest rate was increased without guarantor’s consent or corresponding term in the contract of guaranty do not result in his liability for non-fulfillment or improper fulfillment of obligations by the borrower even if there were consents of bank and debtor”. The Supreme Court of Ukraine also states: “Increase of interest rate under credit agreement which was made against the agreement and without consent of guarantor and as the result of which the amount of his liability was enlarged is the ground for guaranty termination”.
Thus the higher judicial instance in Ukraine fully accepts the position of Section 1 of Article 559 application as measure of debtor’s rights and interests protection.
Besides guarantor is a separate party in credit relations. Terms of contract of guaranty are related with terms of credit agreement but are not its part. This position is supported by the High Specialized Court of Ukraine for Civil and Criminal Cases and is contained in letters for heads of regional courts of appeal and courts of appeal of Kiev, Sevastopol and the Autonomous Republic of Crimea dated 16.01.2012: “Subsection 2 Based on provisions of Section one of Article 533, Section 1 of Article 544 of the Civil Code of Ukraine about the fact that even though the guarantor is related to the debtor by obligations but he is a separate party in relations with the creditor”. Such position of the High Specialized Court of Ukraine for Civil and Criminal Cases once more confirms that change of obligation terms under credit agreement and result in increase of the amount of financial liability of guarantor cannot automatically, without consent of the guarantor change terms of guaranty.
Thus application of Section 1 of Article 559 of the Civil Code of Ukraine is one of measures for protection of guarantor’s violated rights and has a form of guaranty termination by court. It requires simultaneous presence of facts which define the content and application of the regulation which is stipulated by the mentioned Article.