Türkçe
The financial problems experienced by the capital companies due to the economic difficulties experienced at the global level due to the coronavirus (COVID-19) epidemic, and the fluctuations in the markets in the pre-epidemic-period, have required the search for different guarantee alternatives. Because of the fact that banks have refused to issue letters of guarantee recently and that accordingly companies have difficulties in securing their debts in their daily business operations, the surety bonds, which create an alternative to bank letters of guarantee, have been effectively discussed lately. So, what is surety bond? How is it issued? How much protection do they offer?
WHAT IS SURETY BOND?
“Surety Bond” was firstly introduced to commercial life with the publishing of General Conditions of Surety Insurance (“General Conditions”) in 2014. According to Article 11 of the Insurance Law, “The main content of insurance contracts is regulated in accordance with the general conditions which will be approved by the Undersecretariat and will be applied by the insurance companies. However, special conditions can be established under insurance contracts in accordance with the nature of the business”. Accordingly; the General Conditions in question are binding in for the issuance of all surety bond contracts.
In addition; Article 4 of the Public Procurement Law No. 4734 was also amended by Article 65 of the Law No. 7061 on Amendment of Some Tax Laws and Other Laws dated 28/11/2017 and the surety bonds are accepted as a guarantee under public tenders accordingly.
The surety bond is a type of contract in which the insurer guarantees the beneficiary, in exchange for the premium paid, against the risk of non-performance of the debt of the insured arising from the legal relationship between the beneficiary and the insured. In that respect; since the surety bonds guarantee the performance of the obligations of the debtor (insured) against the beneficiary, the surety bonds are issued for the same purpose of letters of bank guarantee.
WHAT ARE THE ELEMENTS OF SURETY BOND?
Surety bonds consist of trilateral relationship:
Insured: Insured is the party who have entered into contractual relationship with the Beneficiary (Creditor).
Insurer: Insurer is an insurance company which is authorized to issue surety bond.
Beneficiary: Beneficiary is the party against which the Insured has undertaken the performance of its obligations under a contractual relationship.
There are two stages for the issuance of surety bonds:
First of all; a framework contract is signed between the debtor and the insurer to provide guarantee for the debtor’s current or future debts. The framework agreement is a document that constitutes the basis of the surety bonds to be issued by the insurer in favor of the insured and determines the main conditions to be applied for surety bonds.
Surety bonds are a type of a guarantee which is issued on the basis of such framework agreement and includes similar characteristic with the letters of bank guarantee. After the execution of the above-mentioned framework agreement, surety bonds are issued based on this agreement. The insurer requests for the issuance of a surety bond for a specific project or contract, and the insurance company decides whether to issue such surety bond by conducting a risk assessment.
IS IT POSSIBLE FOR THE SURETY BONDS TO BE CANCELLED UNILATERALLY BY THE INSURER OR INSURED?
Insurance premium payments regarding surety bonds are paid by the insured in advance prior to the issuance of the respective surety bond. For that reason, it would not be possible for the surety bond to be cancelled due to the failure of the insured to make the necessary insurance premium payments.
In addition; it is possible for the insured and the insurer to terminate the framework agreement unilaterally. However, even if the said framework agreement is terminated unilaterally within the validity period of the surety bond, the surety bond issued based on such framework agreement will remain valid and the guarantee obligations of the insurer against the beneficiary under the surety bond will continue.
For that reason; just similar to the letters of bank guarantee, it is not possible to unilaterally eliminate the protection provided by the surety bond, except for the consent of the beneficiary. In that respect; it may be said that the creditor, who is the beneficiary of the surety bond, does not have any risk in this context.
IS IT POSSIBLE FOR THE SURETY BONDS TO BE ISSUED CONDITIONALLY? HOW THE COMPENSATION IS MADE UNDER SURETY BONDS?
Surety bonds may be issued as a guarantee for many legal relationships. The most known guarantee types are; advance payment guarantee, manufacturing-maintenance-repair coverage; misappropriation guarantee, customs and court guarantee, tender participation guarantee (bid bond), payment guarantee, performance guarantee, contract guarantee, public tenders guarantee, public receivables guarantee.
Unlike letters of bank guarantee; surety bonds can be issued conditionally. In this case; the insurer shall have the authority to conduct an investigation as to whether the condition stipulated under the surety bond has been realized. In this context; the payment related to the surety bond is made only if the beneficiary provides adequate evidence to prove that the condition indicated under the surety bond is realized (for example, the insured (debtor) has not fulfilled its obligations under the contract, the related administrative authority has decided to liquidate the bid bond of the insured or as a result of the trial, the court guarantee submitted to the insured is ruled to be liquidated).
However, the compensation payment under the unconditional surety bonds, which provide the same legal protection as the letters of bank guarantee, is made immediately by the insurer upon the compensation request of the beneficiary without making any investigation. In this case, the insurer cannot refuse to make compensation by making a plea of the insured and cannot investigate whether the risk subject to the compensation request has been realized.
CAN SURTEY BONDS BE AN ALTERNATIVE OF LETTERS OF BANK GUARANTEE?
In the light of our explanations above; although surety bonds, which are issued without any condition, are referred to as surety bonds, they are actually a type of letters of guarantee. This is also confirmed under article 19 of the Turkish Code of Obligations which states that “in determining and interpreting the nature of a contract, the common and real wills of the parties are sought regardless of the words used by the parties to hide their true meaning or by mistake”.
Under the decision of the 12th Civil Chamber of the Supreme Court numbered 1989/8501 E. 1989/3949 K., this matter is explained as follows: “Although there is a surety statement, the document in question is a letter of guarantee. In accordance with Article 110 of the previous Code of Obligations (Turkish Code of Obligations Article 128), letters of guarantee are guarantee contracts that guarantees the act of the third party, and the responsibility of the guarantor is separate and independent from the main contractual relationship.”
However, the important point here is that the surety bond must be issued unconditionally. A surety bond may only be an alternative to a letter of bank guarantee if the same is issued unconditionally. In that respect; the conditional surety bonds will not be considered as an alternative to the letters of bank guarantee, since the same will not provide the same legal protection as the letters of bank guarantee.
WHAT SHOULD BE TAKEN INTO CONSIDERATION WHILE THE ISSUANCE OF THE SURETY BONDS?
As explained in detail above; in order for a surety bond to have equivalent protection with a letter of guarantee, it must be issued unconditionally. Therefore; in the text of the relevant surety bond, it is necessary to indicate that “the indemnification will be made immediately and without delay, upon the first written request of the beneficiary, together with the legal interest to be accrued from the request date until the payment date, without making any protest, without the permission of the insured, and regardless of any dispute between the parties and its legal consequences.”
WHAT ARE THE ADVANTAGES OF THE SURETY BONDS?
Issuance of surety bonds within the surety insurance instead of a letters of bank guarantee has many advantages for the debtor, in other words the insured.
First of all; it became extremely difficult for banks to issue letters of guarantee, especially in current economic circumstances. While it is difficult even for companies with high credibility to obtain letters of guarantee from banks, it has become almost impossible for smaller companies to carry on business although they are highly capable of fulfilling their obligations properly, have reputable project references and have a high level of professional competence, but just cannot provide economic competence. At this point; surety bonds constitute an excellent alternative for such companies.
While making an evaluation for the issuance of surety bonds, insurance companies generally do not take into consideration of the economical capability of the companies, but take into consideration of the possibilities for the realization of the guarantees risk. For example, while issuance of a surety bond for a contract guarantee, the insurance company makes an evaluation on the risks of failure of the insured to fulfill his obligations under the contract and if the insured’s previous references are reliable, it has the professional capacity to properly perform the obligation and has sufficient financial capacity to carry out this performance, the insurance company agrees to issue a surety bond accordingly. In that respect; it is often easier to maintain the issuance of a surety bond under a surety insurance than to request the issuance of a letter of guarantee from banks.
In addition; since the surety bonds are not registered as “debt” on the company balance sheets and do not affect the credit line accordingly, it creates a more advantageous situation compared to letters of guarantee.
ERKUT LAW OFFICE
For Turkish version, click here.
