Turkey: Memorandum On The Communique Of The Ministry Of Finance Regarding The Letters Of Guarantee

Last Updated: 1 April 2004
Article by Vural Günal

January / 2003

(Has been reviewed in February 2004 after the Accounting General Directorate General Communiqué Serial No. 15 published in the 1st Repeated Official Gazette dated 20.02.2004)

INDEX

I. SUBJECT

II. GENERAL INFORMATION ABOUT LETTERS OF GUARANTEE

  1. Types of Bank Letters of Guarantee
  2. Legal Status of Letters of Guarantee

III. PROVISIONS OF THE COMMUNIQUE

  1. Purpose of the Communiqué
  2. Explanations About Relevant Laws and About Documents Acceptable as Guarantee
  3. Status of Checks
  4. Compliance of Letters of Guarantee With the Laws
  5. Control of the Letters of Guarantee of the Public Entities
  6. The Notification to be made by the Customs Authority to the Treasury Offices
  7. Replacement of Guarantees
  8. Letters of Guarantee and Statutes of Limitation

IV. PROVISIONS OF THE STATE BID TENDERS COMMUNIQUE (2003/2)

*******************************************************************************************************************

MEMORANDUM ON THE COMMUNIQUE OF THE MINISTRY OF FINANCE REGARDING THE LETTERS OF GUARANTEE

I. SUBJECT:

Accounting General Directorate General Communiqué – No. 15" of the Republic of Turkey, the Ministry of Finance has been published in the 1st Repeated Official Gazette on 20 February 2004 and the Communiqué dated 14 January 2003 has been repealed. The Communiqué sets down the principles of Letters of Guarantee to be used for the State-related issues.

In this Memorandum, we are going to summarize the principles of the Communiqué with a general emphasis on the letters of guarantee.

II. GENERAL INFORMATION ABOUT LETTERS OF GUARANTEE:

Letter of guarantee has not been specifically arranged in the Turkish law*, and has been put in practice by contracts signed between the contract parties in reliance upon the freedom of will granted by the Turkish Law of Obligations.

1. Types of Bank Letters of Guarantee:

Depending on the payment terms, the bank letters of guarantee may be classified in two different categories as (i) letters of guarantee payable upon first demand, and (ii) conditional letters of guarantee, or to put it differently, letters of guarantee payable against submission of certain documents. Depending on the coverage of guarantee, the bank letters of guarantee may be classified in different categories as (i) bid bonds (temporary letters of guarantee), (ii) advance payment letters of guarantee and (iii) performance bonds (final letters of guarantee). In addition, the letters of guarantee are used in the market under various names such as "under direct bank guarantee", "under indirect bank guarantee", "letters of guarantee for payment purposes", "letters of guarantee securing shortage of documents" or "counter-guarantees".

2. Legal Status of Letters of Guarantee:

Legal status of the letters of guarantee is open to debate. For this reason, we hereby only refer to different definitions about legal status of the letters of guarantee:

  • a surety contract

  • a guarantee contract

  • a mixed contract

  • a sui generis contract

III. PROVISIONS OF THE COMMUNIQUE:

1. Purpose of the Communiqué:

In its Communiqué, the Ministry of Finance explains its motive and purpose as "to clarify and eliminate doubts on some issues and points in the practice regarding the application of, letters of guarantee issued by banks in tenders to be held by public entities and Article 10 of the Law Regarding the Collection of the Public Receivables".

2. Explanations About Relevant Laws and About Documents Acceptable as Guarantee:

According to the Ministry of Finance:

- Assets and means acceptable as "guarantee" in various transactions and dealings are shown and named in the legislation pertaining thereto.

- Furthermore, the Budget laws also contain provisions about guarantees. Pursuant to the Budget laws:

  • INCOME SHARING CERTIFICATES and other SECURITIES, based on refund of principal, issued by operation of special laws; and

  • STATE INTERNAL BORROWING NOTES and TREASURY BONDS; and

  • LETTERS OF GUARANTEE issued by the Special Financial Institutions

are acceptable as a "Guarantee" in the BID TENDERS and CONTRACTS of public administrations, and for the purposes of Article 10 of the Law 6183 About Method of Collection of Public Debts.

Shortly, assets and means acceptable as a guarantee are named and listed in the yearly budget laws, customs laws and Article 10 of the Law 6183 with regard to bid tenders and contracts of the public entities and administrations.

3. Status of Checks:

Our laws do not contain any clause verifying that checks are acceptable as a guarantee. The Communiqué expressly rules that checks may not be accepted as cash guarantees.

4. Compliance of Letters of Guarantee With the Laws:

Letters of guarantee to be issued and granted by banks for use in such bid tenders are required to be prepared in the format shown in the tender legislation (State Bid Tenders Circular published in the Official Gazette on 07.03.2002) (Exhibit: Formats of Letters of Guarantee).

5. Control of the Letters of Guarantee of the Public Entities:

The issues of:

- whether the letters of guarantee to be issued to entities are prepared in accordance with the principles in the tender legislation, and

- whether the letters of guarantee issued in foreign currency have been included in the accounts by conversion into Turkish Lira by the entity over the foreign currency purchase rate of the Central Bank of the Republic of Turkey on the date of its receipt,

shall be controlled by public entities.

6. The Notification to be made by the Customs Authority to the Treasury Offices:

It is obligatory that a written notification, in TWO COUNTERPARTS, regarding the compliance of the letters of guarantee with the legislation and the absence of any issues preventing them to be acceptable must be sent by the Customs Administration to the Treasury Offices for the acceptance by the Treasury Offices of the letters of guarantee taken against customs taxes and duties. For this reason the letter of guarantee to be thoroughly inspected by both entities must be prepared in accordance with the legislation in all aspects.

It must be noted that the bank letters of guarantee duly issued and granted directly "TO THE NAME OF THE BIDDER" are converted by the related Treasury Offices of the authorities into TL over the "foreign exchange buying rate" of the Turkish Central Bank current as of the date of receipt of the bank letter of guarantee. Therefore, the contract signed with the customer must, as a precaution, clearly show the customer’s debt in foreign currency, before a letter of guarantee is issued.

7. Replacement of Guarantees:

Guarantees delivered to the Treasury Offices for the State bid tenders may be fully or partially replaced by other acceptable guarantees of the same value. Accordingly, such demands about the letters of guarantees may be fulfilled by banks pursuant to the related contract provisions.

8. Letters of Guarantee and Statues of Limitation:

According to the Regulation, the banks issuing the letters of guarantee are not relieved of their liability in connection therewith, because the risk guarantee thereunder may occur at any time, as long as "the obligations covered by the letter of guarantee issued by the bank with a payment guarantee" ARE NOT DULY PERFORMED by the contractor in accordance with the related contract and specifications. The following clause of the Regulation is important: "BANK’S LIABILITY CONTINUES AND REMAINS IN EFFECT, EVEN IF A LETTER OF GUARANTEE HAS BEEN WRITTEN OFF BY THE BANK AT THE END OF THE TEN-YEARS’ STATUTE OF LIMITATIONS PERIOD FOR LETTERS OF GUARANTEE."

Here, we would like to point out an obligation imposed by the Regulation on the banks. According to the Regulation: "... in order to avoid any mistake, ‘before writing off’ a letter of guarantee at the end of the statute of limitations period of ten years starting from the date of issuance thereof, the bank MUST CHECK with the related authorities whether the subject PROJECT WORKS ARE CONTINUING, and the bank must proceed ACCORDING TO THE RESULT OF SUCH INQUIRY..."

IV. PROVISIONS OF THE STATE BID TENDERS COMMUNIQUE (2003/2):

The State Bid Tenders Communiqué (2003/2), published in the Official Gazette on 18 January 2003, clarifies for the purpose of the State Bid Tenders Law 4734 that letters of guarantee issued by the "special financial institutions" are also acceptable as a letter of guarantee issued BY BANKS.

With my best regards,

Vural Günal

Legal Advisor

* Assoc. Prof. Vahit Doğan; Banka Teminat Mektupları (Bank Letters of Guarantee), 1999, Ankara, page 56

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TEMPORARY LETTER OF GUARANTEE

(BID BOND)

…………

Date

:

…………

Number

:

Whereas our Bank* stands as a guarantor for TL ............ (only .................. TL), being the amount of bid bond which the bidder ............., wishing to bid for the ...... project let for contract by your Administration, is required to submit in accordance with the conditions of this bid tender and the provisions of the relevant laws and specifications, now and therefore, we, the undersigned, acting as and in the capacity of the responsible officers and the authorized signatories of our Bank*, hereby agree, undertake and declare in the name and account of our Bank* that if and when the contract is duly awarded to the bidder with a notice and the bidder is requested to submit a performance bond and to sign the contract, but the bidder fails to submit a performance bond and to sign the contract and to comply with the proviso of the relevant laws and specifications of the project works, our Bank will pay to your Administration or to your order the above cited amount of guarantee, plus legal interests to be accrued from the date of demand to the date of actual payment, in full, in cash and promptly upon your first written demand, without any protest, court judgment or consent of the said bidder and irrespective of any dispute that may arise between your Administration and the bidder, and irrespective of the legal results and consequences of such disputes.

    • Total sum of temporary, final and advance payment letters of guarantee issued by our Branch, that are still valid and in force, also including the amount of this letter: TL ........
    • Limit of our Branch: TL. ..........
    • Limit transferred from the reserve fund of our General Management: TL. ..........
    • Total limit of our Branch: TL. ..........

.......... Branch Office

Name, Position and Signature of Authorized Officer(s) of the Bank*

NOTE: In the letters of guarantee issued upon a counter-guarantee of foreign banks or similar credit institutions, name of the foreign bank or credit institution issuing that counter-guarantee will be given, and the related foreign currency will be inserted in stead of "TL" or "lira", and no figure will be written in the sections relating to limits. However, it will be separately stated that the letter of guarantee is issued against a counter-guarantee.

* Special financial institutions will use the word "institution" in place of the word "bank".

***************************************************************************************************

FINAL LETTER OF GUARANTEE

(PERFORMANCE BOND)

…………

Date

:

…………

Number

:

Whereas our Bank* stands as a guarantor for TL ............ (only .................. TL), being the amount of performance bond which the contractor/customer ............., who was awarded the contract for the ...... project as a result of the bid tender organized by your Administration, is required to submit in accordance with the provisions of the relevant laws and specifications, now and therefore, we, the undersigned, acting as and in the capacity of the responsible officers and the authorized signatories of our Bank*, hereby agree, undertake and declare in the name and account of our Bank* that if and when the said contractor fails to perform its contractual obligations in accordance with the contract and the relevant laws and specifications, our Bank will pay the above cited amount of guarantee, plus legal interests to be accrued from the date of demand to the date of actual payment, in full, in cash and promptly upon your first written demand, without any protest, court judgment or consent of the said contractor and irrespective of any dispute that may arise between your Administration and the contractor, and irrespective of the legal results and consequences of such disputes.

    • Total sum of temporary, final and advance payment letters of guarantee issued by our Branch, that are still valid and in force, also including the amount of this letter: TL ........
    • Limit of our Branch: TL. ..........
    • Limit transferred from the reserve fund of our General Management: TL. ..........
    • Total limit of our Branch: TL. ..........

.......... Branch Office

Name, Position and Signature of Authorized Officer(s) of the Bank*

NOTE: In the letters of guarantee issued upon a counter-guarantee of foreign banks or similar credit institutions, name of the foreign bank or credit institution issuing that counter-guarantee will be given, and the related foreign currency will be inserted in stead of "TL" or "lira", and no figure will be written in the sections relating to limits. However, it will be separately stated that the letter of guarantee is issued against a counter-guarantee.

* Special financial institutions will use the word "institution" in place of the word "bank".

***************************************************************************************************

ADVANCE PAYMENT LETTER OF GUARANTEE

…………

Date

:

…………

Number

:

Whereas our Bank* stands as a guarantor for TL ............ (only .................. TL) to be paid by your Administration to the contractor/customer, who has assumed the .............. project works as a result of the bid tender organized by your Administration, in accordance with the provisions of the contract and the relevant laws and specifications, now and therefore, we, the undersigned, acting as and in the capacity of the responsible officers and the authorized signatories of our Bank*, hereby agree, undertake and declare in the name and account of our Bank* that if and when this advance payment is requested to be repaid for any reason whatsoever, our Bank will pay the above cited amount of guarantee, plus legal interests to be accrued from the date of demand to the date of actual payment, in full, in cash and promptly upon your first written demand, without any protest, court judgment or consent of the said contractor and irrespective of any dispute that may arise between your Administration and the contractor, and irrespective of the legal results and consequences of such disputes.

    • Total sum of temporary, final and advance payment letters of guarantee issued by our Branch, that are still valid and in force, also including the amount of this letter: TL ........
    • Limit of our Branch: TL. ..........
    • Limit transferred from the reserve fund of our General Management: TL. ..........
    • Total limit of our Branch: TL. ..........

.......... Branch Office

Name, Position and Signature of Authorized Officer(s) of the Bank*

NOTE: In the letters of guarantee issued upon a counter-guarantee of foreign banks or similar credit institutions, name of the foreign bank or credit institution issuing that counter-guarantee will be given, and the related foreign currency will be inserted in stead of "TL" or "lira", and no figure will be written in the sections relating to limits. However, it will be separately stated that the letter of guarantee is issued against a counter-guarantee.

* Special financial institutions will use the word "institution" in place of the word "bank".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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