Contact: Revan Sunol; Erdem & Erdem (Turkey)
Introduction
Letters of guarantee have come to prominence with the increase in the variety and size of commercial transactions. With bigger transactions, as the non-performance of the obligations undertaken may cause non-compensable damages to the obligee, it became necessary for a reassurance to be obtained for the compensation of damages that may arise from such non-performance by a third party.
Letters of guarantee, and especially bank letters of guarantee, are demanded in commercial transactions because they are payable immediately and unconditionally upon demand, provide fast compensation and because any defense and obligations that the obligor may have against the obligee may not be raised by the issuer of the letter of guarantee against the addressee of the letter. The objective is to reassure the addressee of the letter of guarantee as an incentive for entering into a transaction.
Legal Characteristic and Elements of Letters of Guarantee
Legal Characteristic
Although the legal characteristic of letters of guarantee has been subject to discussion for a long time, today it is widely accepted to be a guarantee agreement.
The Court of Appeal's Decision of Joint Chambers dated 13.12.1967 and numbered E.1966/16, K.1967/7 describes bank guarantee letters as guarantee agreements. According to said decision, the bank's undertaking with the addressee is completely separate and independent from the main agreement and the relationship between the parties to such agreement. The decision qualifies guarantee agreements as the undertaking of a third party's performance. However, practice with respect to the characteristics of letters of guarantee continued to be uncertain. As a result, the Court of Appeal issued a second Decision of Joint Chambers in 1969. Pursuant to the 1969 decision, the clause included within letters of guarantee setting forth that immediate and unconditional payment shall be made upon the written demand of the obligee under the main agreement shows that letters of guarantee are a type of guarantee agreement which is the undertaking of a third party's performance as regulated under article 110 of the old Code of Obligations ("old CO") No. 818. The undertaking of a third party's performance has been regulated in line with the old CO under the new Code of Obligations No. 6098 ("new CO") in its article 128.
