Preliminary Injunction in Bank Letters of Guarantee and the Outcome of the Risk within a Fixed Term

With the demand and globalization of commercial life, the tools for commercial payment have diversified and a need for secure payment methods has increased. Letter of guarantee issued by the banks is seen as the most secure payment method in national and international commercial relations.

Bank letters of guarantee, is a bank payment commitment that one of the parties provides in favor of the other party in order to guarantee the debt/credit relationship between the parties. Letters of guarantee are preferred as they are not considered commercial papers which cannot be confiscated, that it is paid immediately and unregistered, on demand, made to the bank and it is independent from the debt/credit relationship.

There is not special regulation in the legislation regarding letter of guarantees in the Turkish Legal system. The legal precedents and doctrines are considered in disputes arising in its application.

The most general classification for bank letters of guarantee is that the letters of guarantee are definite and temporary.  The letter of guarantee is determined by its risk, subject, the secondary bank, and conditional arrangement.

In order for the party, whom the letter of guarantee is provided in favor, to request payment from the bank, the risk indicated in the letter of guarantee must be realized. If the risk has realized, a payment request can be made from bank in definite letters of guarantee. If there is no definite risk, the return of the letter of guarantee is possible, and if it is not clear whether the risk will occur, the bank letter of guarantee is not converted into money until the outcome of the risk is determined and it is not returned to the other party.

In temporary letters of guarantee, if the risk is realized within the fixed term, the letter of guarantee is converted to money and if the there is no foreseeable risk the letter of guarantee can be returned to the other party.  If the outcome of the risk is not clear within the fixed term, the issue of how to maintain the assurance provided by the letter of guarantee becomes important.

It is seen that if the possibility of the risk can be foreseen, temporary letters of guarantee are used. In case the situation of the party that provides the letter of guarantee to the banks is not suitable for providing a temporary bank letter of guarantee, the letter of guarantee and an affirmative covenant is drafted – towards the extension of the letter of guarantee if the outcome of the risk cannot be determined within the fixed term -. Therefore, the beneficiary is assured that the letter of guarantee shall be extended/renewed even if the term of the letter of guarantee is due. It is very important that this assurance is included in the legislation together with a clear regulation on the letters of guarantee.

The party that provides the letter of guarantee, to prevent the letter from being converted into money, is able to request preliminary injunction before courts. The only way in which the letter of guarantee cannot be converted into money is for the court to decide on preliminary injunction. It is seen that the courts, grant preliminary injunction against this payment method, which is trusted by traders and is important in vitalizing business life, after concluding in-debt investigations. Otherwise, it is certain that business life will also be negatively affected by the loss of trust in the bank letter of guarantee.

Şengün & Partners Attorney Partnership

Managing Senior Associate

Gazali Demir

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