There are a number of pitfalls to take into account when considering the use of an English law governed guarantee in jurisdictions such as the Ukraine or other CIS countries, as despite the similarity of terminology and language used, variations in meanings may affect the validity and enforceability of the guarantee.

To reduce risk exposure and achieve maximum recovery rates lenders tend to take security interests  over the assets of the borrower. however, in deals involving on-lending and down-streaming of funds to a subsidiary level, lenders are often exposed to high risks of  being structurally subordinated. consequently, the security over the borrower’s assets may be of low value due to major  cash flow and core assets of the group remaining at the operating subsidiary’s level, which are out of the lender’s reach and control. It is common practice that the borrower is either a holding company with only share assets and equity interests in the subsidiaries or a financing special purpose entity being incorporated specifically for holding the relevant intra-group receivables.

With a view to reducing exposure and obtaining additional comfort, lenders typically require that the significant subsidiaries who operate core assets of the borrower’s group become parties to a guarantee, governed by english law and given in favour of the lender or a security trustee.


Under English law, a guarantee is a contract by which the guarantor is obligated to pay the lender if the original borrower fails to do so. In essence, a guarantee is deemed to be an ancillary obligation which entirely depends on the validity and enforceability of the principal underlying obligation. As such, if the principal obligation becomes null or void, then the guarantee will not be preserved and the guarantor will be released from liability.

In practice and in an attempt to minimise the effect of a secondary obligation, lenders seek to include certain additional provisions aimed at preserving the obligations under an english law guarantee. specifically, a guarantee agreement routinely used in financial markets, frequently contains principal debtor and indemnity clauses. A principal debtor clause typically provides that a guarantor would be treated as if it were a principal borrower even though the underlying obligation becomes unenforceable. An indemnity clause would usually also be included to provide lenders  with an independent obligation for indemnification by the guarantor which does not depend on the existence  or validity of any obligation of a third-party. Both types  of clauses are designed to preserve a guarantor’s liability where it would otherwise be unenforceable or discharged, therefore gaining popularity and being frequently applied as market standard practice.


On the contrary, the Ukrainian legal system distinguishes between two forms of obligations, setting forth a third-party support: (i) a guarantee and (ii) a suretyship agreement. Unlike English law, under Ukrainian law both types of agreements constitute security interests but they do however differ in so far as (i) a guarantee is considered as a primary and independent obligation which is given solely by banks or regulated entities (also referred to as the “financial guarantee”) and (ii) a suretyship may be given by any Ukrainian entity and is classified as an ancillary obligation. Consequently, no Ukrainian borrowers or other obligors may avail themselves of giving a guarantee unless they are either a bank or a regulated entity under Ukrainian law.

Comparing the legal nature of the Ukrainian law guarantee with the English equivalent instrument, we note that despite the common title, both instruments are substantially different; especially with respect to those entities that are eligible by law to give the guarantees. As it stands, it appears that the closest equivalent of the English guarantee in Ukrainian law would be a suretyship agreement, rather than a guarantee. There are many common features between a Ukrainian suretyship and an English guarantee such as both instruments being classified in both jurisdictions as a secondary type of liability which depends on enforceability of the guaranteed obligation of the principal debtor.

In view of these different regulations, when drafting an English law guarantee which is intended to be used in cross-border transactions, particularly if its provider is located in Ukraine, Russia or any other CIS country1, lawyers acting for lenders should keep in mind the substantial regulatory requirements to be met depending where such guarantor or obligor is registered, where national rules may often be mandatory and cannot be derogated by the parties’ choice, even if particular guarantee agreements are governed by foreign law. Certain pitfalls attributing to standard provisions of English law guarantee are explained further.

Legal characterisation and terminology

To begin with, although the English term “guarantee” can be translated in Ukrainian both as “guarantee” and as “suretyship”, “suretyship” and “surety“ are the terms to be used in all relevant English documents. Lenders should bear in mind the principal difference – that a Ukrainian obligor must be incorporated as a bank or a regulated entity under Ukrainian law to be able to act as a guarantor and give a valid English law guarantee rather than a surety under a suretyship agreement. Therefore, if in a particular case a Ukrainian obligor is not a bank or a regulated entity, the English law agreement should use the terms “surety” and “suretyship” in order to minimise the disputability of its validity in a Ukrainian court on the grounds of lack of legal capacity of the security provider to enter into such transaction. Despite the fact that under Ukrainian law the terms and expressions of the parties are not sufficient to determine the nature of the agreement, they will be taken into consideration by the Ukrainian court as a starting point for determining the nature of the legal relationship between parties.

Disputable nature of a “principal debtor” and/or an indemnity clause

Secondly, if a Ukrainian-based obligor is neither a bank nor a regulated entity, the wording of the principal debtor clause and any reference to indemnity or other similar wording (allowing the surety to assume primary liability either alone or jointly with the principal debtor) should not be used. Their inclusion into a suretyship agreement may imply elements of a financial guarantee which may be issued only by entities with capacity. The general principle of Ukrainian security law does not allow the surety to assume primary and independent obligation under the suretyship agreement as an indemnity liability. As a result, if included, the above contractual clauses might potentially be disregarded by the Ukrainian court and deemed unenforceable or null and void ab initio.

Tax gross-up provision

It is also common practice to add “tax gross-up provisions” into English law guarantees, offering the lender protection against tax deductions that may be required by law to be made by a surety (guarantor) before making payment due to such lender. According to a tax gross-up clause, the surety (guarantor) is obliged to gross-up the payment and to pay additional amounts so that the lender receives the full amount which would have been received if no such deductions or withholdings were required. However, Ukrainian tax law prohibits the payment of tax for (and on behalf of) another person and does not recognise such contractual gross-up provisions. Thus, the tax gross-up provision set out in an English law guarantee given by a Ukrainian obligor may be at a risk of being considered by Ukrainian courts as invalid and unenforceable. An alternative way to structure the receipt by the lender of full amount payment without any deductions is to include a specific tax indemnity, covering the grossed-up amounts as a contractual obligation of an entity of the borrower’s group which is registered outside Ukraine. Such “offshore tax gross-up structure” is often seen in Ukraine and the CIS as an agreement where a lender will be indemnified by a foreign obligor against the deducted amounts being unpaid by a Ukrainian guarantor or surety.

One-way jurisdiction provision

Another clause which is frequently used by lenders in loan documentation is a one-way jurisdiction clause. Such clause provides only one party, usually the lender under the loan documentation, with the benefit of bringing court proceedings in a competent court. As the concept of an asymmetrical jurisdiction clause has not been tested in Ukraine, Ukrainian court practice is silent in respect of validity and enforceability of such provisions. However, the Ukrainian court may take a position that a one-way clause contained in a guarantee is illegal insomuch as it effectively prevents the other party from bringing a claim, which falls foul of Ukrainian procedural law. Moreover, a Ukrainian court may have controversial views on the matter of recognising provisions which give jurisdiction to the foreign court. In fact, Ukrainian statutory law permits one-way jurisdiction provisions only to the extent that they are made in favour of the Ukrainian court. As a one-way jurisdiction clause set out in loan documentation usually nominates the non-Ukrainian court as forum convenience, such clause may be set aside or deemed unenforceable in a Ukrainian court. Unlike the jurisdiction of foreign courts, the competence of a foreign arbitration tribunal should be fully respected and enforced within Ukraine, subject to the terms and conditions of the New York Convention2, to which Ukraine is a party.

Choice of foreign governing law

The parties’ choice of foreign law to govern a guarantee or other security instrument (to the extent that they are not related to a mortgage or any other specific immovable property that is subject to national regulations) would be recognised by Ukrainian law. Ukrainian courts respect the parties’ intent as to the choice of governing law and will not apply the concept of “significant ” or “real connection ” of governing law if parties have explicitly made a valid selection of governing law in the security agreement.

Overall, an English law guarantee is a standard instrument which is routinely executed by Ukrainian obligors in capital market transactions. However, proper reflection of the above matters in a specific English law document will bring lenders more comfort and confidence in two situations: when such English law instrument is challenged in a Ukrainian court by a guarantor who is unwilling to pay, or when the Ukrainian courts assume jurisdiction over the guarantee related issues as a part of an enforcement procedure sought against Ukrainian obligor and its assets located within the territory of Ukraine, pursuant to a foreign arbitral award or state court decision.