The modifications made by the Turkish Code of Obligations No. 6098 ("Code") to surety agreements (known as "kefalet sözleşmeleri" in Turkish) was a hot topic of discussion, not only among practitioners, but also among the general public, due to certain changes made by the Code to the procedural requirements of a surety, such as the requirement of obtaining spousal consent. In this article, we first provide a brief overview as to what a security, surety and a guarantee are. Secondly, we analyze the differences between a surety agreement and a guarantee agreement, as our experience suggests that these two are among the most common and significant types of securities sought and received by the banks.

What is a security agreement?

Security agreements are broadly defined as agreements through which a third party undertakes the risk faced by another party[1].  A more specific example would be a situation in which a third party undertakes the risk arising from the non-performance of an obligation by another party[2].  In order to define the scope and limits of "security agreements," what constitutes a "security" should also be defined. A security may be a specific asset, which would be encashed or liquidated if the risk were to arise or it could be the personal undertaking of a third party, through which the recipient of the security becomes entitled to seek recourse from the assets of the undertaking party[3].

Both a surety agreement and a guarantee agreement are granted against the risk of non-performance of an obligation by a third party and both of them entitle the recipient to seek recourse from the assets of the undertaking party, instead of resorting to the encashment or liquidation of a specific asset.

What is a surety agreement? What is a guarantee agreement?

Article 581 of the Code defines a surety agreement as an agreement through which a surety undertakes to be personally liable to a creditor for the consequences of a debtor's non-performance of its obligations. Although a separate section under the Code deals specifically with surety agreements, a guarantee agreement is not explicitly defined under the Code. As such, the term itself does not signify a single, definite type of agreement. Therefore, the main factor to consider when distinguishing between the two types of agreements would be whether the risk is undertaken regardless of the validity and continuance of a debt. If the risk is undertaken regardless of whether a debt is valid and still in effect, this would point toward the existence of a guarantee agreement[4].  In light of this, if the underlying debt were not deemed valid, then the surety would not be held liable either. On the other hand, a guarantor in the same situation would nevertheless be held liable. As a consequence of the foregoing distinction, while the defenses which may be put forward by the debtor may also be put forward by the surety, the guarantor would not be able to benefit from those defenses[5],  as its obligation is considered to be a separate obligation, and not tied to the underlying obligation of the original debtor. In fact, it is not only a right but a duty of the surety to put forth and argue the defenses which may also be put forth by the debtor, under Article 591 of the Code.

One other consequence of an obligation arising from a surety agreement being attached to the underlying debtor's obligation is that the surety becomes a successor to the creditor up to the amount it performs the obligation on behalf of the debtor (Article 596 of the Code). The guarantor, on the other hand, would only be able to seek recourse from the debtor, if the agreement between itself and the debtor stipulates so.

Lastly, the Code stipulates detailed procedural requirements for a surety agreement. Article 583 of the Code seeks that the surety agreements shall be made in writing and the maximum amount, for which the surety will be liable, shall be stipulated. The relevant provision of the law also rules that certain matters shall be put in writing by hand-writing (as opposed to sureties signing standardized texts, to make sure that the sureties become aware of the liabilities they are putting themselves under). The aforementioned issue of spousal consent is also one of them. Article 584 of the Code is the relevant provision with respect to the spousal consent, which must be obtained prior to entering into a surety agreement. The relevant article was amended shortly after the Code went into force, and now sets forth an exception for the shareholders or managers of a commercial enterprise, regarding the surety agreements they will enter into with respect to the relevant commercial enterprise. Spousal consent shall not be sought for such surety agreements.

Consequences

In light of the foregoing, creditors may prefer to enter into a guarantee agreement, as the guarantor's obligation thereunder is separate from the underlying obligation of the debtor (unlike a surety agreement), thus rendering it difficult for the party providing security to avoid performance under the security agreement. That said, whether or not a guarantee agreement can be obtained (as well as the terms and conditions of any such agreement) would be subject to the negotiation power of the parties.


[1] 6098 sayılı Türk Borçlar Kanunu Çerçevesinde Kefalet Sözleşmesi (Surety Agreements within the Scope of the Turkish Code of Obligations No. 6098), Burak Özen, p.1.

[2] ibid, p. 2.

[3] ibid, p. 5.

[4] ibid, p. 6, p.23.

[5] ibid, p. 27.


This article was first published in Legal Insights Quarterly by ELIG, Attorneys-at-Law in March 2017. A link to the full Legal Insight Quarterly may be found here.


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