Financial Institutions and Markets

Contact: Fatih Işık; Erdem & Erdem Law Office (Turkey)

Introduction

As is widely known, legal transactions are formed upon consensus of declarations of intent. The purposes of the parties engaging in the legal transactions are reflected in these declarations of intent. However, the parties’ declarations of intent may not reflect the real intention of the parties at all times.

In some cases, the real intentions of the parties must be determined. The disputes arising in practice mainly originate from determining the nature of the relationship between the parties, making it necessary to determine the rules applicable to this relationship. Even though parties may define their relationship in a certain way, the determination of the nature of the legal relationship between parties must be made according to their real intentions . This general rule is based on Article 18 of the Code of Obligations numbered 818 (“CO”) and Article 19 of the Turkish Code of Obligations numbered 6098 (“TCO”). Pursuant to the two articles specified, while determining and interpreting the type and content of an agreement, the real and common intentions of the parties shall be taken into consideration regardless of the words used by the parties by mistake or with the intention to hide their real purposes.

Consequently, the legal nature of the relationship between the parties in all cases shall be determined by considering whether or not the declaration of intent of the parties legally qualifies their relationship .

Guarantee or Suretyship?

One of the circumstances which requires interpretation of the parties’ intentions under Turkish law is a dispute concerning whether a security relationship between the parties is a guarantee agreement or a suretyship agreement. This matter has been discussed in the doctrine and rulings of the Court for a long time .

Determining whether the nature of the security relationship between parties is a guarantee agreement or a suretyship agreement is essential, due to differences in the conditions concerning the formation, features and the articles of the agreements, even though their function of security is similar.  It is useful to begin by mentioning the differences between these two agreements briefly .

For instance, since the obligations arising from suretyship agreements are accessory to the obligations arising from the main agreement, the invalidity of the main agreement shall result in the invalidity of the suretyship agreement. However, in cases where there is a guarantee agreement independent from the main agreement, the creditor of the guarantee agreement may recourse to the guarantor even if the principal obligation becomes or is deemed invalid.

Another difference between these two agreements is in the exceptions and objections arising from the main agreement. In a suretyship agreement, the surety may exercise the exceptions and objections of the principal debtor against the creditor, whereas the guarantor of a guarantee agreement may not exercise the exceptions and objections of the principal debtor against the principal creditor.

The main difference with respect to these agreements is the form requirements. Suretyship agreements may be concluded only by complying with important form requirements, whereas the validity of a guarantee agreement does not require any special form .

As seen, there are important differences between these two security agreements. Therefore, a determination of which agreement the parties desire to sign is important. It is observed that parties often use the terms “suretyship agreement” and “guarantee agreement” interchangeably, thus the real intentions of the parties while signing the agreement must be determined. For instance, a 2001 decision of the General Assembly of the Civil Chambers of the Court of Cassation concluded that an agreement referred to as a guarantee agreement by the parties was actually a suretyship agreement, and the Court ruled that the agreement was invalid, since the requirements of form were not respected .

Criteria to be Considered

Certain criteria may be used for distinguishing these two types of agreements . The first criteria to be taken into account are the expressions used by the parties. Despite the fact that the expressions of the parties are not sufficient to determine the nature of agreement, it is apparent that these expressions are the starting point for determining the nature of the legal relationship. As has been already indicated, the usage of these two words in place of each other causes substantial problems. This circumstance is mostly observed in translations made from foreign languages into Turkish. The English word “guarantee” is translated into Turkish both as “guarantee” and “suretyship”. However, the nature of the agreement is not taken into consideration in the course of translation. Therefore, the expressions used by the parties are important in determining the nature of the agreement. Nonetheless, the clarity of the parties’ expressions does not remove the need for interpretation.

Other criteria, which can be used, to distinguish between these two agreements are the clauses stipulated in the agreement. Some of the clauses stipulated in the agreement may indicate the presence of a guarantee agreement, whereas some clauses may indicate the presence of a suretyship agreement. For instance, it may be inferred that a waiver of exception aimed at proceeding against the principal debtor instead of the surety or the exception of foreclosure or waiver of the right of recourse may indicate the presence of a suretyship agreement, since the aforesaid exceptions are seen only in suretyship agreements; and it may be accepted that the clauses on waiver of these rights can only be regarded as a suretyship agreement. Additionally, a clause concerning the several and joint liability of both parties may result in the assessment of the security as a suretyship. Further, a reference in the security agreement to the principal agreement from which the principal obligation arises may indicate the presence of a suretyship agreement, since a suretyship agreement is an accessory to the principal agreement, whereas a guarantee agreement is an agreement independent from the principal agreement from which the principal obligation raises.

Furthermore, clauses regarding payment on first request, being bound by an unconditional and non-recourse obligation or the non-existence of an  objection right to the debt may result in the determination that the agreement is a guarantee agreement.

Conclusion

As demonstrated, guarantee agreements and suretyship agreements are two different types of agreements which can be easily mistaken for one another.  However, it is important to discern between the two, and the above-stated criteria may be used to do so. However, the criteria stated above are separately insufficient for the determination of the nature of an agreement. Besides, each legal relationship has its unique conditions. Therefore, each situation must be assessed on a case-by-case basis when determining if a security relationship is a guarantee agreement or a suretyship agreement.