One Demand Can Freeze Millions: Bank Guarantees, Unfair Calls and Injunctions in Turkish Construction Projects

Bank guarantees are among the most powerful risk-allocation instruments used in Turkish construction projects.

A contractor may spend years performing a major infrastructure, residential, industrial or energy project while simultaneously maintaining several bank guarantees in favour of the employer. These guarantees may secure advance payments, contractual performance, completion obligations, defects during the warranty period or obligations arising before final acceptance.

Their commercial importance is obvious.

Their legal risk is less obvious.

A contractor may believe that the employer cannot claim under a guarantee unless it first proves an actual contractual breach. Yet many construction guarantees are drafted as irrevocable and payable on first demand, allowing the beneficiary to request payment from the bank without first obtaining a court judgment establishing the contractor’s liability.

This produces one of the most difficult tensions in construction law:

The employer wants a guarantee that can be converted into cash immediately when the project fails.

The contractor wants protection against an abusive or premature call.

Turkish law attempts to balance these interests through the legal independence of bank guarantees, contractual interpretation, the prohibition of abuse of rights and—where the necessary conditions exist—interim injunctions preventing payment or encashment of the guarantee.

Understanding this system is essential before signing a construction contract involving substantial bank security.

What Is a Bank Guarantee Under Turkish Law?

Turkish legislation does not regulate every aspect of bank guarantee letters through a single comprehensive statutory regime.

Their legal structure has instead been developed significantly through Court of Cassation jurisprudence and banking practice.

Two historic decisions of the Court of Cassation’s General Assembly for the Unification of Judgments are particularly important.

The decisions dated 13 December 1967, E.1966/16, K.1967/7, and 11 June 1969, E.1969/4, K.1969/6 characterized bank guarantees as guarantee arrangements rather than ordinary suretyship. The established approach emphasizes that the bank undertakes an obligation separate from the principal contractual obligation guaranteed between the beneficiary and the contractor.

This distinction remains fundamental.

A typical construction guarantee involves three different legal relationships:

1. The underlying construction contract

Between the employer and contractor.

2. The relationship between the contractor and the issuing bank

The contractor requests the bank to issue the guarantee and generally assumes reimbursement obligations toward the bank if the bank is required to pay.

3. The guarantee relationship

Between the issuing bank and the beneficiary/employer.

These relationships are legally connected in economic terms but are not necessarily legally dependent on one another.

The Independence Principle

The core characteristic of a bank guarantee is its relative independence from the underlying construction contract.

Suppose:

A contractor agrees to construct a factory for EUR 40 million.

The contractor provides a EUR 4 million performance guarantee issued by a Turkish bank.

A dispute later arises over whether delays were caused by the contractor or by late design information supplied by the employer.

From the contractor’s perspective, the underlying contract may show that no contractual default occurred.

But the bank’s payment obligation is determined primarily by the wording and conditions of the guarantee itself.

This is the commercial purpose of an autonomous guarantee.

The employer does not want to litigate for four years before gaining access to security. The employer wants a reliable financial instrument that can respond when the contractual risk materializes.

The Court of Cassation’s established characterization of bank guarantees as independent guarantee obligations reflects this function.

A Bank Guarantee Is Not the Same as Suretyship

This distinction can have major practical consequences.

In ordinary suretyship, the surety’s responsibility is closely connected with the principal debtor’s obligation.

A bank guarantee, particularly an autonomous first-demand guarantee, operates differently.

The bank assumes its own contractual payment obligation toward the beneficiary.

Consequently, defences available to the contractor under the underlying construction contract are not automatically available to the bank against the beneficiary.

For example, the contractor may argue:

• the extension of time application should have been approved,
• liquidated damages were wrongly calculated,
• practical completion occurred,
• the employer itself caused delay,
• or the employer owes larger amounts to the contractor.

Those arguments may ultimately determine the dispute between contractor and employer.

But they do not automatically mean that the issuing bank can refuse a formally compliant demand under an independent guarantee.

That autonomy is exactly what makes bank guarantees commercially valuable—and dangerous.

“First Demand” Guarantees Create the Highest Risk

Many construction guarantees contain language substantially similar to:

the bank irrevocably undertakes to pay the beneficiary upon its first written demand without protest, court order or proof of the underlying breach.

The exact wording varies.

However, where the guarantee is genuinely drafted as an unconditional or first-demand instrument, the beneficiary’s ability to call the guarantee is significantly stronger.

The bank will normally examine matters such as:

• whether the demand was made by the correct beneficiary,
• whether it was submitted before expiry,
• whether the required declaration was included,
• whether the amount requested falls within the guarantee limit,
• and whether any documentary requirements stated in the guarantee were satisfied.

The bank does not ordinarily conduct a full construction-law trial before making payment.

This means the most important document in an urgent guarantee dispute may not initially be the 300-page construction contract.

It may be the two-page guarantee letter.

The Main Types of Guarantees Used in Construction Projects

Different guarantees protect different risks.

Treating all guarantees as interchangeable is a serious mistake.

Bid or Tender Guarantee

A bid guarantee protects the employer or contracting authority during the tender stage.

It may respond where a bidder withdraws its offer improperly or fails to execute the contract or provide the required performance security after award.

In public procurement, Turkish legislation specifically recognizes bank guarantee letters as acceptable forms of security, subject to the statutory and tender-document requirements.

Advance Payment Guarantee

An advance payment guarantee secures money paid by the employer to the contractor before the corresponding work has been earned.

For example:

Contract price: EUR 50 million
Advance payment: EUR 5 million
Advance guarantee: EUR 5 million

The commercial purpose is not normally to secure every possible breach of the construction contract.

Its purpose is primarily to protect the unamortized advance.

This distinction can become decisive when the employer attempts to call an advance guarantee after the advance has already been substantially or entirely recovered through interim payment deductions.

Performance Guarantee

The performance guarantee—often described as kesin teminat in Turkish practice—secures contractual performance.

It may respond to:

• failure to complete,
• serious delay,
• termination for contractor default,
• uncorrected defects,
• contractual debt,
• or other specified failures,

depending on its wording and the underlying contract.

Performance guarantees are often among the largest security instruments maintained throughout the construction period.

Retention Guarantee

Instead of allowing the employer to retain a percentage from each interim payment, the contractor may provide a bank guarantee for the equivalent retention amount.

This improves contractor cash flow but converts retained money into bank exposure.

Defects or Warranty Guarantee

After provisional or practical acceptance, the performance guarantee may sometimes be reduced or replaced with a warranty-period guarantee.

This security protects obligations concerning defects appearing during the maintenance or warranty period.

The commercial risk changes after construction completion.

The employer no longer primarily needs protection against total non-completion. It needs protection against defects that the contractor fails to remedy.

Public Construction Projects Have Additional Statutory Rules

Bank guarantees used in public construction contracts require separate analysis because the public procurement legislation contains mandatory rules regarding security.

Under the Turkish public procurement framework, bank guarantee letters are recognized among acceptable forms of security, and performance security is regulated specifically in relation to contracts awarded under Law No. 4734.

For public works, the return of performance and additional performance security is also regulated by Law No. 4735.

The official Public Procurement Authority materials explain that in construction works, once defects and deficiencies have been corrected and the provisional acceptance report has been approved, one half of the performance security and additional performance security is returned. The remaining portion is returned following fulfilment of the statutory conditions associated with final acceptance and the contractor’s relevant liabilities.

Public procurement guarantees therefore cannot always be analysed in the same way as privately negotiated guarantees between two commercial companies.

The applicable legislation, tender specifications, general conditions and particular contract conditions must all be examined together.

When Can the Beneficiary Call the Guarantee?

The first source is always the guarantee itself.

A guarantee may be:

• unconditional,
• conditional,
• payable on first demand,
• payable following a declaration of breach,
• payable only upon submission of specified documents,
• linked to termination,
• linked to failure to repay an advance,
• or limited to particular contractual obligations.

The exact wording matters.

Consider two guarantees.

Guarantee A

“We will pay EUR 2 million upon your first written demand.”

Guarantee B

“We will pay up to EUR 2 million upon submission of a written demand accompanied by the engineer’s certificate confirming termination of the contractor for default.”

The commercial purpose may look similar.

Legally, they are significantly different.

The beneficiary seeking payment under Guarantee B must comply with the additional documentary condition.

Bank guarantees should therefore be reviewed as independent commercial instruments rather than treated as simple appendices to the construction contract.

Expiry Dates Can Decide the Entire Dispute

Many guarantees contain an expiry date.

A beneficiary who fails to make a valid demand before expiry may lose the protection of the guarantee.

The wording should therefore be examined carefully to determine:

• the final demand date,
• whether original documents must reach the bank before that date,
• whether the guarantee automatically extends,
• whether an extension request must be made,
• whether there is an “extend or pay” mechanism,
• and what happens if project completion is delayed.

Contractors should also monitor expiry dates closely.

An employer may request extensions repeatedly where completion or final acceptance has not yet occurred.

A contractor refusing an extension may face a call under the guarantee if the construction contract expressly authorizes the employer to demand payment rather than allow the guarantee to expire.

The “Extend or Pay” Problem

Large construction contracts commonly require the contractor to maintain security until a defined milestone.

If the guarantee is about to expire before that milestone, the employer may demand:

Extend the guarantee—or we will call it.

This can place the contractor under substantial banking pressure.

An extension may require:

• renewed bank approval,
• additional collateral,
• higher commissions,
• blocked credit limits,
• parent-company support,
• or cash collateral.

The legal outcome depends heavily on the construction contract and guarantee wording.

A contractor should therefore negotiate the mechanism for extensions before the project begins rather than during a dispute.

What Is an Unfair or Abusive Call?

The autonomy of the guarantee does not mean that the beneficiary has unlimited freedom.

A demand may be challenged where it is made outside the guarantee terms or where the circumstances demonstrate a legally abusive use of the instrument.

Examples may include situations where:

• the guarantee has expired,
• the demand exceeds the guarantee amount,
• a required contractual/documentary condition clearly has not occurred,
• the guarantee secures only an advance that has already been completely repaid,
• the beneficiary calls security for obligations outside its defined scope,
• the secured obligation has indisputably ceased,
• or the call constitutes a manifest abuse of rights.

However, the threshold for stopping an autonomous guarantee should not be confused with simply showing that the underlying construction contract is disputed.

If an employer says the contractor is in default and the contractor says the employer caused the delay, the existence of that disagreement alone may not justify preventing an independent bank guarantee from functioning.

Otherwise, the commercial purpose of first-demand guarantees would be destroyed.

Advance Guarantees Provide a Good Illustration

A Court of Cassation decision frequently discussed in this context involved an advance payment guarantee issued for a construction-related contractual relationship.

The contractor argued that provisional acceptance had already occurred and that the purpose of the advance guarantee had therefore expired, while the employer attempted to call the guarantee because deficiencies remained.

The Court of Cassation’s analysis distinguished the function of the advance guarantee from security intended to cover post-acceptance performance obligations and concluded, in the circumstances of that case, that the contractor had sufficiently established the basis for interim protection against the call.

The lesson is important:

The name and purpose of the guarantee matter.

An employer should not automatically be entitled to use an advance guarantee as though it were an unlimited performance guarantee.

Can a Turkish Court Stop the Guarantee From Being Encashed?

Potentially, yes.

A contractor facing an allegedly unlawful guarantee call may request an interim injunction (“ihtiyati tedbir”).

Article 389 of the Turkish Code of Civil Procedure provides the general basis for interim relief where a change in the existing circumstances may make obtaining the right substantially more difficult or impossible, or where delay may cause serious harm or disadvantage.

Article 390 regulates the procedure for obtaining interim relief and allows a request to be made before proceedings are commenced from the competent court dealing with the merits, while after commencement it is generally requested from the court hearing the underlying proceedings. The applicant must identify the grounds for relief and present supporting evidence.

Article 391 allows the court to order measures appropriate to the circumstances, including preventing an act or imposing another measure necessary to protect the disputed right.

A request preventing payment under a bank guarantee therefore falls conceptually within the Turkish interim-measures framework.

An Injunction Is Not Automatic

The contractor must normally establish a sufficiently persuasive legal and evidentiary basis for urgent relief.

This is particularly important because an injunction preventing payment changes the commercial position that the guarantee was intended to create.

Turkish appellate practice has recognized that a separate dispute alleging that a guarantee is being called unlawfully may be accompanied by a request under Articles 389 et seq. to prevent encashment. At the same time, courts distinguish such a substantive guarantee dispute from broader insolvency or restructuring proceedings where merely preserving the debtor’s assets is not enough to interfere automatically with third-party rights under a guarantee.

Consequently, a contractor should not file a one-page injunction request saying only:

“We disagree with the employer, so stop the bank.”

The application should normally explain precisely:

• what the guarantee secures,
• why the beneficiary’s demand falls outside that purpose,
• what contractual milestone has occurred,
• why the call is unlawful or abusive,
• what evidence makes that conclusion sufficiently apparent,
• and why payment before final judgment would create serious prejudice.

Approximate Proof Is Central to Interim Relief

Interim proceedings do not ordinarily involve a complete trial of the construction dispute.

The court must decide rapidly whether the applicant has established a sufficiently credible basis for protection.

Construction contractors should therefore organize the application around documents that can be understood quickly.

Strong evidence may include:

• the bank guarantee,
• construction contract,
• provisional acceptance certificate,
• final acceptance documentation,
• advance amortization statements,
• interim payment certificates,
• engineer’s determinations,
• termination notices,
• employer correspondence,
• defect lists,
• settlement agreements,
• bank statements,
• or previous acknowledgements by the beneficiary.

A 40-page narrative unsupported by decisive documents is generally less effective than a clear documentary chronology demonstrating why the call falls outside the guarantee.

The Court May Require Security From the Applicant

Interim injunctions can cause losses to the party restrained by them.

For this reason, the Turkish Code of Civil Procedure contains rules requiring the applicant, in principle, to provide security for potential loss caused by the interim measure, subject to statutory exceptions and judicial assessment under the relevant provisions.

In a major construction project, this can itself become financially significant.

Imagine a contractor asks the court to block payment of a USD 10 million guarantee.

The employer argues that delaying payment could cause substantial financing losses.

The court may have to balance these interests when structuring interim relief and any corresponding security requirement.

An injunction strategy should therefore consider not only the merits but also the applicant’s ability to provide any court-ordered security.

Timing Is Critical

A bank guarantee dispute can move far faster than an ordinary construction lawsuit.

The sequence may be:

10:00 – Employer submits demand to bank.

14:00 – Bank confirms documents appear compliant.

Next banking day – Payment scheduled.

If the contractor begins preparing an injunction application only after the bank has already paid, the nature of the dispute changes significantly.

Before payment, the objective is:

prevent encashment.

After payment, the objective may become:

recover money wrongfully obtained and claim resulting damages.

The second route can be considerably more difficult commercially.

For that reason, construction companies should have internal escalation procedures for threatened guarantee calls.

Who Should Be Covered by the Injunction?

This requires careful procedural drafting.

A guarantee transaction involves both the beneficiary and the issuing bank.

Depending on the claim and procedural structure, the requested measure may need to address:

• the beneficiary’s ability to make or continue the demand,
• the bank’s ability to make payment,
• or both.

The applicant should avoid ambiguity.

A decision stating only that “the defendant shall not collect the guarantee” may create practical difficulties if the bank is not clearly informed of the measure before payment.

Implementation of the court order is therefore as important as obtaining it.

What Happens If the Bank Has Already Paid?

Payment does not necessarily mean that the contractor loses all rights.

If the beneficiary was not legally entitled to retain the guarantee proceeds, the contractor may potentially bring claims seeking repayment or damages depending on the contractual and legal basis.

Turkish case law contains disputes in which contractors sought recovery of amounts allegedly obtained through wrongful encashment of guarantees.

But recovery litigation raises new questions:

• Was the beneficiary actually entitled to payment?
• Was the entire amount justified?
• Was only part of the guaranteed exposure valid?
• What damages resulted?
• What interest applies?
• Did the bank properly comply with the guarantee?
• Does the contractor have a direct claim against the beneficiary, the bank or another party?

Preventive action is often preferable to attempting to reverse the financial consequences later.

The Issuing Bank Also Has Its Own Risk

Banks are not merely mechanical payment channels.

They must determine whether a demand complies with the terms of the guarantee.

A bank that refuses a compliant demand without legal justification may face liability toward the beneficiary.

Conversely, a bank that pays outside the guarantee terms may face difficulties when seeking reimbursement from its customer.

The bank therefore focuses closely on the text of the guarantee and demand, rather than assuming the contractor’s interpretation of the underlying construction dispute is correct.

This is another reason why contractors should not expect their relationship manager at the issuing bank to resolve the construction dispute in their favour.

If legally effective protection is required, a court order may become necessary.

Calls for Only Part of the Guarantee

Guarantees do not always have to be called for the entire face amount.

Where the wording permits partial demands, the beneficiary may call only the amount allegedly due.

This can reduce the risk of an argument that an otherwise legitimate claim became abusive because the beneficiary demanded a disproportionately high amount.

For example:

Guarantee amount: EUR 5 million
Documented unrepaid advance: EUR 900,000

Calling EUR 900,000 may be easier to justify than calling the full EUR 5 million if the guarantee’s commercial function is limited to repayment of the outstanding advance.

For beneficiaries, the ability to explain why the amount demanded is contractually connected to the secured risk can be crucial in defending against an injunction.

Public-Sector Encashment Can Carry Additional Consequences

In public construction contracts, the consequences of contractor default may extend beyond the immediate cash value of the guarantee.

The public procurement framework provides circumstances in which performance security and additional performance security may be recorded as revenue following termination or failure to comply with statutory obligations. The applicable rules must be examined together with Law No. 4735 and the procurement documents.

The Public Procurement Authority’s materials also explain that where statutory liabilities relating to the public works contract remain unpaid at the relevant stage, security may be converted into cash and applied against those liabilities without the need for separate protest or judgment in the circumstances specified by the legislation.

Public works contractors should therefore not automatically transfer private-project assumptions into public procurement disputes.

A Guarantee Should Have a Clear Release Mechanism

One of the most common drafting problems is describing in detail when a guarantee must be provided but saying almost nothing about when it must be returned.

A strong construction contract should regulate:

• original guarantee amount,
• reduction mechanism,
• expiry,
• extension obligations,
• provisional acceptance,
• final acceptance,
• defects period,
• release conditions,
• permitted calls,
• partial release,
• and replacement of one guarantee with another.

For example:

10% performance guarantee during construction

↓

reduced to 5% after provisional acceptance

↓

replaced by a 2.5% defects guarantee

↓

released after final acceptance

creates significantly greater commercial predictability than:

“The employer may retain the guarantee until all contractor obligations are satisfied.”

The latter wording can generate years of dispute.

Advance Guarantees Should Reduce With the Advance

Contractors should particularly seek a reduction mechanism for advance payment guarantees.

If an employer has paid EUR 10 million in advance and the advance is gradually recovered through interim-payment deductions, keeping a EUR 10 million guarantee outstanding until the end of the project unnecessarily consumes banking capacity.

A properly structured guarantee may reduce automatically or upon certification as the advance is repaid.

Without such a mechanism, the contractor may have to maintain security far beyond the actual remaining financial exposure.

This affects:

• bank limits,
• guarantee commissions,
• liquidity,
• bonding capacity,
• and the contractor’s ability to tender for other projects.

Bank guarantees are therefore not merely legal instruments. They directly affect contractor financing.

Beware of Open-Ended Guarantee Language

Contractors should scrutinize wording that secures:

“all present and future obligations of the contractor whatsoever arising directly or indirectly in connection with the project.”

Such wording can create disputes concerning whether the guarantee covers:

• delay damages,
• defects,
• indemnities,
• tax liabilities,
• third-party claims,
• repayment obligations,
• termination damages,
• and obligations arising years after physical completion.

A narrower guarantee tied to a defined risk provides greater predictability.

For the employer, broader wording increases security.

The correct balance is a commercial negotiation rather than a purely technical banking issue.

Governing Law and Jurisdiction Must Be Checked

International construction projects frequently combine:

• a Turkish project,
• a Turkish contractor,
• a foreign employer,
• a Turkish or foreign issuing bank,
• an English-law or Swiss-law construction contract,
• ICC arbitration,
• and a guarantee subject to separate governing law.

Parties should never assume that the law governing the construction contract automatically governs the bank guarantee.

The guarantee may contain its own:

• governing law clause,
• jurisdiction clause,
• place of presentation,
• international guarantee rules,
• or banking conditions.

Where arbitration exists in the underlying contract, urgent court relief concerning a guarantee may also require separate procedural analysis.

The correct forum must therefore be identified before an emergency occurs.

Practical Example: Performance Guarantee Call After Termination

Consider a Turkish EPC contractor constructing an industrial plant.

Contract price: USD 80 million
Performance guarantee: USD 8 million
Advance guarantee: USD 4 million

The project is delayed.

The contractor argues that the employer failed to provide access to the site for 150 days.

The employer argues that the contractor independently suffered additional delay.

The employer terminates the contract and calls both guarantees in full.

The contractor immediately needs to ask separate questions about each instrument.

Performance guarantee

Does termination for alleged contractor default fall within the guarantee?

Was the required form of demand submitted?

Does the guarantee require only a declaration, or additional evidence?

Advance guarantee

How much advance remained unamortized?

If only USD 500,000 remained outstanding, on what basis is the employer seeking USD 4 million?

Injunction

Is there clear documentary evidence showing that one of the demands exceeds the function or scope of the guarantee?

Would payment create serious and difficult-to-reverse consequences?

Can the contractor satisfy the interim-relief evidentiary threshold?

The two guarantees should not automatically receive the same legal treatment merely because the same employer called them on the same day.

Practical Checklist for Contractors

Before providing a bank guarantee, the contractor should verify:

What exact risk does the guarantee cover?

Is it conditional or payable on first demand?

What documents must accompany a demand?

Can partial calls be made?

Does the guarantee reduce automatically?

When does it expire?

Can the employer demand an extension?

Can failure to extend trigger an immediate call?

When must the guarantee be returned?

Does provisional acceptance reduce the guarantee?

Does a separate defects guarantee replace it?

What law governs the guarantee?

Which court has jurisdiction?

What is the bank’s reimbursement and collateral arrangement with the contractor?

The time to answer these questions is before the guarantee is issued.

Practical Checklist for Employers

Employers should also exercise care.

Before making a call, the beneficiary should check:

Has the guaranteed risk actually occurred?

Does the guarantee cover this particular liability?

Is the guarantee still valid?

Has every documentary requirement been satisfied?

Is the amount demanded defensible?

Has the secured advance already been recovered?

Has the guarantee contractually reduced after acceptance?

Could the call realistically be characterized as abusive?

An employer making an unnecessarily aggressive call may convert a legitimate construction dispute into urgent injunction proceedings and subsequent damages litigation.

Conclusion: Bank Guarantees Are Powerful Because They Operate Before the Construction Dispute Is Finally Decided

A bank guarantee is not simply another clause in a construction contract.

It is a separate financial instrument capable of moving millions of dollars before the parties have established who is ultimately right in the underlying dispute.

Turkish jurisprudence has long treated bank guarantee obligations as having an independent guarantee character rather than ordinary suretyship.

That autonomy means that a contractor cannot normally prevent payment simply by showing that the employer’s underlying construction claim is disputed.

But autonomy is not unlimited.

A demand that clearly falls outside the guarantee, ignores its expiry or conditions, seeks payment for a risk no longer secured, or otherwise constitutes an unlawful or abusive use of the instrument may provide a basis for judicial intervention.

Turkish procedural law allows interim relief where the conditions of Articles 389 et seq. are satisfied, and case law recognizes that disputes concerning allegedly unlawful guarantee calls may support applications seeking to prevent encashment.

In practice, the legal strategy can often be reduced to three questions:

1. What exactly does the guarantee secure?

2. Has the beneficiary complied with the guarantee’s payment conditions?

3. Is there sufficiently strong and urgent evidence to justify stopping payment before the merits are finally decided?

For contractors, the safest approach is:

negotiate narrowly → monitor expiry and reduction → preserve project records → react immediately to a threatened call.

For employers:

draft clearly → call only within scope → document the contractual basis → avoid disproportionate or abusive demands.

Because once a first-demand guarantee is called, the legal dispute may no longer be about whether money will move.

It may become a dispute about whether the money can be stopped before it moves.