Bank Guarantee

Legal Framework

In Turkey, ‘bank guarantee’ is commonly used interchangeably with ‘letter of guarantee’. In cross-border trade and construction projects, guarantees are often drafted as on-demand (‘first demand’) instruments, making the exact demand wording, method of presentation, and expiry mechanics critical.

Under Turkish practice, a bank guarantee (often referred to as a ‘letter of guarantee’) is typically treated as an independent guarantee undertaking, evaluated primarily under the general principles of the Turkish Code of Obligations (TBK No. 6098), good faith, and relevant court practice. This independence means the bank's obligation to pay is triggered solely by the demand conditions specified in the guarantee itself, regardless of disputes in the main transaction. URDG 758 applies only if the guarantee expressly incorporates it by reference. URDG 758 is not statutory law; it operates as contractual rules only when expressly incorporated. Where incorporated, URDG provides standard rules on examination of demands, presentation, and time limits.

Demand (On-First-Demand) vs Conditional Guarantees

The distinction between on-demand and conditional guarantees is critical in practice. An ‘on-first-demand’ guarantee creates a primary obligation for the bank to pay upon receipt of a complying demand, in accordance with the guarantee’s terms and any incorporated rules (such as URDG 758), without requiring the beneficiary to prove the applicant’s breach or default under the underlying transaction. In contrast, a conditional guarantee ties the payment obligation to the presentation of specified documents (for example, a certificate, a contractual declaration, a third-party report, or in some structures an arbitral award or court judgment), as defined in the guarantee text. For on-demand guarantees, strict documentary compliance is paramount; the demand must exactly match the terms of the guarantee. Consequently, the wording of the demand clause is often the most negotiated element, as it determines the ease of calling the guarantee.

Independence from the Underlying Contract

One of the defining features of a bank guarantee, particularly in its on-demand form, is its independence from the underlying sales or service contract. This means the bank determines whether to pay based solely on the facial compliance of the demand and any required documents with the guarantee's terms, rather than investigating the merits of the underlying commercial dispute. Consequently, the bank generally cannot refuse payment citing defenses available to the applicant under the main contract.

Bank Guarantee Essentials (Checklist)

• Parties: Clearly identify Beneficiary, Applicant, and Issuing Bank
• Amount & Currency: Specify limit and any reduction mechanism
• Expiry: Define expiry date or event and claim period
• Demand Conditions: Exact wording and required supporting documents
• Governing Rules: Explicit reference to URDG 758 (if incorporated by reference)
• Dispute Resolution: Governing law and jurisdiction/arbitration for the guarantee itself
• Transferability: State whether the guarantee can be assigned
• Notice Method: Follow the authenticated method specified in the guarantee (e.g., SWIFT, courier, registered mail).

Disclaimer: The information provided in this glossary entry is for general informational purposes only and does not constitute legal advice. For specific cases, please seek professional legal counsel.