Bank Letters of Guarantee

In today's globalized economy, the complexity of national and international commercial transactions demands robust security mechanisms to ensure that contractual obligations are met. In this context, Bank Letters of Guarantee (Banka Teminat Mektupları) play an indispensable role as a premier security instrument.

Introduction: The Need for Commercial Security

When parties enter into a commercial contract, there is always a risk that one party may fail to fulfill their obligations. For the creditor, such a failure can lead to significant and irreversible financial damages. To mitigate this risk and foster a foundation of trust, businesses frequently utilize bank letters of guarantee. As a form of personal security, they are highly favored because they are issued by banks - reliable institutions with high liquidity - ensuring that compensation is easily and swiftly accessible without entering into protracted litigation.

Legal Framework and Nature in Turkish Law

Interestingly, despite their widespread use, Bank Letters of Guarantee are not explicitly defined or comprehensively regulated in a single specific law in Türkiye. Instead, their legal framework, elements, and consequences have been meticulously shaped over decades by the precedents of the Supreme Court of Appeals (Yargıtay) and evolving commercial practice.

Historically, due to the lack of explicit legislation, there was considerable doctrinal debate regarding the legal nature of these instruments. However, landmark Supreme Court Unification Judgments in 1967 and 1969 conclusively established that a bank letter of guarantee qualifies as a Guarantee Agreement (Garanti Sözleşmesi), specifically falling under the scope of "undertaking the act of a third party" (üçüncü kişinin fiilini taahhüt) as defined in Article 128 of the Turkish Code of Obligations (TCO).

The Three-Party Relationship

A bank letter of guarantee inherently creates a tripartite relationship involving the following parties:

• The Applicant (Lehtar): The debtor in the underlying contract who requests the bank to issue the guarantee.
• The Beneficiary (Muhatap): The creditor in the underlying contract in whose favor the guarantee is issued.
• The Guarantor Bank (Banka): The institution that issues the guarantee and undertakes the risk.

This structure gives rise to three distinct legal relationships:

1. The Underlying Relationship (Temel İlişki): The contract between the Applicant and the Beneficiary (e.g., a construction contract or a supply agreement).
2. The Coverage/Counter-Guarantee Relationship (Karşılık İlişkisi / Kontrgaranti): The agreement between the Applicant and the Bank, stipulating commissions, fees, and the bank's right of recourse if the guarantee is called.
3. The Guarantee Relationship (Garanti İlişkisi): The independent commitment between the Bank and the Beneficiary.

Bank Guarantee vs. Surety (Kefalet): The Crucial Distinction

Understanding the difference between a bank guarantee and a surety agreement (kefalet) is paramount in Turkish law.

Feature	Bank Guarantee (Garanti)	Surety (Kefalet)
Nature of Obligation	Primary & Independent (Asli ve Bağımsız): The bank's obligation to pay is separate from the validity or existence of the underlying contract.	Secondary & Accessory (Fer'i): The surety's obligation depends entirely on the validity and continuation of the underlying main debt.
Defenses	The bank generally cannot invoke defenses that the applicant has against the beneficiary.	The surety can (and generally must) invoke any defenses that the main debtor has against the creditor.
Purpose	Designed to secure against a specific risk and ensure immediate payment upon demand.	Designed to provide a backup payer if the primary debtor defaults, often involving a longer legal process.

Types of Bank Letters of Guarantee

Based on commercial needs, guarantees can take various forms:

• Advance Payment Guarantees (Avans Teminat Mektubu): Secures the repayment of an advance payment made by the beneficiary if the applicant fails to perform the contracted work.
• Performance / Definitive Guarantees (Kesin Teminat Mektubu): Guarantees the full and proper fulfillment of the applicant's contractual obligations.
• Bid / Temporary Guarantees (Geçici Teminat Mektubu): Commonly used in public tenders to ensure the bidder does not withdraw their bid before the contract is signed.
• Termed vs. Indefinite Guarantees (Vadeli ve Vadesiz): A guarantee can have a specific expiry date (vadeli) or remain valid indefinitely until the risk is resolved (vadesiz).

Calling the Guarantee and Possible Defenses

Making a Demand (Ödeme Talebi)

To call the guarantee, the beneficiary must submit a formal demand to the bank. For termed guarantees, this demand must be made before the expiry date. The demand must align with the conditions specified in the letter text.

Can the Bank Refuse to Pay?

Due to the independent nature of the guarantee, the bank's ability to refuse payment is severely restricted. The bank cannot refuse payment by citing disputes in the underlying contract (e.g., "The applicant says they actually delivered the goods").

The bank can only refuse payment based on:

• Defenses arising from the letter itself: e.g., The demand was made after the expiry date, or the signature does not match.
• Abuse of Rights (Hakkın Kötüye Kullanılması): If it is absolutely clear, manifest, and easily provable with definitive evidence that the beneficiary has no legitimate right to claim the money (e.g., fraud), the bank may refuse.

Injunctions (İhtiyati Tedbir) by the Applicant

Applicants often try to obtain court injunctions to stop the bank from paying the beneficiary. Turkish courts are generally reluctant to grant such injunctions because it undermines the fundamental commercial trust in bank guarantees. An injunction is usually only granted if the applicant can provide liquid, indisputable evidence (such as a signed release from the beneficiary) proving that the risk did not materialize or the claim is fraudulent.

The Impact of Concordat (Konkordato)

In recent years, due to economic fluctuations, the use of concordat (a debtor relief and restructuring process) has increased in Türkiye. A critical question arises: If the applicant enters concordat, can the beneficiary still call the bank guarantee?

Because the bank guarantee is an independent commitment of the bank, the applicant's concordat process does not prevent the beneficiary from calling the guarantee and receiving payment from the bank. The bank must pay. Following the payment, the bank's ability to seek reimbursement from the applicant will be subject to the rules of the concordat process.

Conclusion

Bank Letters of Guarantee are the backbone of commercial security in Türkiye. Their independent, primary nature ensures that creditors can secure their investments and receivables effectively. However, the nuances of drafting, calling, and defending against unfair demands require a deep understanding of Supreme Court jurisprudence and the Turkish Code of Obligations. Both applicants and beneficiaries must approach these instruments with careful legal scrutiny to maximize their protection and avoid unintended financial liabilities.

Frequently Asked Questions

What is the main difference between a bank guarantee and a surety (kefalet) under Turkish law?

A surety is accessory (secondary) to the main contract, meaning if the underlying contract is invalid or the debtor has valid defenses, the surety is not obliged to pay. A bank guarantee, however, is a primary and independent undertaking. The bank must pay upon the beneficiary's demand regardless of disputes in the underlying contract.

Can a bank refuse to pay a letter of guarantee?

Generally, no. Since the bank guarantee is independent of the underlying relationship, the bank cannot invoke defenses arising from the contract between the applicant and the beneficiary. The bank can only refuse payment if there are defects in the letter of guarantee itself, or if there is a clear, proven abuse of rights (fraud) by the beneficiary.

How does concordat (konkordato) affect a bank guarantee?

When a company (applicant) enters a concordat process, it protects them from debt enforcement. However, because a bank guarantee is an independent undertaking by the bank, the beneficiary can still call the guarantee and demand payment from the bank. The bank's subsequent right to seek recourse from the applicant will be subject to the concordat provisions.