Letter of Guarantee

The letter of guarantee is the most widely used form of security in commercial relationships, construction and supply contracts and public tenders. At its customer’s request, the bank undertakes to pay the beneficiary up to a certain amount.

Legal Nature

It is not separately regulated by statute. Depending on its content:

• Guarantee: Letters containing clauses such as “on first demand, unconditionally, without need for protest or judgment” are independent contracts of guarantee within TCO Article 128. Most letters in practice are of this kind.
• Suretyship: Letters drafted as accessory to the main debt are subject to suretyship rules.

Types

• Provisional (bid) letter: Given at the bidding stage of tenders.
• Definitive (performance) letter: Secures performance of the contract.
• Advance payment letter: Secures repayment of an advance.
• Fixed-term and open-ended: In fixed-term letters, the bank’s liability ends if no call is made within the term.

Payment on First Demand

With independent guarantees, the bank pays upon the beneficiary’s written demand without investigating the underlying relationship, and then claims reimbursement from its customer. A debtor who considers the call unjustified sues the beneficiary under the underlying contract.

Protection Against Abusive Calls

Courts grant interim injunctions stopping payment under independent guarantees only exceptionally: where readily available evidence shows the call is clearly without legal basis, in bad faith and a manifest abuse of rights.

Electronic Issuance

Under Article 5 of Electronic Signature Law No. 5070, security agreements generally cannot be concluded by secure electronic signature, but bank letters of guarantee are excepted. See Electronic Signature.