Major Principles Of Suretyship In The Turkish Legal System
By Melis Kızıltay
ADMD Law Office, Istanbul TURKEY
Suretyship is a kind of security commonly used in business transactions in order to protect creditors from damages providing that debtor fails to fulfill obligations. It is a unilateral contract by which the surety undertakes the obligation of the debtor for the payment of the debt. According to Turkish law, suretyship contracts are subject to the provisions set out in Articles 483-504 of the Turkish Code of Obligations (“TCO”).
Legal Nature and the Validity of Suretyship Contracts
First of all, as mentioned above, this is a unilateral contract in which only one party (surety) undertakes an obligation. The existence of a valid suretyship contract basically depends on a duly agreed contract between the surety and the creditor. Thus, there is no need for debtor’s participation to the contract or his consent.
Another special feature of the suretyship is that surety’s liability is ancillary. It means the surety contract continues to be valid if the debtor’s debt is valid. For the same reason, the performance of the surety’s obligation can only be requested if the principal obligation is due and payable. Ancillary nature of suretyship differentiates it from the guarantee agreements which are a different form of security. Additionally, surety liability cannot be greater than of the principal’s.
The suretyship contract imposes an obligation of payment. Although the damage arise from a performance, non performance or a default by the debtor, the surety’s liability is stable and the details of the performance of principal can be disregarded.
Following the Article 484 of TCO, the format of the contract must be in written at which the maximum liability of the surety shall be stated. Also, capacity must not be disregarded when concluding suretyship contracts since only ones with full contractual capacity can be entitled to enter into such contract. Accordingly, suretyship contracts cannot be executed via proxy.
Ordinary Suretyship v. Joint Suretyship
The type of the suretyship has a primary importance in terms of the extent of liability and the defenses that may be applicable against the creditor. In contrary to joint suretyships, ordinary suretyships do not impose any primary liability on the surety. Thus, the payment cannot be demanded from the surety before debtor has become a subject to the execution proceedings by the creditor. Otherwise, the surety is entitled to plead the creditor the defense that he must initiate execution proceedings primarily against the creditor as it is mentioned in Article 486/p.1 of the TCO. However, in the event of a bankruptcy of the principal debtor, an unsatisfied execution or impossibility of filing execution against the debtor in Turkey, then the creditor can primarily demand the payment from the surety.
According to Article 486/p.2, if the obligation is secured by ‘real security’ (pledge and mortgages) that were initiated before the execution of the suretyship contract, the creditor shall first execute against such real security. If the creditor directly demands the payment from the surety without such trial, surety has a right to plead the creditor a defense based on such fact. However, such a defense is not available to the joint surety under the TCO. Thus, as it is mentioned in Article 487, the creditor may demand the payment from the surety prior to any demand from the principal debtor.
Defenses of the Surety
Sureties possess two types of defenses. One type is identical to the debtor’s defense and the other is solely granted the surety. Article 497 states that surety is not only entitled but also is under the obligation to plead against the creditor the defenses which principal debtor is also entitled to. It is a legal obligation for the surety because in case of waiver of such defenses by the debtor, the surety may invoke such pleas against the creditor. If he fails to do so, then it is presumed that he forfeits his right of recourse against the debtor.
The other types of defenses are contractual defenses and they base on the suretyship contract. As it is pointed out above, defenses regarding the primary demand of payment from the debtor by the creditor or primary recourse to real securities could be common examples of such kind of defenses. In addition, exchange offers or allegations regarding non binding contracts could be categorized under the defenses originating from suretyship contracts.
Termination of the Suretyship Contracts
Termination of suretyship contracts could be divided in two subcategories, one of which arise directly from the suretyship contract itself and the other exist due to the extinction of principal debt. Since the nature of the suretyship is ancillary, the termination of the principal debt by a payment either by the debtor or another third party or impossibility of performance or any other reason that terminates the principal debt will eventually terminate the suretyship.
In addition there are some other reasons originating from suretyship contract itself. In case of a delegation or assignment of the debt by the creditor or by debtor with the consent of the creditor, the liability of the surety will end unless the consent of the surety is also obtained as it is mentioned in Article 176 of TCO. Moreover, if the suretyship contract is concluded for a fixed time and unless the creditor enforces claims within one month following the expiration of such period, liability of the surety automatically expires.