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LAW OF OBLIGATIONS
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Term and Prescription of Letters of Guarantee
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Att. Revan Sunol
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
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Article of December 2013