Ercüment Erdem Assoc. Prof. H. Murat Develioğlu

The Problem Of Whether The General Provision Regarding Personal Guarantees in Article 603 Of The Law Of Obligations Shall Be Applied To Bill Guarantees

August 2014

Introduction

The Law of Obligations No. 818 did not entail any regulation with respect to conditions for validity for personal guarantee agreements, other than surety. Neither is there any such regulation about this in the Swiss Law of Obligations. However, Article 603 entitled “Scope of Application”, which was added with the Turkish Law of Obligations No. 6098[1](“TLO”), regulates this issue and brings novelties with regards to agreements which are concluded in any other name but are related to personal guarantees granted by real persons, thus the scope of application of the provisions regarding surety are extended. The justification of the aforementioned article sets forth that this provision, in essence, shall be applicable to agreements concluded in any other name on behalf of the creditors in order for them to be exempt from the provisions protecting the surety, for instance to guarantee agreements.

For bill guarantees, which qualify as personal guaranties and are found in Turkish Commercial Code No. 6102[2] (“TCC”), it is a question of debate whether TLO Art. 603 is applicable or not. The discussions and decision of the Court of Cassation with respect to this issue are examined below.

General Information and Conditions of Validity with respect to Surety Agreements

Pursuant to TLO Art. 581, surety agreements are agreements in which the surety undertakes to be personally liable to the creditor for the consequences of the obligor’s non-performance of his obligation. This agreement also imposes an ancillary obligation to the surety. The surety agreement is concluded between the creditor and the surety. The conditions of a surety agreement are: the existence of a valid main obligation and a surety agreement, the intention of being a surety and the form requirements.

These conditions are listed below:

Form Requirement

Pursuant to TLO Art. 583/1, agreements which are not concluded in writing, and which do not bear the hand writing of the surety with respect to the maximum amount, the date and joint suretyship in case there is joint suretyship, shall not be valid.

Capacity for Being a Surety:

Real Persons’ Capacity for Being a Surety

Establishing a surety agreement is forbidden for minors and persons with limited capacity.

Persons with a legal advisor cannot be a surety without the permission or approval of their advisors.

A person who is not a surety during the period running as of the announcement of the term given for a bankruptcy agreement is specified as an example of a situation which limits the capacity for being a surety.

Legal Person’s Capacity for Being a Surety

The Ultra vires principle is effective for legal persons; thus, surety agreements must serve the purpose of associations or foundations.

By stating that, “Trading companies, pursuant to Article 48 of the Turkish Civil Law, may take advantage of all the rights and undertake the depts. Legal exceptions are reserved with respect to this matter” under TCC Art. 125/2, the ultra vires principle was abandoned for trading companies. The exception specified in the article is Art. 371/2 TCC with respect to joint stock companies. As per said article, joint stock companies are bound by the transactions concluded between their authorized persons and third parties for issues other than the company’s principle field of operation, where the third parties are acting in good faith.

Consent of Spouse

Pursuant to TLO Art. 584, written consent of the spouse is required in order for a real person to be a surety. However, as stated in the article, if there is not a separation decision given by the court or unless the statutory right of living separately has arisen, such consent is a condition for validity.

If the creditor of the main obligation is the spouse of the surety, consent of the spouse is no longer a condition for validity. Consent of the spouse is not necessary regarding the amendments to the surety agreement made in favor of the surety.

General (Brief) Information on Bill Guarantee

A bill guarantee is a document used to secure a debt, arising from a negotiable instrument of law. Form requirements with respect to bill guarantees are specified under TCC Art.701. Pursuant to said article, a bill guarantee shall be written on a bill of exchange or allonge in order to be valid. The writing shall state “for bill guarantee” or a corresponding expression shall be used and the signature of the person providing the bill guarantee is required.

Since a bill guarantee is a security institution peculiar to negotiable instruments of law regulated under the TCC, it cannot be seen as a surety agreement specified under the TLO. Besides, there are special provisions that separate bill guarantees from surety. First of all, surety provides an ancillary security whereas a bill guarantee is independent and has principal character. Moreover, in contrast to a surety, a bill guarantee annotation must be written on a bill of exchange, bond or allonge.

Agreements Included in the Scope of Article 603 and the Issue of whether said Provision shall be Applicable to Bill Guarantees

Article 603 sets forth the following regulation: “the provisions regarding the form of the surety, legal capacity for being a surety, and consent of the spouse are also applicable to other agreements entitled differently where real persons provide personal guarantee.” In the doctrine, the application area of this article is a question of debate. There is no doubt that guarantee and assurance debt participation agreements for the purpose of assurance are within the scope of Art.603. The characteristics of these agreements are that their forms and provisions are not explicitly determined within the law.

On the other hand, implementation of Art. 603 was debatable for agreements whose forms and provisions have already been specified in the law, such as the bill guarantee. There were two opinions about this matter. The first opinion defended that this provision should be applied to bill guarantee relationships as well. For justification, the defenders of this opinion asserted that TLO Art. 603 is a mandatory provision and non-application of this regulation to bill guarantees may prevent the purposes of the provision by tangling around it. Authors who defend the second opinion hold that since the form requirements of a bill guarantee are specified in the TCC, bill guarantees cannot be subject to TLO Art.603.

Court of Casssation’s Opinion

The Court of Cassation decision, dated 04.07.2013,[3] states that, “Under the Turkish Commercial Code, the consent of the spouse requirement is not regulated in order to make a commitment. Since negotiable instruments are regarded as business transactions pursuant to the Article 3 of the Turkish Commercial Code No. 6102, there is no place for the application of Art. 584 of the Law of Obligations in the present case since Law of Obligations counts as a general provision against the provisions of the Turkish Commercial Code”, and therefore embraces the second opinion.

In another decision[4], the Court of Cassation notes the differences between the bill guarantee and surety, and again reaches the same conclusion; specifying that TLO Art.603 cannot be applied to bill guarantees due to the existence of special provisions under the TCC.

Conclusion

Article 603 entitled “Application Area”, which was not present in the Law of Obligations No. 818, generated different opinions. However, pursuant to recent decisions rendered by the Court of Cassation, it may be concluded that a new regulation will not have an impact on the bill guarantee relationship, which is regulated through the special provisions in the TCC. Bill guarantees shall only be subject to the provisions in the TCC.



[1] Published on the Official Gazette dated 11 January 2011 and no. 27836, and entered into force on 1 July 2012.

[2] Published on the Official Gazette dated 14 February 2011 and no. 27846, and entered into force on 1 July 2012.

[3] Supreme Court, 12th Civil Chamber decision numbered 2013/16400 E., 2013/25100 K., and dated 4.7.2013.

[4] Supreme Court, 12th Civil Chamber decision numbered 2013/10055 E., 2013/24337 K., and dated 27.6.2013.