Introduction
Surety and guarantee agreements are types of personal guarantees, which provide the assured with the right to apply to the assurer in the event that the principal debt is not fulfilled by the debtor. Although they serve the same purpose, surety and guarantee agreements differ in terms of the legal framework and the scope of the security they provide. It is therefore important to assess the nature of these agreements and to distinguish between them in order to understand the specific obligations of the surety/guarantor.
1. Surety Agreements
The surety agreement is regulated in Articles 581 et seq. of the Turkish Code of Obligations numbered 6098 ("TCO"). According to Article 581 of the TCO, a surety agreement is defined as "an agreement under which the surety undertakes to be personally liable to the creditor for the consequences of the debtor's failure to fulfil its obligation". In this regard, as will be explained below for guarantee agreements, it can be said that unlike the guarantee agreements, the main debt relation between the creditor and the debtor is at the center of a surety agreement.
1.1. Formal Validity Requirements
As stipulated in the Article 583 of TCO, the surety agreements are subject to certain formal requirements. In this context, the agreement must;
- be arranged in writing,
- include the upper-limit of the surety's liability,
- include the date of commencement of the suretyship, i.e. the date on which the surety's obligations commence,
- if the suretyship is set with joint and several liability, include a statement to this,
- the matters (ii), (iii) and (iii) to be indicated in the surety's handwriting.
Additionally, Article 584 of the TCO requires the real person surety to provide the written consent from its spouse. The spouse must have given his/her consent at the latest at the time of signing the surety agreement, for it to be considered valid. It should be noted, however, that the consent requirement does not apply to certain surety agreements, such as where a real person provides a surety for a commercial enterprise that he or she owns or for a company in which he or she is a shareholder.
1.2. Rights, Obligations and Liabilities of the Surety
The validity of the suretyship is tightly connected to the validity of the principal relationship. Therefore, in case the principal relationship is invalid for any reason, the surety is released from its obligation to perform the debt in place of the debtor, as stated in Article 591 of the TCO.
In its most common form, the ordinary suretyship, the creditor can apply to the surety only after having appealed to the debtor and the debtor fails to perform. However, as stipulated in Article 585 of TCO, it is possible for the creditor to apply directly to the surety, if at least one of the following conditions is met:
- Obtaining a definitive certificate of insolvency as a result of the enforcement proceedings against the debtor,
- Pursuit of enforcement proceedings against the debtor becomes impossible or significantly difficult to conduct in Türkiye,
- The debtor is declared bankrupt, or
- The debtor is granted a concordat period.
In addition, if a pledge has also been established as a mean of collateral for the same debt that the surety assures to perform, the surety may request that the debt to be covered from the pledge be covered first.
It should also be noted that, according to Article 586 of TCO, the creditor may apply directly to the surety before proceeding against the debtor and without covering the debt from the pledged immovable (if any), if the suretyship is determined to be joint and several. However, even in this case, prior to application to the surety the debtor must be defaulted, the notification to the debtor must have been unsuccessful or the debtor must be in a clear inability to perform. In addition, if the debt is secured by a movable or receivable pledge, it must first be covered by the pledge, if the debt is not considered to be uncoverable from by the pledge or the debtor declares bankruptcy or is granted a concordat period.
Pursuant to Article 589 of the TCO, the surety is liable with;
- the principal debt and the legal consequences of the debtor's fault or default,
- the expenses made for the legal proceedings against the debtor, provided that the creditor has notified the surety in advance and in a reasonable time so that the surety may to perform the debt instead of the debtor; and
- contractual interest accrued for a year and accruing for the current year
up to the limit stated in the surety agreement.
According to Article 598 of the TCO -and as a clear consequence of the tight link between the suretyship and the principal debt – the surety's obligation ends with the conclusion of the principal debt in any form, as well as with the end of the suretyship term in the case this is stipulated in the surety agreement.
2. Guarantee Agreements and Their Differences from Surety Agreements
Although not specifically provided for, guarantee agreements are permitted under Turkish law, based on the undertaking of the act of a third party as set out in Article 128 of the TCO. Therefore, it is possible to provide assurance of the debtor's performance by assuming the role of a guarantor.
While the guarantee agreements are not regulated in Turkish law in the same way as surety agreements, Article 603 of the TCO extends the scope of the formal requirements and the consent obligation stipulated for surety agreements to guarantee agreements with respect to natural persons as guarantors.
Guarantee agreements are mainly used in two ways, either as surety-like guarantee agreements or as pure guarantee agreements.
- Surety-like guarantee agreements are used to secure a specific debt of a third-party debtor to a creditor, as the surety agreements explained above. However, unlike a surety, the guarantor cannot refrain from not performing, even if the debtor-creditor relationship becomes invalid.
- Pure guarantee agreements are used to encourage the other party to a particular transaction, by assuring the party of its possible profits to be gained from the transaction, e.g. joint-venture agreements with a provision stipulating profit expectations and, in the case of failure to meet those expectations, coverage of the assured party's expected returns by the guarantor party.
The distinguishing features of the guarantee agreements from the surety agreements arise from the fact that the relationship between the guarantor and the creditor depends solely on itself and is separate from the principal relationship between the debtor and the creditor, if any. Therefore, if the main relationship is invalid, the obligation of the guarantor to perform the debt to the assured party remains valid. However, the surety agreement is fundamentally linked to the principal debt relationship. It is also crucial to state that the defenses and objections that the principal debtor may claim against the creditor may also be claimed by the surety against the creditor while the guarantor does not have the defenses and objections that the third party has against the guaranteed party in the guarantee agreements.
The classification of an agreement as a guarantee agreement, i.e. the determination of the independence of the agreement from another debt relationship or, in other words, the determination of the assurer's liability as not ancillary to a principal debt, may require a detailed examination of the provisions pf the agreement, especially in the case of suretyship-type guarantee agreements. In this regard, certain criteria, should be taken into account, such as whether there is any reference to another relationship, a performance obligation for the assurer on first demand, a waiver on assurer's rights under the TCO.
Conclusion
Surety and guarantee agreements serve to the same purpose: providing assurance to the other party by establishing a contractual obligation, which foresees the surety/guarantor to perform if the assured party fails to achieve the primarily desired result. The main difference between the agreements, is that while a suretyship is based on performance of a specific obligation in place of the debtor, whereas a guarantee is based on the performance itself, regardless of whether or not there is a valid principal debt relationship.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
