AVAL IN BILLS OF EXCHANGE:Its Legal Nature, Form, and Importance in PracticeAn Evaluation Within the Scope of Articles 700-702 of the Turkish Commercial Code
Attorney - Mediator Fatih Mehmet Tercan
info@tercanhukuk.com
1. Introduction
The need for trust and guarantee in commercial life has given rise to aval, a unique guarantee institution for bills of exchange. Although it carries the nature of a personal guarantee like a surety, aval differs from suretyship by being an abstract and independent obligation specific to the law of bills of exchange, and it yields different results in practice. Assuming an important function especially in the circulation of drafts, promissory notes, and checks, aval stands out as one of the fundamental tools that reinforce the security of commercial transactions. This article examines the legal nature, formal conditions, and the liability of the avalist (guarantor) within the framework of Article 700 and the following provisions of the Turkish Commercial Code (TCC) No. 6102; and evaluates the reflections of the fundamental features of bills of exchange on the institution of aval.
2. The Legal Nature and Legal Basis of Aval (TCC Art. 700 et seq.)
Aval is a guarantee institution that ensures the payment of the amount in bills of exchange is fully or partially secured. Regulated in Articles 700 and subsequent articles of the TCC, an aval can be given by a real person as well as by a legal entity through its organ. Unlike other types of guarantees such as suretyship, pledge, or mortgage, aval is a form of guarantee specific only to bills of exchange and is evaluated within the framework of the unique principles of the law of negotiable instruments.
The scope of the aval regarding the beneficiary is quite wide. It is not only in favor of the drawer; an aval can also be given in favor of endorsers or other persons responsible for the bill of exchange. If it is not specified for whom it is given, the aval is deemed to be given for the drawer (TCC Art. 701/4). The person giving the aval becomes liable exactly as the person for whom they have undertaken the commitment.
3. Formal Requirements of Aval (TCC Art. 701)
In the law of bills of exchange, validity is bound by strict formal conditions. The aval annotation must be written on the draft, promissory note, or check, or on an 'allonge' attached to these instruments.
The formal conditions pursuant to TCC Art. 701 are as follows:
The aval annotation must be written on the draft/promissory note/check or the allonge.
The phrase "for aval" or another synonymous expression must be used.
It must be signed by the person giving the aval.
Any signature placed on the face of the draft, excluding the signatures of the drawee or the drawer, is considered an aval annotation. An aval given without complying with the formal conditions is not valid and does not yield legal consequences. In this regard, it is mandatory that the aval is explicitly inscribed into the text of the instrument and the signature of the avalist is present; an aval cannot be given by a separate contract or declaration.
4. Liability of the Avalist and Rights of Recourse (TCC Art. 702)
4.1. Principle of Equal Liability with the Principal Debtor The person giving the aval is in the same legal position as the debtor of the bill of exchange in whose favor the aval was given. This situation constitutes one of the most fundamental points where aval differs from suretyship. While in a suretyship the creditor must first apply to the principal debtor, the liability of the avalist is direct and independent in nature. The creditor may resort to enforcement proceedings specific to bills of exchange against the avalist without seeking any preconditions.
4.2. The Effect of the Invalidity of the Principal Debt on Aval As a natural reflection of the abstraction principle in the law of bills of exchange, even if the debt secured by the avalist is invalid for a reason other than a defect in form, the validity of the aval remains unaffected (TCC Art. 702). This provision is one of the most important regulations that reinforce trust in bills of exchange and make the institution of aval functional. For example, the invalidity of the principal signature on the instrument due to a lack of capacity does not eliminate the liability of the avalist.
4.3. Rights of Recourse If the avalist pays the amount of the draft, they acquire the rights arising from the draft against the person for whom they assumed the commitment and against those who are liable to that person under the draft (TCC Art. 702/3). This right can be exercised by endorsing the instrument to the payee; the moment the avalist makes the payment, they are deemed to have taken over all the rights and claims attached to the instrument.
5. Fundamental Features of Bills of Exchange Affecting Aval
5.1. Negotiability (Circulation Capacity) Bills of exchange are negotiable instruments. The transfer of the instrument and the transfer of the right it contains occur simultaneously. Thanks to this, bills of exchange serve as both a means of credit and an instrument of payment in commercial relations; their entry into international circulation is also based on these features. Because they can change hands quickly and frequently, international regulations such as the Hague and Geneva rules have been adopted to ensure uniformity in this field.
5.2. Principle of Abstraction In bills of exchange, there is no connection between the right embodied in the instrument and the underlying debt relationship that caused this right to arise. Once a bill of exchange is issued, a defect or flaw in the underlying relationship that gave rise to it does not affect the validity of the bill of exchange. As a result of this principle, the debtor cannot assert the invalidity in the underlying debt relationship against third-party bearers. The same principle applies in terms of aval: the obligation of the avalist continues to exist independently of the underlying relationship.
5.3. Independence of Signatures and Public Trust Pursuant to TCC Art. 677, signatures on a bill of exchange belonging to persons without capacity to borrow, or forged or fictitious persons, do not affect the validity of the other signatures. The owner of a valid signature cannot escape liability by asserting the invalid signatures. On the other hand, bills of exchange are instruments that enjoy public trust, and the bearer acquires only the rights written on the instrument. In order to protect this trust, acts of alteration and forgery relating to bills of exchange are defined as crimes under Articles 204 and 210 of the Turkish Penal Code.
6. Fundamental Differences Between Aval and Suretyship
Although both aval and suretyship carry the nature of a personal guarantee, their legal regimes differ significantly from each other. By the decision of the Grand General Assembly on the Unification of Judgments of the Court of Cassation dated 20.04.2018 and numbered E.2017/4, K.2018/5, it was ruled that the condition of spousal consent regulated in TCO Art. 584 shall not be applied to the institution of aval in bills of exchange. This decision is extremely important in terms of legally clarifying the fundamental points where the two institutions diverge.
The fundamental differences can be summarized as follows:
While suretyship is subject to the general law of obligations within the framework of TCO Art. 582 et seq. provisions, aval is solely subject to the law of bills of exchange under the scope of TCC provisions.
While suretyship is dependent on a valid and existing principal debt, aval creates an abstract obligation independent of the principal debt.
While strict validity conditions such as spousal consent and a written form are sought in suretyship, the validity of aval is evaluated together with the instrument as a whole and there is no obligation for a separate contract.
7. Conclusion
Aval, as the unique guarantee institution of the law of bills of exchange, assumes an important function in commercial life and directly contributes to the circulation security of the instruments. Shaped within the framework of TCC Art. 700-702, the institution of aval; significantly diverges from suretyship thanks to its independence from the principal debt, the direct liability of the avalist, and the assurance provided by the principle of abstraction, and it offers a stronger guarantee opportunity to creditors.
It is of great importance to strictly comply with the formal conditions when giving an aval in practice. In the event that the aval annotation is not explicitly and properly placed on the instrument, the guarantee shall be deemed invalid; the creditor will not be able to benefit from the assurance. For this reason, the correct application of the TCC provisions by the parties in the position of both the avalist and the creditor is of critical importance in terms of preventing possible legal disputes.
Legal Bases and Judicial Decisions
Turkish Commercial Code No. 6102, Art. 700, 701, 702, 677, 671 et seq., 776-779, 780-781
Turkish Code of Obligations No. 6098, Art. 582 et seq., 584
Turkish Penal Code No. 5237, Art. 204 and 210
Court of Cassation Grand General Assembly on the Unification of Judgments, E.2017/4, K.2018/5 (20.04.2018) – Decision on the non-requirement of spousal consent in aval
Hague Convention and Geneva Conventions on Bills of Exchange