GUARANTEE CONTRACTS

I- DEFINITION AND SPECIAL CHARACTERISTICS

Upon Turkish law, a specific kind of personal assurance is “Guarantee.” In guarantee contracts, the guarantor strictly undertakes to pay the loss to be experienced by creditor with his total mass of assets, which are leviable, if the original debtor fails to fulfill his obligations arising from the legal relationship between the creditor and the original debtor.

A- Guarantee Contracts are Accessory

The main difference of guarantee contracts from warranties and bank guarantees, which are also types of personal assurance, is the fact that, the validity of the guarantee is strictly bound on a valid, binding and continuing legal relationship between the creditor and the original debtor. So, guarantee contracts are accessory. As a result of this feature, the guarantor will be responsible to the creditor, at the same extent and for the same amount with the original debtor. If the original debt relationship is invalid due to any reason or it is dissolved, the guarantee contract will not be automatically invalid, however then the guarantor will not responsible to the creditor any more. Moreover, if the guarantor happens to accept a stipulation to the contrary, this stipulation will not be valid due to the violation of the principle of guarantee contracts being accessory.

As a result of this characteristic, the guarantor is able to set forth the defense opportunities (objection, plea) againist the creditor, which would be set forth by the original debtor himself. (Please see Obligations Code art. 497). Even if the guarantor fails to use this right, the original debtor might lose this right too, with the presence of certain conditions.

B- Guarantee Contracts are Secondary

With the secondary characteristic, the creditor is unable to address the guarantor without addressing the original debtor first. This feature only exists at the ordinary guarantee. Because, in ordinary guarantee, the creditor shall firstly address to the original debtor and should recourse to the foreclosure, if the debt is assured with a pledge. If the creditor addresses the guarantor without trying these, the ordinary guarantor shall be able to set forth the pleas which are stated at article 486 of Obligations Code.

However, at the successive guarantees, the secondary quality of guarantee is ineffable.

C- Being Alienated from the Main Debt

This characteristic is especially important, regarding the difference between the successive indebtedness and successive guarantee. That is, whether the main subject of the legal relationship between the original debtor and the creditor is commodities, services or money, as a general rule, the subject of the guarantor’s debt is only “money.” Because, the guarantor does not assure to perform the liability of original debtor; instead, he strictly undertakes to fulfill the benefits expected by the creditor from the performance of the liability. In simple words, these benefits are the expectation interests.

Secondly, when the guarantor pays to the creditor his expectation interest, his guarantee debt is dissolved; but this does not mean the dissolution of the original debtor’s debt. Therefore, the guarantor who performs his liabilities to the creditor acquires right of recourse to the original debtor, being the successor of creditor’s rights.

D- Gratious Contract Fastening the Obligation to a Sole Party

Only person who undertakes a debt with the guarantee contract is the guarantor. The creditor is not subject to a performance liability arising from this contract.

II – VALIDITY CONDITIONS OF GUARANTEE CONTRACT

A– The debt which is assured with the guarantee contract must be valid and binding. This is also a result which arises from the accessory feature. Therefore, if the original debt relationship is invalid due to the lack of capacity to contract, fictituous bargain or any of the reasons listed at article 19 of OC, or the original debt relationship is dissolved due to the reasons stated at article 113 et seq. of OC, the guarantor shall not be responsible in any means. Even if there are stipulations to the contrary at the contract, the guarantor shall not be responsible; unless the contract’s main target is warranty.

The meaning of OC art. 485/final is, at any original debt relationship in which the guarantor has one-sided disconnectedness due to error or partial incapacity, if the guarantor furnishes a collateral giving the impression of being aware of the actual situation, it is commonly accepted that, actually there’s a contract of warranty which is dependent on the form requirements of the guarantee contract. In this case, the guarantor is able to set forth the original debtor’s all objections and pleas, other than the error of the original debtor or invalidity of the debt relationship due to the partial incapacity.

The debt assured with the guarantee contract can either be existent or prospective.

B – The guarantee contract has to carry the validity conditions set forth at art. 19 of OC, which are binding for all types of contracts in general. Here, about the capacity to be guarantor, the provisions of Turkish Civil Code art. 449, art.429/b.9, Turkish Law of Bankruptcy art. 290 and the legal entities’ capacity to conclude guarantee contracts only with limited to their establishment aims are worth mentioning.

C- The guarantee contract should be concluded in ordinary written statement form and the liability amount of the guarantor should be written on the guarantee bond. Numerically determination of this amount is not mandatory, it is widely accepted that, if the guarantor’s liability amount is comprehensible from the guarantee bond or from the original debt relationship in which the guarantee bond is bound to (in practice, especially for the guarantees which are bound to the credit cards), these will be sufficient.

The amount of guarantor’ liability might be shown in foreign currency.

All types of contracts which increase the liability burden of guarantor should be concluded with the formal requirements, shown at art. 484 of OC.

III- TYPES OF GUARANTEE CONTRACTS

A- Ordinary Guarantee: OC art. 486. It is not much used at the practice, due to its secondary features. In ordinary debt relationships, the guarantor is assumed to be ordinary guarantor, if the succession fact is not explicitly mentioned at the contract. The ordinary guarantor has special pleas, such as discussion (spot case) and foreclosure.

B- Successive Guarantee: It is widely used in practice. In ordinary business deals, the guarantor gives assurance with the title of successive guarantor and in commercial business deals, the guarantor is automatically assumed to be successive, upon art. 7 of Turkish Commercial Code and the creditor is free to address either one of them (original debtor or guarantor) or both.

C- Common Guarantee: More than one person acts together with the desire and intention of being common guarantors. It has two kinds, such as ordinary and successive common guarantee. In ordinary common guarantee, the guarantors have the distribution plea right as well as their other pleas arising from ordinary guarantee, according to OC art. 488.

D- Recourse Guarantee: OC art. 489/ II. If the guarantor which is successor to the creditor having paid to him recourses to the original debtor, this guarantor assures the guarantor that original debtor will pay his debt to him.

E- Guarantee to Guarantor: OC art. 489/ I. This type has no practical usage. Here, another guarantor assures the main guarantor to the creditor with another guarantee contract.

SCOPE OF THE GUARANTOR’S LIABILITIES

If the amount of money for which the guarantor will be liable is explicitly written at the guarantee contract, this will be definitely beneficial for the guarantor. Because, the guarantor is liable from the original debt (main debt) + all result’s of original debtor’s default (such as default interest) + if any contractual interest rate is determined at the contract, one yearly interests and the yielding interests + if he is duly informed, the court expenses, with the amount stated at the guarantee contract being the maximum. If the total amonut of these listed items exceed the maximum amount of the guarantee bond, the guarantor shall be only liable to pay to its extent. If the guarantor himself is in default of his “guarantee debt”, then he will be liable without being bound to this maximum.

REASONS FOR DISSOLUTION OF GUARANTEE CONTRACTS

1. Dissolution of the original debt relationship (OC art. 492)

2. Change of the original debtor. (In case of imperfect delegation) the guarantor’s unwillingness to show his explicit acceptance (OC art. 176)

3. In guarantee with a certain period, if the creditor does not start the execution proceedings within one month after the expiry of guarantee period or suspends the execution proceedings for a long time, the guarantor shall be automatically freed from the guarantee debt. We have to stress on the fact that, if there isn’t any explict understanding about the original debt relationship to be time-limited as well as the guarantee contract, then the guarantee contract shall not be automatically time-limited.

4. At a guarantee contract which is concluded for an unlimited time, if the creditor does not enforce its credit within one month after the debt’s maturity date or suspends the execution proceedings for a long time, the guarantor shall be freed from the guarantee debt.

5. The creditor and the guarantor are free to determine the dissolution of guarantee contract, in any time they wish.

6. According to OC art. 501, if the creditor does not accept the payment done by the debtor without any rightful reason, the guarantor will be freed from his guarantee debt without being obliged to pay.

7. According to OC art. 502, if the original debtor goes bankrupt and the creditor fails to inform the guarantor, the guarantor will be freed from the guarantee debt in proportion to his losses arising from his unability to inform the trustee of the bankrupt’s estate about his prospective right of recourse.

8. The creditor is obliged to provide the guarantor, who is about to make the payment, the documentation on his hands which are required for the execution proceedings againist the original debtor and the other warranties which are obtained for the original debt. If he fails to perform this duty (liability), the guarantor will be freed from his guarantee debt, according to OC art. BK md. 501/c.2.

GUARANTOR’S RIGHT OF RECOURSE TO THE ORIGINAL DEBTOR

When the guarantor pays his guarantee debt to the creditor, his guarantee debt will be dissolved, however the original debtor will not be freed from his debt. The guarantor, who has paid his debt to the creditor will be his successor and then, start the execution proceedings againist the original debtor. The guarantor’s pre-renouncement of this right is invalid, according to OC art. 496. At the recourse stage, the original debtor is able to set forth the objections and pleas, arising from the original debt relationship and which had to be set forth to the creditor during the execution procedure, to the guarantor. Consequently, if there are any defense means which weren’t used during the previous execution procedure, the guarantor will lose his recourse right in proportion to them, upon OC art. 497. Besides, in case of a situation stated at art. 498 of OC, the guarantor will lose his recourse rights.

MATURITY AND PRESCRIPTION OF THE GUARANTEE DEBT

At earliest and if anything about the maturity date is determined at the contract, the guarantee shall be mature whenever the original debt relationship is mature. If the creditor is obliged to notify the debtor to have the original debt mature, the guarantor is entitled to claim the immaturation plea, in case the guarantor is informed about this notification. If the debt assured by the guarantor becomes mature before the due date, because of original debtor’s bankruptcy, the guarantor cannot be enforced by the creditor before the original debt’s actual due date, according to OC art. 491. However, this provision is not mandatory.

The guarantee contract is up to the 10 yearly general prescription period after its date of maturity.

REFERENCES: Tandogan, Special Debt Relationships, V.2, Ankara, 1987; Reisoglu, Guarantee upon Turkish Law and Banking Practice, Ankara, 1992; Elcin-Grassinger, Guarantor’s Defense Opportunities againist the Creditor, upon Turkish Obligations Code, Istanbul, 1996

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