Precarious loan? Commodate loan? Mutual loan?! A simple loan?

23/08/2022

What are the differences between these contract types? In the following overview, we explain everything and add some illustrative examples.

Precarious loan (CZ: výprosa)

If the lender provides the borrower the use of

  • A non-fungible thing;
  • Without consideration;
  • With no agreement on the period of use; and
  • Without no agreement on the purpose of the use;

a precarious loan is created.

A non-fungible thing is a thing which does not perish by ordinary use or wear and tear. Typically, it is not food, building materials, consumer goods, money.

A thing may be provided for the exercise of right of use or the right of usufruct (the taking beneficial assets). However, the right of usufruct would have to be expressly agreed, it does not arise of itself. Thus, if the subject of the precarious loan is a plot of land (orchard), the borrower does not automatically have the right to harvest the fruit of the trees for himself.

No consideration means that no direct or indirect payment is provided in return for the right of use. However, the provision of a security is not consideration - e.g. if the borrower provides the lender with a security ("deposit" out of which any damage to the property will be paid) beginning the use of the flat. Neither a "symbolic payment" - e.g. the use of a football field by the municipal football team for 1 CZK per year/month - is regarded as consideration.

The payment of the usual costs associated with the use of the thing - e.g. utilities and energy for the use of the apartment - are neither considered to be consideration. Thus, if someone is allowed to use an apartment and only pays for utilities and services, it could be precarious loan.

Other conditions for precarious loan are the absence of an agreement on the purpose and duration of the use of the thing. If the purpose is agreed, but only in the abstract (no time period of use can be inferred from it), it may still be a precarious loan. For example, lending a dog as a friend to someone to cheer them up; or lending a painting to someone to have their living room decorated. If, however, the purpose is agreed in such a way that a limitation on the period of use is apparent (e.g. lending someone the flat to live in for the duration of their studies; lending the crates for moving flat), it is no longer a precarious loan.

The lender may reclaim the thing at any time. On the other hand, the borrower cannot return the thing at a time when it would cause the lender hardship (unless the lender agrees to this). For example, if the lender was on holiday and would have to return early to take back the thing.

The borrower's obligation to compensate for damage to the thing has elements of strict liability: if damage to the thing occurs because the borrower has breached the duty of proper use, the borrower shall compensate the lender for the damage caused thereby. The breach of duty is presumed, i.e. it will be up to the borrower to prove that he used the thing properly (in the agreed or reasonable manner).

Suppose the lender had given the borrower a rattlesnake to keep. The rattlesnake would die due to an illness it contracted. It would then be up to the borrower to prove that he had taken proper care of the rattlesnake - if he indeed proves this, he would not be liable for the damage.

Commodate loan (CZ: výpůjčka)

If the lender provides the borrower the use of

  • A non-fungible thing;
  • Without consideration;
  • Temporarily; and
  • In an agreed manner of use or in a manner appropriate to the nature of the thing;

a commodate loan is created.

The range of things that may be borrowed through commodate loan is the same as for a precarious loan.

As regards the possibility of arrangement of the right usufruct, the same applies as in the case of a precarious loan.

The use must also be without consideration. Again, however, the provision of security is not considered to be a consideration: for example, the use of a shopping trolley upon the deposit of a 'returnable' tenner can be a commodate loan; and so can the use of a locker in a cloakroom upon deposit of a coin.

The difference of commodate loan from precarious loan is the temporary nature of the use - that is, the provision of the thing is not relatively "permanent" at the beginning (as would be the case with precarious loan). However, the period of use may be agreed as a fixed period as well as an indefinite period. Temporariness can be linked to the passage of time (e.g. 'for 3 years' / 'until you reach the age of majority'), to a person's actions (e.g. 'until you finish college' / 'until you find your own place to live') or to a specific event (e.g. 'until the end of your maternity leave' / 'until the end of your life').

However, if the period of use is not fixed either directly or indirectly (by specific purpose), the contract would be a precarious loan.

As regards the return of the thing, the lender cannot claim early return. The exception is where the borrower uses the thing in breach of the contract; or where the possibility of early return has been agreed. On the other hand, the borrower may return the thing early, except where this would cause the lender hardship (unless the lender has approved the return).

The borrower shall again bear the cost connected to the ordinary use of the thing. Thus, for example, in the case of a loan of an apartment, the borrower pays for his own utilities and services and other costs.

The same applies to compensation for damages as in the case of precarious loan. If the borrower lets another person possess the thing without the lender's consent, and damage is caused to the thing, the borrower is obliged to compensate for the damage, unless the damage would have occurred nevertheless.

Consider the example of the rattlesnake mentioned above. Suppose that the rattlesnake is lent for a certain period of time. The borrower, without the lender's consent, would give the rattlesnake over to a friend for a few days. The rattlesnake would die while at the borrower's friend had it "secretly" in his possession. The borrower will thus be liable to the lender for damages unless he proves that the snake would have died otherwise, e.g., he proves that the poor rattlesnake was already suffering from a fatal disease when he got him.

Mutual loan (CZ: zápůjčka)

If the lender provides the borrower the use of

  • a fungible thing;
  • to use at will;
  • and after a time to return the same kind of thing;

a mutual loan is created.

The object of the loan is a fungible thing, that is, a thing that can be replaced by a thing of the same kind. E.g. cattle, food, building materials, consumer goods, money.

If money is lent, it shall be returned in the currency of the place of performance. Thus, by law, the rule that money is returned in the currency in which it was lent (as is the case, for example, with a simple loan) does not apply here. But this legal rule is dispositive, which means that it is possible to arrange otherwise (e.g. that the money is returned in the same currency in which it was lent).

However, if the money is returned in a currency other than that in which it was lent, then it must be equal in value.

If a fungible thing other than money is lent, the thing returned is of the same kind, regardless of whether its value has increased or decreased in the meantime.

A loan may be for a consideration (as opposed to a precarious loan or commodate loan), if the parties agree so. In the case of a monetary mutual loan, the remuneration is interest, whereas in the case of a non-monetary mutual loan, a remuneration could be a reasonably larger quantity of thing lent, or a better-quality thing (of the same kind).

What if the parties agree that the borrower is obliged to return a smaller quantity of fungible things than he received from the lender? In such a case, the contract - in the part relating to fungible things that the borrower is not obliged to return - will be treated as a contract of gift, or as a contract of sale or exchange (if the borrower must give the lender monetary or other consideration in exchange for the things). The rest of the contract - in the part relating to the consideration that the borrower must return - may be treated as a contract of mutual loan.

If there is no agreement as to when the loan is to be repaid, the maturity is linked to the notice of termination of the contract. Unless otherwise agreed, the notice period is 6 weeks. The borrower may repay the loan without notice, as long as no interest has been agreed.

If the monetary mutual loan is repaid in cash, the place of payment shall be the residence or registered office of the lender. If the loan is repaid by cashless transfer, the place of payment shall be the establishment of the payment service provider which holds the relevant account of the lender (or the establishment of the postal service provider which hands over the amount to the lender in cash).

In the case of non-monetary mutual loan, the place of return is the residence or registered office of the borrower. For book-entry securities, there is an exception - return is done by credit to the lender's property account.

Suppose the subject of the loan is a flock of sheep. The place of return is neither agreed nor implied by the negotiations of the parties. The borrower is a farmer, an individual entrepreneur, and is based in the centre of Brno, where he runs a sheep-product shop. The flock of sheep should therefore be returned at that location. It is therefore advisable in such cases to pay attention to the place of return of the loan.

Arrangements can be made to repay the loan in instalments. If the borrower is in default with the payment of more than 2 instalments, or one instalment for more than 3 months, the lender may terminate the contract and demand repayment of the entire debt with interest. However, the parties may agree otherwise. For example, they may stipulate that if the borrower fails to meet a single instalment, the loan contract is 'cancelled' - the borrower shall repay entire loan, which shall be done until the next instalment is due.

Simple loan (CZ: úvěr)

According to the simple loan contract, the lender shall, upon request, provide the borrower with

  • funds up to a certain amount;
  • for consideration - interest;
  • for a specific purpose (if agreed);
  • and the money shall be returned within the agreed time, otherwise within one month of the request for repayment.

By a simple loan contract, the lender undertakes to provide the borrower, at his request and for his benefit, with funds up to a certain amount, and the borrower undertakes to repay the funds provided and to pay interest. Thus, until the money is provided to the borrower, the lender is the debtor and the borrower is the creditor. Once the money is provided, the status of creditor and debtor is reversed.

According to the simple loan contract, only the money can be provided, no other things.

Whereas in the case of a mutual loan, the money is returned in the currency of the place of repayment, in the case of a simple loan the borrower returns the money in the same currency in which it was lent.

The use of the lent money may be tied to a specific purpose. If the borrower uses the money for another purpose, the lender has the right to withdraw from the contract and the borrower must repay the money and interest without undue delay.

The borrower must repay the money within the agreed period. If there is no agreed period, within 1 month of the date on which the borrower is asked to repay the money.

However, the borrower may also repay the money early. Interest is then payable only for the period from the granting of the loan until repayment.

Special rules apply to consumer loan, consumer loan for housing, etc. (according to Act No. 257/2016 Coll., on consumer credit), and others.