A bank guarantee instead of retention money: how to set it up in a works contract so it can be called

In a works contract, an employer commissioning construction may reserve retention money: it withholds part of the price as assurance that the contractor will complete the works and remedy defects during the warranty period. That can leave the contractor’s money tied up long after handover, so it may propose that a bank guarantee replace the retention. For the employer this can be an equally good solution, but only if the guarantee is issued in the right wording and remains valid for long enough. The terms of the retention and of its replacement by a guarantee therefore need to be agreed in the works contract.

The text of the letter of guarantee decides

The Act defines a bank guarantee as a unilateral undertaking by a bank towards a creditor:

A bank guarantee arises by a written declaration of the bank in a letter of guarantee that it will satisfy the creditor up to a specified sum of money in accordance with the content of the letter of guarantee if a specified third party (the debtor) fails to perform a specified obligation or if other conditions set out in the letter of guarantee are fulfilled.

— Section 313 of Act No. 513/1991 Coll. (unofficial English translation)

The bank guarantees up to the sum and on the conditions set out in the letter of guarantee, and may raise against the creditor only those objections that the letter permits (Section 316(1)). Whatever is agreed in the works contract but does not find its way into the letter does not bind the bank. The employer should therefore insist that the wording of the guarantee be an annex to the works contract and that the contractor deliver a letter in precisely that wording.

On first demand, or subject to conditions

Unless the letter of guarantee provides otherwise, the bank may not raise the debtor’s objections and must pay on the creditor’s written request; a prior demand on the contractor is required only if the letter so provides (Section 317). For the employer, a guarantee of this kind is the closest thing to withheld cash. The contractor, by contrast, may seek to make payment conditional on documents, for instance a declaration by the employer that a notified defect was not remedied within the agreed period. Such documents must be submitted with the request or without undue delay after it (Section 319). Every condition increases the risk that the bank will refuse to pay because of a formal flaw in the request, so their number and precise wording need to be negotiated in advance.

A guarantee for the remedying of defects secures a non-monetary obligation. For that case the Act assumes that the sum in the letter secures the monetary claim the employer would have on breach of the obligation (Section 314). Even so, it is better to state expressly in the letter which claims the guarantee covers, in particular whether it also covers the cost of having defects remedied by another firm and contractual penalties.

Validity period and warranty period

Where the period of validity is limited in the letter of guarantee, the guarantee lapses if the creditor does not notify its claims to the bank in writing during that period (Section 321(1)). A guarantee that ends on the day the warranty period expires leaves the employer unprotected precisely in respect of defects notified at the end of it. The validity period should therefore extend beyond the warranty period by a margin allowing for notification of the defect, the period for remedying it and the making of a request to the bank. It should equally be agreed what happens if the warranty period is extended or handover is postponed: the contractor is to extend the guarantee in good time and, should it fail to do so, the employer may reserve the right to call the guarantee or to withhold the retention money again.

What belongs in the works contract

• a model wording of the letter of guarantee as an annex, and requirements as to the bank that is to issue it,
• the amount of the guarantee and the beginning and end of its validity, tied to handover of the works and the warranty period,
• the moment at which the retention money is released, for instance only once a valid letter has been delivered to the employer,
• a duty to extend or replace the guarantee and the consequence if the contractor fails to do so,
• the procedure on a transfer of the project: where the guarantee may under the letter be called only on non-performance of the obligation, rights under it may be assigned only together with the secured claim (Section 318).

Where the employer calls the guarantee without entitlement

Once the guarantee has been paid out, the contractor must pay the bank what the bank paid under the letter, provided the letter was issued in accordance with its contract with the bank (Section 321(2)), and may not raise against the bank the objections it has against the employer unless its contract with the bank obliged the bank to include those objections in the letter of guarantee (Section 321(3)). Any dispute about whether the employer was entitled to payment is therefore conducted afterwards between the employer and the contractor:

A creditor who has obtained performance under a bank guarantee to which it was not entitled as against the debtor shall return that performance to the debtor and compensate it for the damage thereby caused.

— Section 321(4) of Act No. 513/1991 Coll. (unofficial English translation)

For the contractor it is therefore essential that the works contract define precisely when the employer may call the guarantee. For the employer, that those conditions are not so strict that the guarantee could not in practice be called at all.

We prepare the wording of the letter of guarantee, or review the bank’s draft, through our suretyship and bank guarantees service, and set up the retention mechanism and its replacement by a guarantee in a construction works contract. We write about warranty periods and liability for defects in defects and warranties under a construction works contract.

How this will work under the new Civil Code

On 1 October 2026, the National Council of the Slovak Republic approved the new Slovak Civil Code, which will take effect on 1 July 2027. Under it, a bank guarantee will become a type of financial guarantee that may be issued not only by a bank but also, for example, by the contractor’s parent company. The works contract should therefore specify whether the employer will accept only a bank guarantee. The Commercial Code is not being repealed for now, so for guarantees and works contracts between businesses the position will be settled definitively only by the implementing amendment.

For the mechanism described in this article, the following in particular will change:

• the issuer will not be able to revoke the guarantee once the letter has been handed over,
• the letter will be able to provide in advance for an extension of validity or a change in the amount as at a certain date or on fulfilment of a condition, for example where handover is postponed; any other change only with the employer’s consent, and partial or conditional consent will be regarded as a refusal,
• documents required by the letter will always have to be submitted while the guarantee is valid,
• it will be possible to assign the right to payment under the guarantee, but the right to call the guarantee only if the letter permits it, which needs to be addressed on a transfer of the project.

The abstract nature of the guarantee remains, as do the limitation of the bank’s objections to the scope of the letter and the lapse of the guarantee if the employer does not assert its claims while it is valid. For construction of a building, however, the law will set a five-year warranty period, and the validity of the guarantee should also allow for it.

Guarantees issued by 30 June 2027 and works contracts concluded by that date will be governed by the existing legislation. If the guarantee is to be issued from 1 July 2027, add to the model letter an extension tied to postponement of handover and a rule on assignment of the right to call the guarantee.

Status as of 22 October 2026: the act has been approved and was signed by the President on 20 October 2026, but has not yet been promulgated in the Collection of Laws. Until 30 June 2027, the rules described above in this article apply.