Türkiye is relatively new to the use of surety bonds, which are financial instruments covering a wide range of products, compared to other countries. The country formalized the use of surety bonds with the “General Conditions of Surety Bonds” publication by the Undersecretariat of Treasury on 01.02.2014. Surety bonds reduce some of the burden placed on the private sector in public tenders and enable the use of bank letter credit limits in other areas of need. Around the world, surety bonds have served as a type of insurance for quite some time. They are essentially an alternative to letters of guarantee issued by Turkish banks.
Since surety bonds are a recent addition to Turkish legal doctrine, the law makes no explicit reference. In general, they refer to a contract where, in exchange for a premium payment, an insurance company agrees to assume any obligations owed to an obligee resulting from the risk that the debtor fails to fulfill the obligations specified in the policy.[1] In a surety bond, the parties are the insurer, the insured or the debtor, and the obligee.
Even though the legality of surety bonds and the terms associated with them are still debated, these instruments obligate the insurance company to act as surety for the debtor’s potential failure to fulfill their contractual or legal obligations, including the payment for the surety bond issued for the creditor or the employer. This type of insurance differs from traditional insurance in that it replaces letters of guarantee used in the banking industry.
Legal Basis
In Türkiye, the first regulation concerning surety bonds was the “General Conditions of Surety Bonds” (“General Conditions”) published by the Undersecretariat of Treasury in 2014.[2] General Conditions specify the following bonds in the respective order: Advance payment bond, production/maintenance/repair bond, fidelity bond, customs and court bond, bid bond (temporary bond), payment bond, performance bond, contract bond, public tender bond, and public claims bond.
On 05.12.2017, the “Law Amending Certain Tax Laws and Some Other Laws”[3] was published in Official Gazette No. 30261 and clarified the legal basis of surety bonds. The Law amended articles 4 and 34 in Public Procurement Law no. 4734, enabling businesses to submit surety bonds issued by Turkish insurance companies to tender authorities as a type of guarantee in any tender, including public tenders. The amendment formed the legal basis of surety bonds by adding the term “letters of guarantee” to article 34 and the following phrase to article 4 in the Public Procurement Law: “Letter of guarantee shall mean a letter of guarantee given by a bank, as well as a surety bond issued by a Turkish insurance company.”
Article 5 of Insurance Law no. 5684 requires insurance companies to obtain a license for each field in which they wish to provide services. Therefore, an insurance company with no license for providing surety bonds is not allowed to issue them.
Across the world, the surety bond usage rate is highest in the United States, where insurance companies meet the demand for letters of guarantee. In applicable cases, banks do not provide bank guarantees; instead, insurance companies issue surety bonds.[4] In Türkiye, surety bonds were unavailable until recently due to a lack of supply from insurance companies and a legal basis. As a result, the recognized form of the bond was a letter of guarantee issued by a bank.[5] Thanks to recent amendments, surety bonds can now be used in relevant transactions.
In 2021, Elvan, the Turkish Minister of Treasury and Finance at the time, underlined the government’s efforts to stay current with global business trends and to introduce new products and services, stating: “For example, we must focus on promoting products that would increase our country’s trading capacity, such as credit insurance and surety bonds. As state representatives, we are ready to enforce regulations that would pave the way for such changes.”[6] This statement proves the administration’s support for the use of surety bonds.
Surety Bond vs. Bank Guarantee
The primary alternative to a surety bond is a letter of guarantee issued by a bank. The main distinction between them is in the fulfillment of obligations. While banks pay the amount specified in the guarantee in the event of non-performance of obligations, insurers prioritize the completion of a transaction.
The primary benefit of a surety bond over a bank guarantee is that it does not have the latter’s limits. Therefore, surety bonds facilitate private sector operations. As a result, following the formation of a legal basis, the use of surety bonds has gained popularity and is likely to rise in the future. Another benefit of surety bonds is that the insurance company conducts risk analyses and performance evaluations before issuing a surety bond. When a risk materializes, it pays compensation and fulfills the necessary obligations.[7]
Using Surety Bonds in Public Tenders
In Türkiye, the most common use of surety bonds is in public tenders. The publication of the General Conditions in 2014 and the amendment in the Public Procurement Law in 2017 allowed for the use of surety bonds in public tenders, which generally require high investment costs. As indicated above, companies benefit from obtaining surety bonds for public tenders and using bank loans for other purposes. The private sector is increasingly turning to surety bonds for public tenders because they offer effective alternatives, particularly for businesses, such as the public tender bond and the production/maintenance/repair bond.
A surety bond typically serves the same purpose as a bank letter of guarantee. However, surety bonds are favored by the private sector because they offer an alternative method for performing obligations, allow for exceeding bank loan limits and provide insurance risk analyses. Surety bonds are commonly issued by insurance companies all over the world. Therefore, it is good news that this system has been recognized under Turkish law. Still, surety bonds must be subject to more stringent legal requirements to end debates over their legal basis.
[1] https://dergipark.org.tr/en/download/article-file/1444534
[2] https://tsb.org.tr/media/attachments/Kefalet_Sigortası_Genel_Sartları.pdf
[3] https://www.resmigazete.gov.tr/eskiler/2017/12/20171205-12.htm
[4] https://dergipark.org.tr/tr/download/article-file/571234
[5] https://sigortacigazetesi.com.tr/banka-teminat-mektubuna-alternatif-kefalet-sigortasi/
[6] https://www.hmb.gov.tr/duyuru/hazine-ve-maliye-bakani-bakan-lutfi-elvan-turkiye-sigorta-birliginin-genel-kuruluna-video-konferans-yontemiyle-katildi
[7] https://dergipark.org.tr/en/download/article-file/1444534
