Bank Guarantee Letters in Turkish Law: Legal Nature and Practical Insights

Bank guarantee letters are one of the most important tools for minimizing creditor risk, especially in large projects, tenders, and international trade. These letters go beyond a personal commitment to fulfill a debt or obligation, offering the financial strength and reputation of a bank as security. So, what is the exact legal standing of this powerful financial instrument in Turkish law, and what problems might parties face in practice?

Parties and Functioning of a Bank Guarantee Letter

A bank guarantee letter relationship is fundamentally based on a tripartite structure:

• Applicant (Lehtar): The natural or legal person who requests the issuance of the guarantee letter from the bank and is the principal obligor of the debt or commitment.

• Beneficiary (Muhatap/Garanti Alan): The creditor party in whose favor the guarantee is issued, entitled to demand payment from the bank if the applicant fails to fulfill their commitment.

• Bank (Guarantor): The financial institution that, upon the applicant's request, undertakes to pay the beneficiary if a specified risk materializes.

In practice, the bank assumes the risk of the applicant's failure to perform a specific act (e.g., delivering goods, completing a construction). When this risk occurs, the bank makes the payment upon the beneficiary's first written demand, usually without further conditions.

Legal Nature: Suretyship or Guarantee Contract?

The legal nature of bank guarantee letters has long been a subject of debate in Turkish law. The fundamental question is: Is this letter an "ancillary" suretyship agreement dependent on the principal debt, or is it an "independent" guarantee contract separate from the principal debt? This distinction is critical as it directly affects the scope of the bank's payment obligation.

The Turkish Court of Cassation (Yargıtay) settled this debate with its unification of case law decisions, particularly in 1967 and 1969. According to the High Court, bank guarantee letters are independent guarantee contracts in the nature of an "undertaking for the act of a third party" as regulated in Article 110 of the Code of Obligations. The most fundamental difference from suretyship is its independence from the underlying contractual relationship (the contract between the applicant and the beneficiary).

Consequences of Being a Guarantee Contract: The Principle of Independence

The classification of a guarantee letter as a guarantee contract brings with it the "principle of independence." According to this principle:

1. The bank cannot investigate whether the underlying relationship between the applicant and the beneficiary (e.g., the construction contract) is valid or whether the applicant is justified in their claims.

2. The bank cannot raise the applicant's defenses related to the principal debt (e.g., claims that the debt was paid, set-off, or defective performance) against the beneficiary.

3. The "unconditional payment on first written demand" clause in the letter obliges the bank to pay immediately upon the beneficiary's request.

Common Practical Issues and Solutions

Attachment and Assignment: Since a guarantee letter is not a negotiable instrument, the document itself cannot be attached (seized). However, the beneficiary's right to claim payment from the bank, once the risk has materialized, can be attached. Assignment (temlik) of the letter is generally not possible unless the letter contains a clause permitting transfer or the bank subsequently consents.

Statute of Limitations: Claims arising from bank guarantee letters are subject to a general 10-year statute of limitations, starting from the date the risk materializes. For term-limited letters, a definite clause such as "will become null and void if a claim for compensation is not made by..." should be included to end the bank's liability at the end of the term. Otherwise, if the risk occurs within the term, the beneficiary can make a claim for up to 10 years.

Bank's Refusal to Pay: A bank cannot arbitrarily refuse payment. However, it can refrain from paying in two exceptional cases: 1) If it is proven with liquid (conclusive) evidence that the beneficiary's demand is clearly abusive and in bad faith. 2) If a court-ordered injunction (ihtiyati tedbir) is served on the bank.

Recourse and Counter-Guarantees: After paying the beneficiary, the bank has a right of recourse against the applicant for the amount paid. To ensure this recourse relationship functions smoothly, banks typically obtain a "counter-guarantee" agreement or other securities (mortgage, pledge, etc.) from the applicant when issuing the guarantee letter. The absence of a counter-guarantee can complicate the bank's recourse process.

Conclusion

Bank guarantee letters are an indispensable tool for providing security in commercial relationships. However, their independent nature, the consequences of the "payment on first demand" clause, and complex legal issues such as statutes of limitations and attachment that arise in practice require this instrument to be handled with care. It is crucial for parties, whether as applicants or beneficiaries, to seek professional legal advice during the issuance, claim, or dispute stages to protect their rights and manage potential risks.