Direct And Indirect Bank Letters Of Guarantee
Various distinctions have been made in doctrine[1] regarding the types of letters of guarantee, and the situation also varies depending on whether or not another bank is involved. Guarantee letters can be issued directly by the beneficiary’s bank to the payee, or indirectly through the involvement of a second or more banks in international guarantee letter relationships where direct issuance is not possible. The distinction between direct and indirect guarantee letters is based solely on whether a second bank is involved in the guarantee letter relationship.
- a) Direct Bank Guarantees
There are basically three separate parties in a direct guarantee relationship. These are the beneficiary, who is the party to be guaranteed, the bank, which is the guarantor, and the addressee, who is the other party to the basic relationship with the beneficiary. In a direct guarantee, the guaranteeing bank is, as a rule, the guarantor itself.[2] However, this may not always be possible, such as when the beneficiary is located in a foreign country. In such cases, a bank in the beneficiary’s country may be included in the relationship as a correspondent bank, and the letter of guarantee may be issued through this bank. The correspondent bank has limited liability, which is limited to acting in accordance with the instructions of the first bank from which the beneficiary makes the request. In direct letters of guarantee issued to a beneficiary in a foreign country, the primary liability towards the beneficiary remains with the first bank to which the beneficiary makes the claim.[3] The correspondent bank’s role and function here is to establish communication between the beneficiary and the first bank, and it does not assume any independent liability.
The direct guarantee letter relationship proceeds as follows, in terms of the indemnification situation and the bank’s liability:
– Establishment of a basic relationship between the beneficiary and the drawee,
– The beneficiary’s application to the bank for the issuance of a guarantee letter,
– The issuing bank’s issuance of the guarantee letter for this relationship and its delivery to the drawee,
– The drawee’s claim for compensation in accordance with the procedure in the event of a risk,
– Recourse by the guaranteeing bank to the beneficiary under the counter-guarantee,
– Payment by the beneficiary to the bank or collection from the credit limit,
– Termination of the risk of the guaranteeing bank in relation to the relevant letter of guarantee and reduction of the risk.[6]
A direct letter of guarantee relationship can be established in two ways. First, it is a situation where the guaranteeing bank, which is not a correspondent bank, issues the letter of guarantee directly to the addressee. Second, it is a letter of guarantee relationship where the correspondent bank is involved, but the responsibility lies with the guaranteeing bank and the beneficiary who made the request.
- b) Indirect Bank Guarantees
In an indirect guarantee relationship, there may be four or more parties depending on the involvement of the banks. Indirect guarantees are used in international commercial relations and are issued independently by a bank located in the country of the beneficiary, not by the first bank to which the beneficiary requests the guarantee. Here, the first bank requests the second bank to issue a letter of guarantee in favor of the beneficiary and under the specified conditions, and in return, the first bank provides a counter-guarantee to the second bank.
The direct letter of guarantee relationship generally proceeds as follows in terms of the compensation situation and the bank’s liability[7]:
– Establishment of a basic relationship between the beneficiary and the beneficiary,
– The beneficiary applies to their own bank for the issuance of a letter of guarantee,
– The beneficiary’s bank requests the bank in the country where the beneficiary is located to issue a letter of guarantee in favor of the beneficiary by providing a counter-guarantee,
– The foreign bank issuing the guarantee issues a letter of guarantee in accordance with the instructions received and delivers it to the beneficiary,
– The beneficiary makes a claim in accordance with the procedure in the event of a risk and seeks reimbursement of the letter,
– Recourse by the foreign bank to the bank at which the beneficiary made the request under the counter-guarantee,
– Reimbursement by the bank at which the beneficiary made the request to the foreign bank,
– Recourse by the beneficiary’s own bank,
– Termination of the risk related to the relevant letter of guarantee and reduction of risk by the bank at which the beneficiary made the request.
The fundamental difference from the situation described in direct letters of guarantee, where a second bank is involved, is that another bank other than the first bank issues the letter of guarantee directly and independently to the beneficiary. Here, the second bank is directly liable to the beneficiary.[8]
Year: 2025
Application: Direct And Indirect Bank Letters Of Guarantee
Lawyers: Mehmet Said Sarıbaş & Bilal Akbaba
E-mail: info@saribasakbaba.av.tr
Website: saribasakbaba.av.tr
[1] Vahit Doğan, Bank TM, pp. 75-99; Seza Reisoğlu, Bank TM, pp. 142-159; Yaşar Alıcı, pp. 764-768; Ekici-Durukanoğlu, pp. 124-137.
[2]Doğan, Vahit, Bank Guarantees, p. 93.
[3] Doğan, Vahit, Bank Guarantees, p. 94.
[4] Exceptional circumstances; In cases such as the beneficiary’s release of the bank or the expiry of the guarantee letter, the risk of the guaranteeing bank ceases. In the event of a partial compensation claim, the bank’s liability will continue in accordance with the terms specified in the letter for the amount specified, excluding the compensated portion.
[5] In cases where there is no correspondent bank relationship.
[6] Ekici-Durukanoğlu, p. 48.
[7] Exceptional cases: Situations involving multiple banks. In such cases, the letter of guarantee will be issued by the last bank, which will bear the primary liability. The other banks will guarantee their bilateral relationships by providing counter-guarantees to each other.
[8] Vahit Doğan, Bank Guarantees, pp. 94-95.
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