PROCEDURE FOR REDEMPTION OF BANK LETTERS OF GUARANTEE 10 October 2023

1. WHAT ARE BANK LETTERS OF GUARANTEE USED FOR?

In the absence of a separate legal regulation, the legal basis of bank letters of guarantee is Article 128 of the Turkish Code of Obligations No. 6098 (''TCO''). With a bank letter of guarantee, the bank undertakes to make a certain amount of payment to the addressee (guarantor) in the event that the beneficiary (customer) fails to perform its obligations or other risks specified in the contract are realised. This commitment creates an independent contractual relationship between the bank and the addressee. The beneficiary is not a direct party to the letter of guarantee.

The most important reason why bank letters of guarantee are frequently preferred is that the party undertaking to pay is a bank, which is a reliable institution.

The bank, which has the guarantee obligation, usually signs a contract with the beneficiary against the possibility of making payment in the event of the realisation of the risk, which is referred to as a contract guarantee in practice. In this way, the bank prepares a legal ground for recourse to the beneficiary in case of payment.

2. WHAT IS THE LEGAL STATUS OF BANK LETTERS OF GUARANTEE?

There is no legal definition of bank letters of guarantee in the TCO. For this reason, there were differences of opinion regarding the legal nature of bank letters of guarantee for many years. On the other hand, the Court of Cassation ruled in its Unification Decision dated 11.06.1969 (1969/4 E. and 1969/6 K.) that bank letters of guarantee are a guarantee contract in the nature of undertaking the act of a third party.

3. HOW ARE BANK LETTERS OF GUARANTEE CONVERTED INTO MONEY?

Since bank letters of guarantee are issued addressed to the addressee, the request for their redemption must also be made by the addressee. In addition, since this statement is a declaration of will, it must be made against the bank that issued the letter of guarantee.

It should be noted that the conditions and processes under which the request will be made are usually regulated in the letter of guarantee. However, for all letters of guarantee, the payment request to be made must be made in writing.

During the period when the risk has not yet occurred, the addressee is only the expected beneficiary. When the risk occurred, i.e. when the addressee fails to perform the act undertaken by the addressee or when a risk included in the guarantee agreement is realised, the addressee's receivable becomes due and payable and the addressee may demand compensation for the loss from the bank. In other words, the risk must be realised in order for bank letters of guarantee to be converted into cash. The moment of risk realisation varies according to the type of letter of guarantee.

Even in the case where the risk has not been realised, i.e. the addressee is only the expected beneficiary; in the first demand, unconditional bank letters of guarantee may be requested to be converted into money, and in this case, the bank is obliged to make payment. However, if the payment is made, the beneficiary may claim that this demand is unjustified based on the basic relationship with the addressee and demand the return of the amount. In addition, it is also possible to compensate for the damages incurred due to this reason. Since various conditions are included in the guarantee agreements in terms of other types of letters of guarantee, it will not be possible for the bank to make payment in this case.

In the event that the risk is realised, the addressee may apply to the bank with the claim that the guaranteed result has not been realised and demand payment of the amount specified in the letter of guarantee. In this case, the bank is obliged to make payment upon the request of the addressee. However, the documents to be submitted when requesting payment and the conditions under which payment can be requested are often included in the content of the bank letter of guarantee.

If a payment request is made to the bank, the bank must examine the content of the letter of guarantee and act in accordance with the conditions contained in this content. In other words, the scope and conditions of the bank's examination obligation are included in the text of the letter of guarantee. Therefore, it may also vary according to the type of letter of guarantee.