Letter of Credit

1. Conceptual Context: L/C vs. Other International Payment Methods

In international B2B trade, buyers (applicants / amir) and sellers (beneficiaries / lehdar) operate in different countries with distinct legal, exchange control, and trade compliance systems. Turkish exchange regulations, regulated under Decree No. 32 on the Protection of the Value of the Turkish Currency, categorize import/export payment mechanisms into five standard models. Understanding where the Letter of Credit sits within this risk matrix is vital:

• Advance Payment (Peşin Ödeme)
  • Mechanics: Buyer pays the purchase price to the seller before shipment.
  • Risk Allocation: High Buyer Risk (Seller may fail to ship, ship non-complying goods, or face export bans).
• Open Account (Mal Mukabili Ödeme)
  • Mechanics: Seller ships the goods, and the buyer pays after delivery/receipt at destination.
  • Risk Allocation: High Seller Risk (Buyer may delay, default on payment, or face foreign exchange transfer blocks).
• Acceptance Credit (Kabul Kredili Ödeme)
  • Mechanics: Payment is deferred and secured by a bill of exchange (draft) accepted by the buyer or a bank.
  • Risk Allocation: Moderate Risk (Payment is deferred; risk is mitigated if the draft is accepted/avalized by a bank).
• Cash Against Documents (Vesaik Mukabili Ödeme)
  • Mechanics: Original shipping documents are sent via banks; buyer only gets documents upon payment.
  • Risk Allocation: Moderate Risk (Buyer cannot claim goods without paying, but seller faces return-freight risk if buyer refuses documents).
• Letter of Credit (Akreditifli Ödeme)
  • Mechanics: Bank guarantees payment to the seller upon presentation of complying documents.
  • Risk Allocation: Balanced Security (Seller is guaranteed payment by a bank; buyer is guaranteed that payment occurs only after document verification).

2. Three Core Functions of a Letter of Credit

The widespread adoption of the L/C in cross-border trade stems from its capacity to simultaneously fulfill three crucial business functions:

• Payment Security (Güvence/Teminat Fonksiyonu): It insulates both parties from country risk, currency controls, and counterparty default. The seller does not rely on the buyer's creditworthiness but on the creditworthiness of the issuing bank (and confirming bank, if applicable).
• Payment Mechanism (Ödeme Fonksiyonu): It functions as a standardized, internationally recognized transaction pathway governed by the International Chamber of Commerce (ICC) rules. It replaces physical payment-upon-delivery with document-compliance-upon-shipment.
• Financing / Credit (Kredi Fonksiyonu): It allows the buyer to obtain deferred payment terms (usance L/C) while giving the seller a negotiable instrument that can be discounted or negotiated (iştira) with a bank to secure immediate working capital.

3. Legal Nature under the Turkish Code of Obligations (TBK)

Under Turkish private law, the Letter of Credit is not explicitly regulated in the Turkish Commercial Code (TTK) or the Turkish Code of Obligations (TBK No. 6098) as a distinct contract. Consequently, Turkish legal scholars and courts have extensively debated its legal nature, evaluating several statutory frameworks:

• Agency/Mandate (Vekâlet Sözleşmesi): The relationship between the buyer (applicant) and the issuing bank is characterized as a mandate. However, agency rules do not fully explain why the bank owes a direct, independent, and irrevocable obligation to the third-party seller.
• Remittance (Havale): The L/C structure resembles a remittance (where the buyer instructs the bank to pay the seller). However, under TBK Article 555, a remittance can be revoked by the sender until accepted. In contrast, an irrevocable L/C under UCP 600 cannot be modified or cancelled without the consent of all parties.
• Letter of Credit / Letter of Reputation (İtibar Mektubu): TBK Article 515 regulates the traditional "letter of credit," but it is treated as a form of mandate and suretyship, which fails to capture the strict document-based, independent, and international nature of modern documentary credits.
• Abstract Promise of Debt (Soyut Borç Vaadi): While the bank's commitment is separate from the sales contract, it is conditional upon document presentation, which prevents it from being a purely abstract debt.

The Prevailing Turkish Legal Doctrine: The Turkish Supreme Court (Yargıtay) and dominant academic opinion classify the Letter of Credit as a Sui Generis (unique) Contract. It is recognized as an independent guarantee agreement (garanti sözleşmesi) combined with mandate (vekâlet) elements. The bank's promise is primary and autonomous, rather than accessory to the underlying transaction.

4. The Legal Status of "Opening the L/C" (İfa Uğruna Edim)

A key question under Turkish contract law is: What is the legal effect of the buyer opening the L/C on their primary debt under the sales contract? Turkish jurisprudence identifies three distinct legal concepts, and explicitly places the L/C under the third category:

1. Performance as Primary Obligation (Asıl Edim): Opening the L/C is not the ultimate performance of the buyer's payment obligation; it is merely the mechanism designed to achieve it.
2. Performance in Lieu of Payment (İfa Yerine Edim): The seller does not accept the mere opening of the L/C as the final satisfaction and discharge of the purchase price.
3. Performance for the Sake / Purpose of Payment (İfa Uğruna Edim): This is the correct classification. The buyer's debt is not discharged when the L/C is opened. Instead, the seller's right to demand payment directly from the buyer is suspended. The seller must first seek payment by presenting complying documents to the bank. If the bank fails to pay (e.g., due to insolvency or arbitrary refusal), the suspension terminates, and the seller can demand payment directly from the buyer under the underlying contract.

5. Consequences of Buyer's Default in Opening the L/C

If the underlying sales contract requires the buyer to open a Letter of Credit by a specific date, this constitutes a primary contractual obligation. If the buyer fails to open the L/C, or opens it late, the following rules apply under the Turkish Code of Obligations:

• Default (Temerrüt): The buyer's failure to open the L/C on time puts them in default immediately upon the expiration of the agreed deadline, without requiring a formal default notice (ihtar) if a fixed date was set.
• Seller's Remedies: Under TBK Articles 123-125, the seller can:
  1. Insist on the opening of the L/C and claim damages for the delay.
  2. Waive the right to specific performance, terminate the contract, and claim expectation damages (loss of profits).
  3. Withdraw from the contract entirely (rescission) and claim restitution of any performed obligations.

6. Relationships and Recourse Mechanisms

An L/C transaction establishes a complex network of legal relationships, each governed by different rules:

If the issuing bank pays the beneficiary, it has a statutory right of recourse (rücu hakkı) against the buyer. If the buyer defaults on reimbursement, the bank is protected under Turkish law by several security mechanisms:

• Right of Retention (Hapis Hakkı): Under Article 950 of the Turkish Civil Code (TMK), the bank has a lien/retention right over the commercial documents, title deeds, or bills of lading in its possession, preventing the buyer from claiming the imported goods.
• Pledge (Rehin Hakkı): The bank typically secures its recourse claim by establishing a pledge over the documents or the underlying goods.
• Defense of Non-Performance (Ödemezlik Def'i): Under TBK Article 97, the bank can refuse to release the shipping documents to the buyer until the buyer reimburses the L/C amount and pays all commissions.

7. The Autonomy Principle and The Fraud Exception

The cornerstone of international trade finance is the Autonomy Principle, codified in UCP 600 Article 5: "Banks deal with documents and not with goods, services or performance to which the documents may relate." The bank is not responsible if the physical goods are defective, delayed, or non-compliant, as long as the presented documents comply strictly with the L/C terms on their face.

8. Termination of L/C & The Impact of Bankruptcy (İflas)

An L/C terminates upon payment (via cash, acceptance of drafts, or negotiation), expiration of the validity period, or mutual agreement. However, if one of the parties becomes bankrupt (iflas) under the Turkish Enforcement and Bankruptcy Law (İİK), the following rules apply:

• Bankruptcy of the Buyer (Applicant): The bankruptcy of the buyer does not discharge the issuing bank's liability. Since the bank's obligation under an irrevocable L/C is independent, the bank must still pay the seller if complying documents are presented. The bank then registers its recourse claim as an unsecured debt in the buyer's bankruptcy estate (iflas masası).
• Bankruptcy of the Seller (Beneficiary): The right to present documents and collect the L/C proceeds passes to the seller's bankruptcy estate. The estate's trustee must perform the shipment and present documents to collect.
• Bankruptcy of the Issuing Bank: Because the L/C is opened ifa uğruna edim (performance for the sake of payment), the buyer's debt to the seller is not discharged. If the bankrupt bank fails to pay, the seller can demand direct payment from the buyer under the sales contract. If the credit was confirmed, the confirming bank remains fully liable to pay the seller and must then file its claim in the issuing bank's bankruptcy estate.

Frequently Asked Questions

• What is a Letter of Credit (L/C) under Turkish law?
  Under Turkish commercial practice and international standard banking practice (UCP 600), a Letter of Credit (L/C) is a conditional payment guarantee issued by a bank (the issuing bank) at the request of a buyer (the applicant), promising to pay the seller (the beneficiary) a specified sum upon the timely presentation of strictly complying shipping and commercial documents.
• Why is an L/C classified as a "Sui Generis" contract in Turkish jurisprudence?
  Turkish courts and legal doctrine classify the Letter of Credit as a sui generis (unique) contract. While it shares elements with agency/mandate (vekâlet) and remittance (havale) under the Turkish Code of Obligations (TBK), none of these traditional concepts fully explain the bank's independent, irrevocable payment obligation to the seller. Thus, it is recognized as an independent guarantee agreement combined with mandate features.
• What is the legal significance of opening an L/C as "performance for the sake of payment" (ifa uğruna edim)?
  Under Turkish law, opening an L/C is classified as "performance for the sake of payment" (ifa uğruna edim), rather than performance in lieu of payment (ifa yerine edim). This means the buyer's primary payment obligation under the sales contract is suspended but not discharged when the L/C is opened. If the issuing bank fails to pay under a complying presentation (e.g., due to bank insolvency), the seller's right to demand payment directly from the buyer under the sales contract is fully revived.
• What happens if the buyer fails to open or delays the opening of the L/C?
  If the buyer delays or fails to open the L/C, it constitutes a material breach of the underlying contract. Under the Turkish Code of Obligations (TBK Articles 123-125), the seller can declare the buyer in default (temerrüt), grant an additional period (if necessary), and either claim specific performance with delay damages, terminate the contract and claim expectation damages (lost profits), or withdraw from the contract and seek restitution of performed obligations.
• How does the principle of autonomy operate, and what is the fraud exception in Turkey?
  The principle of autonomy (UCP 600 Article 5) dictates that the L/C is separate from the underlying sales contract; banks deal only with documents, not the physical goods. However, under Turkish Civil Code Article 2 (prohibition of abuse of rights), the "fraud exception" applies. If the beneficiary presents fraudulent documents (e.g., shipping non-existent goods), and there is clear, liquid proof, the bank must refuse payment. The buyer can also petition a Turkish Commercial Court for an urgent preliminary injunction (ihtiyati tedbir) under Article 389 of the Civil Procedure Law (HMK) to block the bank from paying the fraudulent beneficiary.
• What is the bank's role and standard of care in examining L/C documents?
  Under UCP 600, the bank must examine the documents using reasonable care to determine if they appear on their face to constitute a complying presentation. Under Turkish law and banking customs, the bank has a professional duty of care. It has a maximum of five banking days following the day of presentation to determine compliance. The bank's liability is limited to document examination; it is not liable for the genuineness of the documents, or the quality or quantity of the physical goods.
• What legal rights does a Turkish bank have if the applicant fails to reimburse it?
  If the issuing bank pays the beneficiary and the applicant (buyer) fails to reimburse it, the bank has a statutory right of recourse (rücu hakkı). To secure this claim, the bank can exercise a right of retention/lien (hapis hakkı) under Turkish Civil Code Article 950 over the documents/goods, assert a pledge right (rehin hakkı) if contracted, or raise the defense of non-performance (ödemezlik def'i) under TBK Article 97, withholding the shipping documents until paid.
• How does the bankruptcy of the applicant (buyer) or the issuing bank affect a Letter of Credit?
  The bankruptcy of the buyer does not affect the bank's independent obligation under an irrevocable L/C; the bank must still pay the seller if complying documents are presented. The bank then seeks recovery in the buyer's bankruptcy estate. If the issuing bank goes bankrupt, the seller can demand payment directly from the buyer under the underlying contract (due to the ifa uğruna edim rule), or claim against the confirming bank if the credit was confirmed.