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December 21, 2023

Legal Nature And Monetization Of Bank Letters Of Guarantee

1. Introduction

Determining the legal nature of bank letters of guarantee is very important as it will directly affect the provisions and consequences of the letter of guarantee. However, the legal nature of the bank letter of guarantee has been highly debated in the doctrine and practice to date, as there has been no regulatory work regulating the bank letter of guarantee under Turkish law so far. 

2. Legal Nature of Bank Letter of Guarantee

In terms of the legal nature of the letter of guarantee, three views are advocated in the doctrine, the first one is that the bank letter of guarantee is in the nature of a surety agreement, while the other view is that this relationship is a guarantee agreement. In addition to these two opinions, the third opinion in the doctrine argues that bank letters of guarantee are sui generis contracts of mixed nature.

The reason for the above-mentioned differences of opinion in the doctrine is that the Supreme Court, in its decisions until 1967, sometimes defined the bank letter of guarantee as a surety agreement and sometimes as a guarantee agreement. However, the Supreme Court of Unification of Jurisprudence General Assembly of Civil Chambers, T. 13.12.1967, 1966/16 E., 1967/7 K;

“Since the title of the bank is that of the guarantor, its commitment is separate and completely independent from the parties to the articles of association and the underlying contract. The Bank’s commitment is manifested as a guarantee commitment regardless of the validity and existence of the beneficiary’s debt. A person is a guarantor if he or she agrees to indemnify the principal debtor for damages arising from non-performance of the obligation, regardless of any objections that the principal debtor may raise. The person who guarantees the act of the third party, i.e. who promises to another person that this person will do something, has entered into an independent undertaking.”

and the General Assembly of the Supreme Court of Unification of Jurisprudence No. 11.06.1969 T., 1969/4 E. and 1969/6 K;

“… by agreeing to pay this money at the request of the customs office against the customs office, without raising any objection and without the need to obtain a judgment, the bank has entered into a commitment independently of the principal debt by waiving to assert that the main debt is legally existing, valid and actionable, which the guarantor is obliged to assert according to article 497 of the Code of Obligations. Although the principal debtor has the right to claim these skins and the guarantor is legally obliged to do so, by waiving the right to claim them, the bank is under a heavier burden than the principal debtor. The surety cannot be under more obligations than the principal debtor. For this reason, the waiver of the defences at the outset does not invalidate this condition and should be taken as a criterion in determining the nature of the contract.”-

The Supreme Court, with its unification of jurisprudence decision, has clearly revealed its view on this issue and ruled that the legal nature of the bank letter of guarantee is not suretyship but a guarantee agreement.

In this framework, the bank letter of guarantee undertakes to cover the damages incurred by the addressee in the event that the beneficiary, who is a third party, fails to fulfill its obligation and/or other risks specified in the bank letter of guarantee arise, pursuant to Article 128 of the Turkish Code of Obligations No. 6100; “The person who undertakes the act of a third party against another person is obliged to compensate the damage arising from the non-realization of this act.”

3. Monetization of Bank Letter of Guarantee

A bank letter of guarantee can be converted into money if the beneficiary does not fulfill its obligation to the addressee at all or as required in the underlying relationship and the addressee suffers a loss as a result of the failure of the beneficiary to fulfill its obligation to the addressee at all or as required, and therefore, if the risk is realized, the addressee applies to the bank and makes a request. In this respect, under normal circumstances, the letter of guarantee should be redeemed by the addressee after the risk is realized, but if the letter of guarantee is redeemed before the risk is realized, the beneficiary may claim that it has fully performed its obligations and that the demand for redemption is unjustified, and may demand the return of the letter of guarantee amount within the framework of the underlying relationship and compensation for the damages incurred due to this

There is no formal requirement for the addressee’s payment request. However, in practice, it is often seen that the letter of guarantee text stipulates the payment condition at the first written request. In terms of whether additional information and/or documents need to be submitted to the bank with the request, the text of the letter of guarantee should be taken as a reference and if a document is stipulated in this text, the request should be made with this document.

In practice, the letter of guarantee is addressed to the addressee and the addressee may be a real person or a legal entity. In this respect, the person who may request the foreclosure of the letter of guarantee shall be the company official according to the current signature circular for legal entities. On the other hand, the conversion of a bank letter of guarantee into money by proxy is also frequently encountered in practice, and no special authorization is required in the power of attorney in this respect.

The parties may stipulate a provision in the text of the letter of guarantee as to when the payment request will be made, or they may not stipulate a provision on this issue. At this point, in the decision of the Supreme Court of General Assembly of Civil Chambers dated 30.03.1988 T., 1987/11-642 E. and K. 1988/287 K;

“…as a rule, in the case of a guarantee given for a certain period of time, the risk subject to guarantee is not realized for its term results in the disappearance of the obligation. If the guarantee agreement is made in accordance with the paragraph added to Article 110 of the Code of Obligations by Law No. 2486 dated 8.7.1981, the bank’s contingent liability ends unless a written request is made until the end of the term. If such a record is not included in the guarantee agreement, even if the letter of guarantee is for a certain period of times, the claim for indemnification can be asserted until the expiration of the ten-year statute of limitations.”

According to the case law mentioned above, in the case of a letter of guarantee given for a certain period of time, the bank’s obligation will disappear if the risk is not realized within the period. Again, if the letter of guarantee contains a written application condition and the written application is not made by the end of the maturity date, the bank’s liability will end. Since the written application was not made within the time limit, the bank’s debt will not arise, and the statute of limitations will not be in question.

On the other hand, pursuant to the decision of the Supreme Court referred to above, if the letter of guarantee has a maturity date and there is no payment record in the initial request at the text of the letter of guarantee, then even if the risk is not realized within the maturity date of the letter of guarantee, the bank’s obligation for compensation will continue until the expiry of the ten-year statute of limitations that will run from the date of acceleration of a debt.

In terms of letters of guarantee at call, since the debt becomes due and payable with the birth of the risk, the addressee will have to make a request from the bank within the ten-year statute of limitations from the birth of the debt.

Best Regards,

Kılınç Law & Consulting

Authors

Duygu Doğan Şahiner

Duygu Doğan Şahiner

Partner

Kılınç Hukuk ve Danışmanlık

Kılınç Hukuk ve Danışmanlık