Construction projects involve a fundamental credit risk: the employer may make substantial financial commitments long before the contractor has fully completed its obligations.
A contractor may abandon the project, fail to complete the works on time, become insolvent, refuse to remedy defects or commit another material breach. Even where the employer ultimately has a strong damages claim, obtaining a court judgment against an insolvent or financially distressed contractor may provide little practical protection.
For this reason, construction contracts in Turkey frequently require the contractor to provide a performance bond, most commonly in the form of a bank guarantee letter (banka teminat mektubu).
The commercial purpose is simple.
Instead of relying exclusively on the contractor’s ability to pay damages after a breach, the employer obtains an additional payment undertaking from a bank.
However, the legal structure is significantly more sophisticated.
A Turkish bank guarantee may operate independently from the underlying construction contract. Particularly where the guarantee contains wording requiring payment “upon first written demand,” “unconditionally,” or “without the need for protest or court judgment,” the employer may be able to demand payment from the bank without first obtaining a judgment proving the contractor’s breach.
That autonomy makes performance bonds extremely valuable to employers—and potentially dangerous for contractors.
The decisive questions are therefore:
What exactly does the bond guarantee?
When can the employer call it?
Can the bank investigate the underlying construction dispute before paying?
Can the contractor obtain an injunction preventing payment?
What happens if the employer wrongfully calls the bond?
Under Turkish law, the answers depend primarily on the wording of the guarantee itself, the underlying contract, the nature of the guaranteed risk and established Court of Cassation principles concerning bank guarantee letters.
1. What Is a Performance Bond?
A performance bond is security provided to protect the employer against the contractor’s failure to perform contractual obligations.
In Turkish construction practice, this is frequently achieved through a bank guarantee letter issued:
by the bank — the guarantor,
at the request of the contractor — the applicant or principal (lehtar),
in favour of the employer — the beneficiary (muhatap).
This creates a triangular relationship.
The first relationship is the underlying construction contract between the employer and contractor.
The second is the relationship between the contractor and the bank under which the contractor requests issuance of the guarantee and normally undertakes to reimburse the bank if payment is made.
The third is the guarantee relationship between the bank and the employer.
The third relationship is particularly important because Turkish case law traditionally treats bank guarantee letters as guarantee undertakings rather than ordinary surety obligations.
Article 128 of the Turkish Code of Obligations regulates the undertaking of a third person’s act and provides an important statutory foundation for guarantee relationships.
Turkish Court of Cassation jurisprudence has long treated bank guarantee letters as independent guarantee relationships, and the distinction between the guarantee and the underlying contractual relationship is central to their enforcement.
2. Performance Bonds Are Not the Same as Ordinary Suretyship
Understanding the difference between a bank guarantee and suretyship is fundamental.
An ordinary surety obligation is generally accessory (fer’i) to the principal debt.
A bank guarantee—particularly a first-demand guarantee—has a substantially more autonomous character.
The bank does not normally become a co-contractor responsible for constructing the building.
Instead, it undertakes to pay an agreed amount if the risk described in the guarantee materialises and a demand complying with the guarantee is made.
The Court of Cassation has repeatedly emphasised the independent character of bank guarantee letters. In a first-demand guarantee, the bank’s payment obligation is not normally dependent on obtaining a final judgment against the contractor.
This independence is the principal reason employers prefer bank guarantees.
Without such security, an employer facing a serious contractor default might first have to litigate for several years, obtain a judgment and then attempt enforcement against the contractor.
With a properly drafted performance guarantee, the employer may have immediate access to bank-backed security while the underlying contractual dispute continues separately.
3. The Most Important Version: The First-Demand Guarantee
Many Turkish performance bonds contain wording similar to:
“Upon receipt of your first written demand stating that the contractor has failed to fulfil its contractual obligations, we irrevocably and unconditionally undertake to pay the requested amount up to the maximum guarantee amount without protest, without requiring a court judgment and without obtaining the contractor’s consent.”
This language creates what is commonly called a first-demand guarantee (ilk talepte ödeme kayıtlı teminat mektubu).
The Turkish Court of Cassation General Assembly of Civil Chambers has explained that, as a rule, a bank issuing such a guarantee undertakes to pay upon a compliant demand without requiring the beneficiary to prove the merits of the underlying contractual claim first. The bank’s examination is principally formal rather than a full determination of the construction dispute.
This means that the bank generally does not conduct a mini-trial.
If the employer says:
“The contractor failed to perform and we call the bond,”
the bank normally examines whether the demand satisfies the documentary and formal requirements of the guarantee.
It does not ordinarily determine whether the contractor’s delay was caused by defective design, whether an extension of time should have been granted or whether a variation order justified additional payment.
Those issues belong primarily to the underlying employer-contractor dispute.
4. The Wording of the Guarantee Determines the Scope of the Bank’s Obligation
Performance bonds should never be analysed merely by their title.
A document headed:
“Performance Bond”
may provide very broad security.
Another document carrying exactly the same title may cover only specifically defined defaults.
The bank’s liability depends upon the wording of the guarantee.
Important provisions include:
- maximum guaranteed amount;
- guaranteed contractual obligations;
- first-demand language;
- conditions precedent to payment;
- documents required with a demand;
- partial-demand rights;
- expiry date;
- place and method for presenting a demand;
- automatic-extension provisions;
- reduction mechanisms;
- governing law;
- and jurisdiction.
Turkish Court of Cassation jurisprudence stresses that the risk stated in a guarantee cannot simply be expanded beyond the wording of the letter. The bank is responsible for the risk it agreed to guarantee, not every financial dispute that may arise between the employer and contractor.
This is an extremely important protection for contractors and banks.
An employer cannot normally use a narrowly drafted guarantee designed to secure one particular obligation as a general source of payment for unrelated contractual claims.
5. Performance Bonds Must Be Distinguished From Advance Payment Bonds
Construction contracts frequently require several different forms of security.
The most common include:
Performance Bond
Secures proper performance of the contractor’s contractual obligations.
Advance Payment Guarantee
Protects the employer where an advance payment is made before the corresponding work has been performed.
Retention Guarantee
May replace cash retention deducted from progress payments.
Defects or Warranty Guarantee
Secures obligations arising during the defects-liability or warranty period.
These guarantees may look similar but secure different risks.
This distinction has practical legal consequences.
Recent Court of Cassation litigation concerning an advance payment guarantee illustrates that the nature of the guaranteed risk matters. Arguments relating to obligations that would ordinarily fall within a performance guarantee cannot automatically be used to justify calling a guarantee issued specifically to secure repayment of an advance.
Accordingly, the employer should not merely ask:
“Do we have a bank guarantee?”
It should ask:
“Which specific risk does this particular guarantee cover?”
6. What Does a Performance Bond Normally Secure?
The precise answer depends on the wording, but a broad construction performance guarantee may potentially secure failures such as:
- failure to commence the works;
- abandonment of the site;
- failure to achieve completion;
- material breach of the construction contract;
- failure to remedy defective work;
- failure to comply with certain employer instructions;
- obligations arising on contractual termination;
- or amounts that become payable because of contractor default.
However, the employer must still remain within the scope of the bond.
Suppose a EUR 2 million guarantee states that it secures:
“all obligations of the contractor relating to construction and completion of the project.”
That wording may be substantially broader than a guarantee stating:
“repayment of the EUR 2 million advance made on 1 March 2027.”
The first may potentially respond to several categories of contractor default.
The second is tied to a much narrower risk.
Drafting therefore determines commercial protection.
7. Does the Employer Need a Court Judgment Before Calling the Bond?
For a properly drafted first-demand guarantee, generally not.
The whole commercial purpose of such a guarantee is to provide payment without requiring the employer first to complete litigation against the contractor.
The Court of Cassation General Assembly has expressly recognised that first-demand wording can require the bank to pay upon a formally compliant demand without requiring proof of the beneficiary’s entitlement through prior litigation.
A clause may expressly state that payment will be made:
without protest;
without judgment;
without contractor approval;
and
upon first written demand.
Where such language exists, the bank generally cannot postpone payment merely because the contractor says:
“I disagree with the employer.”
Otherwise, the principal commercial purpose of an autonomous first-demand guarantee would be defeated.
8. Can the Bank Raise the Contractor’s Defences?
Generally, the bank cannot simply adopt every defence arising from the underlying construction contract.
This follows from the autonomous nature of the guarantee.
Suppose the employer calls the guarantee alleging 180 days of contractor delay.
The contractor argues that:
- 60 days were caused by late drawings;
- 30 days arose from employer variations;
- and the remaining delay falls within force majeure.
Those arguments may be highly relevant to the construction arbitration or court proceedings.
But they do not automatically give the issuing bank the right to refuse a formally valid first-demand call.
The Court of Cassation has emphasised that the bank is not generally entitled to conduct a substantive examination of the underlying dispute in a first-demand guarantee relationship.
This is why performance bonds create a significant cash-flow risk for contractors.
The contractor may ultimately prove that it never breached the construction contract—but the bond may already have been paid.
9. The Bank Can Still Rely on Its Own Defences
The autonomy of the guarantee does not mean the bank is completely defenceless.
The Court of Cassation recognises that the bank may rely on defences arising directly from the guarantee relationship itself.
For example, payment may potentially be refused where:
- the guarantee has expired;
- the demand exceeds the guarantee amount;
- the demand does not comply with required form;
- required documents were not presented;
- the demand concerns a risk outside the guarantee;
- the person making the demand lacks authority;
- or another condition stated in the guarantee has not been satisfied.
The bank therefore conducts a legal-documentary assessment.
What it generally should not do is replace the construction tribunal and decide the merits of the underlying contractor-employer dispute.
10. The Major Exception: Manifest Abuse or Fraudulent Demand
The principle of independence is powerful, but it is not absolute.
Turkish law does not protect an obvious abuse of rights.
Article 2 of the Turkish Civil Code embodies the general prohibition against abuse of rights, and Court of Cassation jurisprudence applies this principle to first-demand guarantees in exceptional circumstances.
The Court of Cassation General Assembly has recognised that where the bank clearly knows that the beneficiary’s demand is abusive and incompatible with good faith, payment may be refused despite first-demand wording.
The threshold is deliberately high.
A simple contractual disagreement is not enough.
The contractor saying:
“The employer is wrong”
does not transform a bond call into obvious abuse.
The exception is more relevant where clear, immediately available evidence establishes that the beneficiary plainly has no right to call the guarantee.
The Court of Cassation has referred, for example, to situations in which incontrovertible documentary evidence demonstrates that the secured obligation has already been discharged but the beneficiary nevertheless attempts to obtain payment.
This distinction protects both objectives of the law:
the commercial reliability of first-demand guarantees, and
the prohibition of clearly abusive demands.
11. Can the Contractor Obtain an Injunction Preventing Payment?
Potentially, yes—but obtaining such relief is difficult.
A contractor who believes that the employer is about to make a clearly unlawful or abusive bond call may seek an interim injunction (ihtiyati tedbir) preventing payment.
Court of Cassation jurisprudence expressly recognises interim judicial relief as one of the exceptional mechanisms capable of preventing payment under a first-demand guarantee.
However, courts must approach these applications carefully.
If an injunction were available whenever the contractor disputed liability, the commercial function of an on-demand bond would disappear.
Accordingly, the contractor normally needs much more than a plausible construction defence.
The application should demonstrate, with strong and readily assessable evidence, why the proposed call falls outside the guarantee or constitutes a manifest abuse.
Possible examples may include:
- the guaranteed obligation has indisputably been fully discharged;
- the bond has expired;
- the beneficiary is demanding payment for an unrelated contract;
- the guarantee was required to be released under an undisputed contractual event;
- or the call is otherwise clearly outside the secured risk.
A complicated claim requiring extensive expert examination of critical-path delay will generally be far less suitable for emergency interference with an autonomous guarantee.
12. A Wrongful Bond Call Can Create Liability
The fact that the bank may be required to pay does not necessarily mean that the employer ultimately has the right to keep the money.
This distinction is essential.
There are effectively two questions:
Question 1: Must the bank honour the demand?
and
Question 2: Is the employer contractually entitled, as against the contractor, to retain the proceeds?
Those questions may produce different answers.
A formally compliant first-demand call may require the bank to pay.
But if subsequent proceedings establish that the employer had no substantive contractual entitlement, the contractor may pursue appropriate claims against the employer for wrongful calling or retention of the guarantee proceeds.
Recent Court of Cassation proceedings concerning first-demand bank guarantees illustrate the legal separation between the bank-beneficiary guarantee relationship and the underlying contractual relationship between principal and beneficiary.
The contractor’s principal remedy may therefore arise after payment, rather than through preventing payment by the bank.
This is why bond calls frequently create parallel litigation.
13. The Guarantee Amount Must Be Negotiated Carefully
The value of the performance bond is fundamentally a commercial allocation of risk.
Private Turkish construction contracts are generally free to negotiate the percentage or fixed amount of security, subject to applicable mandatory-law limitations.
A contract might require:
5% of the contract price;
10%;
20%;
or another negotiated amount.
From the employer’s perspective, an inadequate guarantee may provide insufficient protection if the contractor defaults while substantial completion costs remain.
From the contractor’s perspective, an unnecessarily large guarantee can be extremely expensive.
Banks typically require countersecurity, collateral, credit facilities or other financial support from the contractor.
A EUR 10 million performance bond may therefore substantially reduce the contractor’s available banking capacity throughout the project.
The bond percentage is consequently not merely a legal clause.
It is an important component of project financing.
14. Should the Bond Reduce as Construction Progresses?
Contractors frequently request a reduction mechanism.
For example:
10% bond until provisional acceptance;
5% thereafter;
release at final acceptance.
Alternatively, the original performance bond may be released at provisional acceptance and replaced by a smaller defects-liability guarantee.
This can provide a commercially balanced structure.
Once 95% of a project has been successfully completed, requiring the contractor to maintain exactly the same performance security as on the first day may no longer reflect the employer’s actual remaining exposure.
But reduction should never occur automatically unless the conditions are precisely defined.
The contract and guarantee should identify:
- who certifies completion;
- the reduction date;
- whether outstanding defects prevent reduction;
- whether unresolved claims affect release;
- and whether a replacement warranty guarantee is required.
15. Expiry Dates Can Destroy the Employer’s Security
One of the most serious mistakes an employer can make is allowing a performance bond to expire while contractor obligations remain outstanding.
A fixed-term guarantee may provide:
“This guarantee expires on 30 June 2028, and any demand must be received by the bank no later than that date.”
If the construction project is delayed to December 2028 but the guarantee is not extended, the employer may lose the security before the contractor completes the project.
Employers should therefore maintain a formal bond register showing:
- issuing bank;
- guarantee number;
- amount;
- currency;
- issue date;
- expiry date;
- secured obligation;
- reduction date;
- and extension requirements.
The construction contract should also address what happens if the contractor fails to extend an expiring guarantee.
A common contractual solution permits the employer to call the existing bond before expiry where the contractor fails to provide the required extension.
Such a mechanism must, however, be reflected carefully in the contractual and guarantee wording.
16. Conditional Guarantees and On-Demand Guarantees Create Very Different Risk
Not every performance guarantee must be unconditional.
An employer and contractor may agree that payment requires specified documentary proof.
For example:
“Payment shall be made upon presentation of the engineer’s certificate confirming contractor default.”
Or:
“Payment shall be made following termination of the construction contract for contractor default.”
This creates a more conditional security structure.
The commercial trade-off is clear.
A pure first-demand guarantee maximises employer liquidity and security.
A conditional guarantee provides the contractor with greater protection against arbitrary calls but reduces the employer’s immediate access to funds.
The correct structure depends on:
- project value;
- contractor credit strength;
- employer creditworthiness;
- dispute-resolution mechanism;
- financing requirements;
- bargaining power;
- and the risk profile of the project.
17. Performance Bonds and Contract Termination
A construction contract should explain the relationship between termination and the performance bond.
Possible structures include:
the bond may be called immediately after contractor-default termination;
the bond secures amounts arising from termination;
the employer may call the bond before termination in specified circumstances;
or
the bond remains valid during post-termination completion and settlement procedures.
Ambiguous drafting can create serious disputes.
For example, suppose the guarantee secures only:
“performance of construction obligations until completion.”
If the employer terminates the contractor and appoints another contractor, questions may arise regarding which post-termination losses remain within the guaranteed risk.
It is therefore preferable for major construction contracts and their corresponding bonds to be drafted together rather than separately.
18. Performance Bonds Should Be Coordinated With Delay Penalties
Construction contracts commonly contain both:
delay penalties, and
performance security.
These mechanisms perform different functions.
The delay-penalty clause defines the contractor’s contractual monetary liability for delay.
The performance bond provides security from which certain liabilities may potentially be recovered.
The contract should specify whether the employer may call the performance bond to recover accrued delay penalties.
Otherwise, the employer may have a valid delay-penalty claim against the contractor but face an argument that the particular bond does not secure that category of liability.
This again demonstrates that the phrase “performance bond” is not sufficient.
The guaranteed obligations should be expressly identified.
19. Insolvency Is Where the Performance Bond Becomes Most Valuable
The true economic importance of an independent bank guarantee becomes clearest when the contractor becomes insolvent.
Suppose a contractor abandons a project with EUR 20 million of remaining work.
Without bank security, the employer may be only one creditor among many.
Even if it obtains a large damages judgment, recovery may be minimal.
A valid bank guarantee changes the risk structure.
The employer’s demand is directed against the issuing bank, not merely against the insolvent contractor.
Because the bank’s guarantee obligation is distinct from the contractor’s underlying performance obligation, the existence of serious financial problems at contractor level does not by itself eliminate the bank’s independent undertaking.
This credit-risk substitution is one of the principal commercial reasons performance guarantees exist.
20. Public Construction Contracts Have Their Own Statutory Security Regime
Private construction contracts should be distinguished from public procurement.
Where the project falls within the Turkish public procurement system, the security regime is governed by Law No. 4734 on Public Procurement, Law No. 4735 on Public Procurement Contracts and implementing legislation. The Public Procurement Authority maintains the current consolidated versions of both statutes and the relevant construction procurement regulations.
Article 43 of Law No. 4734 establishes the statutory framework for definitive security (kesin teminat) required from the successful bidder before contract signature. Official Public Procurement Authority materials identify the standard definitive-security level as 6% of the contract/tender amount, subject to the specific statutory structure.
Public contracts also contain specific statutory rules governing:
- acceptable forms of security;
- additional security;
- forfeiture;
- release;
- contractor default;
- contract termination;
- and return of guarantees.
For construction works, Article 13 of Law No. 4735 provides a particular release mechanism under which part of the definitive security is returned following approval of provisional acceptance after defects are addressed, with the balance returned following satisfaction of the statutory conditions associated with final acceptance. Official Public Procurement Authority guidance reproduces this statutory framework.
Accordingly, an analysis appropriate for a private hotel construction contract cannot automatically be applied to a public infrastructure contract.
21. When Can Security Be Forfeited in Public Procurement?
The public procurement regime contains consequences that are more prescriptive than ordinary private construction contracting.
Official Public Procurement Authority guidance notes that in statutory termination scenarios under Law No. 4735, definitive and additional securities may be forfeited without requiring a separate protest and the contract may be liquidated in accordance with the statutory framework.
This is materially different from a purely negotiated private construction arrangement.
Anyone advising on a Turkish performance bond should therefore determine at the outset whether the project is:
a private-law project, or
a procurement governed by the public procurement legislation.
That distinction changes the applicable legal analysis substantially.
22. Foreign Bank Guarantees and International Projects
Major Turkish construction projects may involve contractors or banks located outside Turkey.
The parties may use:
- Turkish bank guarantees;
- foreign bank guarantees;
- counter-guarantees;
- international standby letters of credit;
- or guarantees subject to international rules such as the ICC’s Uniform Rules for Demand Guarantees where expressly incorporated.
In such projects, several additional questions must be addressed:
Which law governs the guarantee?
Which court has jurisdiction over the bank’s payment obligation?
Where must the demand be presented?
Which language controls?
Does the guarantee incorporate international banking rules?
Is a Turkish counter-guarantee involved?
The fact that the underlying construction contract is governed by Turkish law does not necessarily mean that every independent guarantee issued in connection with the project is governed by exactly the same legal framework.
The construction contract and the guarantee must therefore be analysed independently.
23. Common Contractor Mistakes
Contractors frequently focus intensely on price and scope while treating the performance bond as a standard banking document.
That can be a major mistake.
Particularly dangerous provisions include:
an unlimited or excessively long expiry period;
automatic extensions controlled entirely by the employer;
no reduction after substantial completion;
extremely broad descriptions of guaranteed obligations;
first-demand payment with almost no documentary requirement;
and
no contractual mechanism dealing with wrongful calls.
Contractors should also understand the reimbursement arrangement with their bank.
If the employer calls a EUR 3 million bond and the bank pays, the contractor may immediately become liable to reimburse the bank even while it is litigating against the employer over whether the call was justified.
The resulting liquidity crisis can be more damaging than the underlying construction dispute.
24. Common Employer Mistakes
Employers make different errors.
The most common include:
- allowing the guarantee to expire;
- failing to verify the authenticity of the bond;
- accepting a guarantee from an unsuitable issuing institution;
- failing to ensure that the bond covers all relevant contractual obligations;
- agreeing to premature reduction;
- returning the original guarantee too early;
- demanding payment outside the scope of the secured risk;
- failing to comply precisely with the demand procedure;
- and making an aggressive call that later creates substantial wrongful-call liability.
A sophisticated employer should therefore treat performance security as an actively managed project asset.
It should not simply place the guarantee in a file after contract execution.
25. What Should Be Checked Before Accepting a Performance Bond?
Before an employer accepts a bank performance guarantee, the legal team should verify at least:
the issuing bank;
authenticity;
beneficiary’s exact legal name;
contract identification;
guarantee amount;
currency;
scope of the guaranteed risk;
first-demand wording;
documents required for payment;
expiry;
extension mechanism;
partial-call rights;
maximum liability;
reduction provisions;
governing law;
and
jurisdiction or dispute-resolution provisions where applicable.
The guarantee should then be compared line by line with the construction contract.
A performance bond should never be reviewed in isolation.
26. A Practical Example
Assume a developer appoints a contractor to construct a residential project for EUR 50 million.
The contractor provides a EUR 5 million performance bond issued by a Turkish bank.
The guarantee states that the bank will pay, upon the developer’s first written demand, any amount up to EUR 5 million if the developer states that the contractor has failed to fulfil its construction obligations.
Construction later suffers serious problems.
The developer terminates the contract for alleged contractor default and demands the full EUR 5 million from the bank.
The contractor disputes termination and argues that the employer itself caused the delays.
Three distinct disputes now arise.
Bank–Employer Relationship
The bank examines whether the demand complies with the performance bond. If the first-demand conditions are satisfied, it may generally be required to pay without determining the merits of the entire construction dispute. Court of Cassation jurisprudence supports this autonomous structure.
Contractor–Employer Relationship
The contractor may challenge the employer’s termination and argue that the EUR 5 million call was substantively unjustified.
Bank–Contractor Relationship
If the bank pays, it may exercise the reimbursement rights available under its contractual relationship with the contractor.
This example demonstrates why performance bonds cannot be analysed simply as:
“The employer has a EUR 5 million claim.”
The construction contract and the bank guarantee create legally distinct relationships.
Conclusion: A Performance Bond Is Not Merely Security—It Is a Separate Enforcement Mechanism
Performance bonds are among the most powerful risk-management instruments available in Turkish construction contracting.
Their importance lies not merely in increasing the assets available to satisfy a future judgment.
A properly structured bank performance guarantee can create an independent payment obligation owed by a bank directly to the employer, substantially reducing the employer’s exposure to contractor credit risk.
Turkish law and Court of Cassation jurisprudence generally treat bank guarantee letters as independent guarantee relationships. First-demand guarantees are particularly powerful because the bank’s examination is ordinarily formal: the bank does not normally resolve the underlying construction dispute before making payment.
But the principle of independence has limits.
The demand must fall within the risk described by the guarantee. The amount cannot exceed the guaranteed limit. Formal demand requirements must be satisfied. The guarantee must remain valid. And Turkish law does not protect a demand that is manifestly abusive in circumstances clearly established by reliable evidence.
For employers, four issues are therefore critical:
What exactly is guaranteed?
When does the guarantee expire?
What must be presented to obtain payment?
Can the contractor prevent the call?
For contractors, the corresponding questions are equally important:
How broad is the guaranteed risk?
Can the bond be reduced as the project progresses?
When must it be released?
What happens to the contractor’s liquidity if the employer makes a disputed call?
The strongest construction contracts coordinate the performance-bond clause, termination provisions, delay penalties, extension-of-time regime, defects obligations and the wording of the guarantee itself.
Because once a serious construction dispute begins, the difference between an ordinary contractual claim and a properly drafted first-demand bank guarantee may be the difference between attempting to recover money years later and having bank-backed funds available immediately.
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