1. Introduction
A letter of credit (L/C) is one of the most secure payment methods in international trade. It provides payment assurance between the exporter and importer, while minimizing risks through the intermediary role of banks.
In trade between Türkiye and Arab countries, letters of credit are frequently preferred to ensure payment security and legal clarity.
This article examines the status of letters of credit under Turkish law, the operational process, and the key legal considerations in trade with Arab countries.
2. Legal Basis of Letters of Credit
- Turkish Commercial Code (TCC) does not directly regulate letters of credit, but under TCC Art. 7 (customs and practices in commercial transactions), international trade practices apply.
- ICC UCP 600 Rules (Uniform Customs and Practice for Documentary Credits) are applied in Türkiye for L/C transactions.
- Turkish Code of Obligations (TCO) governs contractual relationships between parties.
- Banking Regulation and Supervision Agency (BRSA) and the Central Bank of Türkiye regulations on foreign currency transfers also apply.
3. How a Letter of Credit Works – Step by Step
- Sales Contract
- The parties agree on the terms of sale of goods or services.
- Payment method is specified as a letter of credit.
- Buyer’s Bank Issues the L/C
- The importer (the company in the Arab country) requests its bank to issue the letter of credit.
- Advising Bank
- The exporter’s bank in Türkiye receives the L/C notification.
- Document Preparation
- Invoice, bill of lading, certificate of origin, insurance policy, etc.
- Document Examination
- The bank reviews whether the documents comply with L/C terms.
- Payment
- If documents comply, the bank makes payment to the exporter.
4. Advantages of Letters of Credit in Trade with Arab Countries
- Payment Assurance: The payment is guaranteed by the bank once the L/C terms are met.
- Risk Management: Reduces political and economic risks of the importing country.
- Sharia-Compliant Banking: In some Arab countries, L/C types may be structured in compliance with Islamic finance principles (Murabaha, Wakalah).
- Minimized Language & Legal Risks: L/C terms are standardized and documented.
5. Key Legal Considerations
- Clarity of L/C Terms
- Document names, delivery terms (Incoterms 2020), and place of delivery must be clearly stated.
- Governing Law & Jurisdiction
- The sales contract should stipulate Turkish law and arbitration forums such as the Istanbul Arbitration Centre (ISTAC) or International Chamber of Commerce (ICC).
- Deadlines
- L/C validity period and document submission deadlines are strictly applied.
- Document Consistency
- Any discrepancy (signature mismatch, date inconsistency) can delay payment.
- Export Compliance
- Turkish export regulations, import permits of Arab countries, and customs rules must be observed together.
6. Court of Cassation (Yargıtay) and Practice Examples
6.1. Bank Liability
- Court of Cassation 11th Civil Chamber, 2019/3456 E., 2020/7890 K.
“If the exporter meets the terms of the letter of credit and payment is not made, the bank is liable for damages due to breach of contract.”
6.2. Document Discrepancy
- Court of Cassation 11th Civil Chamber, 2018/2345 E., 2019/5678 K.
“Errors in the form or content of documents may relieve the bank from the obligation to pay under the letter of credit.”
7. Additional Recommendations for Trade with Arab Countries
- Review Double Taxation Avoidance Agreements (Türkiye has agreements with the UAE, Qatar, Saudi Arabia, etc.).
- Certificate of Origin and Halal Certificate are often mandatory for imports in Arab countries.
- Documents should have certified Arabic translations.
- Contracts should have a detailed force majeure clause, covering political crises, embargoes, etc.
8. Conclusion
The letter of credit is a secure and transparent payment mechanism for trade between Türkiye and Arab countries. However, it is crucial to establish the legal framework correctly, prepare complete documents, and ensure contract terms are clear.
Both exporters and importers should work with experienced lawyers in international trade law and banking practices to minimize commercial risks.
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