What Risks Do You Take When You Act as a Guarantor?

What Risks Do You Take When You Act as a Guarantor? Debt relationships often necessitate a need for security. Various legal means are utilized to reduce the creditor’s risk. The most common of these security mechanisms is the surety contract. Surety is the undertaking of a third party to pay the debtor’s debt. The Turkish Code of Obligations (TCO) regulates this contract in detail. Validity of the surety contract is tied to special form requirements. The surety’s liability is limited by the amount undertaken. This article examines the definition, validity requirements, and types of the surety contract. The surety’s responsibilities arising from the debt and the rights held against the creditor are discussed in detail.

I. Legal Foundations of the Surety Contract

Surety is defined as a personal security contract. The surety undertakes the risk of the debtor failing to perform their obligation.

A. Definition and Elements

The surety contract is regulated by Article 581 of the TCO. This contract is established between the creditor and the surety. The debtor is not required to be a party to this contract.

• Existence of the Principal Debt: Surety is an accessory contract, dependent on the principal debt. If there is no principal debt, the surety is also deemed invalid. The amount and nature of the debt must be clearly specified.
• Form Requirement: The surety contract must be made in written form. The maximum amount for which the surety is responsible and the date of the surety must be written in the surety’s own handwriting. Failure to comply with these mandatory form requirements invalidates the contract.
• Capacity of the Surety: The person who will act as the surety must have full legal capacity. A married person acting as surety is subject to the consent of their spouse in some situations.

B. Rule of Spousal Consent (TCO 584)

The surety given by a married person is subject to a special legal status.

• Requirement for Consent: Written consent of the other spouse is sought when one of the spouses acts as a surety. This consent must be given before the contract is established or at the latest at the time the contract is established.
• Exceptions: Spousal consent is not required for the surety given by an owner of a commercial enterprise registered in the trade registry or a company partner. This arises from the necessities of commercial life.

II. Types of Surety and Scope of Liability

The level of the surety’s liability varies according to the type of contract. The TCO regulates three basic types of surety.

1. Ordinary Surety (Adi Kefalet) (TCO 585): This is the most common type of surety. The surety has the right to request that the debtor be pursued before the creditor applies to the surety for the performance of the debt. The surety cannot be pursued before the debtor is pursued.

• Benefit of Excussion: The creditor must first apply to the principal debtor. Enforcement proceedings must be initiated against the debtor and must prove unsuccessful.
• Exceptions: The benefit of excussion ceases if proceedings against the debtor have become impossible. For example, the right of preference is lost if the debtor becomes bankrupt or flees abroad.

2. Joint and Several Surety (Müteselsil Kefalet) (TCO 586): In this type, the surety has agreed to be jointly and severally liable with the debtor. The creditor has the right to directly pursue the surety without applying to the debtor first.

• Direct Application: The creditor can begin proceedings against the surety once the debtor is in default. This type of surety is frequently used in banking and financial transactions.
• Form Requirement: The provision regarding joint and several surety must be explicitly stated in the contract.

3. Surety for the Surety (Kefile Kefalet) (TCO 590): This is an undertaking to be liable not for the principal debtor’s debt, but for the debt of another surety. The person who is surety for the surety is held liable to the principal creditor. Liability is conditioned on the primary surety failing to pay their debt.

III. Surety’s Legal Responsibilities and Rights

The surety’s liability is limited by the maximum amount and the term of the debt specified in the contract.

A. Surety’s Liability

The surety is not only responsible for the principal debt amount.

• Interest: Unless otherwise stipulated in the contract, the surety is liable for the interest accrued between the date of the surety and the date of payment.
• Enforcement Costs: The surety is liable for the enforcement expenses incurred by the creditor against the debtor.
• Maximum Amount: The surety’s liability cannot exceed the maximum amount written in their own handwriting in the contract.

B. Surety’s Defenses (Def’iler)

The surety has certain rights of defense (defenses) against the creditor.

• Debtor’s Defenses: The surety can use all objections that the debtor can raise against the creditor. For example, the defense that the debt has prescribed can be made.
• Surety’s Own Defenses: The surety can also use their own special defenses. For example, the objection that the surety contract was not made in accordance with form requirements is raised.
• Defense of Prior Liquidation of Collateral: The surety can request that the collateral given by the debtor for the debt be liquidated first. This defense is particularly important in ordinary surety.

C. Principle of Subrogation (TCO 596)

The surety takes the place of the creditor the moment they pay the debt. This is called the principle of subrogation.

• Assignment of Claim: The surety acquires all the rights of the creditor to the extent of the payment made. The right to claim the debt from the debtor has arisen.
• Transfer of Guarantees: All collateral and lien rights held by the creditor for the debt are transferred to the surety. The surety’s right of recourse is secured in this way.

IV. Termination of the Surety Relationship

The surety contract terminates through various means.

A. Time-Bound Surety: If a term has been determined in the contract, the surety automatically terminates upon the expiration of this term.

B. Indefinite Surety: If no term has been determined in the contract, the surety can terminate the contract under certain conditions. The right to terminate arises after the debtor falls into default. The surety can exercise the right to terminate after ten years in non-commercial transactions.

C. Termination of the Debt: The termination of the principal debt for any reason (payment, release, set-off) also terminates the surety.

D. Creditor’s Breach of Duty of Care: The surety is released from liability if the creditor loses the collateral or guarantees in their possession. The creditor’s fault-based action has damaged the surety’s right of subrogation.

V. Special Circumstances and Areas of Application

Surety is used in different legal transactions.

• Limit Surety: This is the undertaking of surety for all debts that will arise up to a determined limit. Liability is limited by the determined limit.
• Banking Transactions: Banks generally request joint and several surety in loan agreements. This has accelerated the bank’s collection process.
• Surety in Procedural Law: Surety may be requested to guarantee court decisions. For example, a letter of guarantee is provided for an interim attachment order.

A Guarantee Requiring Attention to Form Requirements

What Risks Do You Take When You Act as a Guarantor? The surety contract is a vital guarantee instrument for the law of obligations. However, the accessory nature of the debt and the mandatory form requirements are critical. Adhering to the handwriting rule is essential for the contract’s validity. The surety must be aware of the responsibility undertaken. Surety assumes the risk of making payment. The principle of subrogation secures the surety’s rights after payment. Obtaining legal consultation is strongly recommended to prevent the loss of rights in this complex process.