Performance Guarantee Disputes in Turkish Energy Projects: When Can a Bank Guarantee Be Called? – 2026 Updated Legal Guide

Performance Guarantee Disputes in Turkey | Bank Guarantee Calls in Energy Projects 2026

When can a performance bank guarantee be called in a Turkish energy project? This 2026 guide explains on-demand guarantees, EPC contractor defaults, wrongful calls, injunctions, URDG 758, advance-payment guarantees, counter-guarantees, arbitration, and compensation claims.

Performance guarantees are among the most important security instruments used in Turkish energy projects. Solar, wind, battery storage, hydroelectric, geothermal, and conventional power plant investments commonly require EPC contractors, equipment suppliers, and other project participants to provide substantial bank guarantees securing their contractual obligations.

When a project develops serious delays or construction defects, the employer may consider calling the guarantee.

For the contractor, however, a call may immediately affect credit facilities, banking relationships, liquidity, and even the contractor’s ability to continue construction.

This creates a critical question:

When can a performance guarantee legally be called in Turkey, and when can the contractor challenge payment?

The answer depends heavily on the wording of the guarantee itself.

Under Turkish commercial practice, a bank guarantee may constitute an independent payment undertaking. Turkish banks themselves describe letters of guarantee as instruments under which the issuing bank undertakes to pay the beneficiary following a compliant demand where the secured obligation has not been fulfilled. (Ziraat Bankası)

Accordingly, foreign investors and contractors should never assume that a dispute under the underlying EPC contract automatically prevents payment under the guarantee.

What Is a Performance Guarantee?

A performance guarantee is typically issued by a bank at the request of a contractor or supplier in favor of the project owner or employer.

Its purpose is to secure performance of specified contractual obligations.

In the energy sector, performance guarantees may secure obligations relating to:

• construction completion;
• commissioning;
• contractual milestones;
• equipment delivery;
• performance testing;
• defect correction;
• warranty obligations;
• other EPC obligations.

Türk Eximbank describes a performance guarantee as a guarantee enabling the beneficiary to claim compensation where the principal’s contractual obligation is partially or fully not performed in accordance with the underlying agreement. (Eximbank)

However, the precise legal consequences depend on the guarantee wording.

1. The Three Principal Parties

A typical bank guarantee involves three principal participants.

The principal or applicant is usually the EPC contractor, supplier, or other party whose performance is secured.

The beneficiary is normally the project owner, employer, or project company.

The guarantor is the bank issuing the guarantee.

These relationships should be distinguished from the underlying EPC contract.

That separation is fundamental to understanding guarantee disputes.

2. The Independence Principle

One of the most important characteristics of an on-demand bank guarantee is its independence from the underlying commercial contract.

Suppose an EPC contractor and project owner disagree over whether construction is delayed.

The contractor argues that the owner caused the delay.

The owner alleges contractor default and calls the performance guarantee.

The bank is generally not expected to conduct a full construction arbitration before deciding whether to honor a facially compliant demand under an independent guarantee.

This independence is what makes bank guarantees commercially valuable.

3. First-Demand Guarantees

Energy EPC contracts frequently require guarantees described as:

unconditional, irrevocable, payable on first demand, or payable without proof of underlying loss.

The precise wording matters more than the label.

A Turkish bank describes a letter of guarantee as permitting payment immediately upon the beneficiary’s first written demand, without requiring the principal’s consent, where the conditions stated in the instrument are satisfied. (Ziraat Bankası)

Accordingly, contractors should understand that a first-demand guarantee may create significantly greater payment exposure than an ordinary accessory suretyship.

4. Conditional Guarantees

Not every guarantee is fully unconditional.

Some guarantees require specified documentation before payment.

For example, the beneficiary may need to provide:

• a signed demand;
• a statement of contractual breach;
• an engineer’s certificate;
• a termination notice;
• specified supporting documents.

If these documentary conditions are not satisfied, the bank may have grounds to reject the demand.

The guarantee should therefore be read word by word before any call is made.

5. When Can an Employer Call a Performance Guarantee?

The first question is whether the event described in the guarantee has occurred.

Potential triggers in an energy project may include:

failure to achieve completion, abandonment, material contractor default, failure to remedy defects, failure to maintain contractual security, termination for contractor default, or another specifically secured breach.

However, the employer must distinguish between the requirements of the underlying EPC contract and the documentary requirements of the guarantee.

They may not be identical.

6. Contractor Delay

Construction delay is one of the most common reasons for calling a performance guarantee.

Suppose a solar EPC contractor is required to achieve commercial operation by June 30 but remains materially incomplete several months later.

The employer may have contractual rights to liquidated damages, termination, and potentially a guarantee call.

However, the employer should first determine whether the contractor has a valid extension-of-time claim.

If the delay was actually caused by late site access, employer variations, governmental delay, or another employer-risk event, a guarantee call may later become highly contentious.

7. Defective Construction

Serious defects can also lead to a guarantee dispute.

Examples may include defective turbine foundations, inadequate electrical works, transformer failures, battery installation problems, defective solar mounting structures, or non-compliant substations.

The project owner should document the defect and give any contractually required notices.

Where the guarantee requires only a beneficiary statement, technical proof may not be required by the bank at the demand stage.

Nevertheless, technical evidence can become essential in subsequent litigation or arbitration.

8. Failure to Pass Performance Tests

Energy EPC contracts commonly require extensive testing.

A project may fail to achieve guaranteed:

• generation capacity;
• efficiency;
• performance ratio;
• availability;
• battery storage capacity;
• round-trip efficiency;
• other technical parameters.

Depending on the EPC contract and guarantee wording, persistent failure may trigger contractual remedies and potentially a performance-guarantee call.

The employer should determine whether the contract first requires retesting, remedial work, performance liquidated damages, or another procedure.

9. Termination for Contractor Default

Termination can create one of the strongest commercial situations for a performance-guarantee call, but it is also one of the most dangerous.

If the employer validly terminates the EPC contract because of contractor default, the employer may need substantial funds to hire a replacement contractor and complete the facility.

The performance guarantee can provide immediate financial protection.

However, if the termination itself was wrongful, the guarantee call may become part of a much larger damages dispute.

Termination notices should therefore be reviewed carefully before a guarantee demand is issued.

10. Advance Payment Guarantees Are Different

Energy projects frequently use several guarantees simultaneously.

An advance payment guarantee generally protects the employer against failure to recover an advance paid to the contractor.

A performance guarantee secures performance obligations.

A warranty guarantee may secure obligations during the defects or warranty period.

Türk Eximbank expressly distinguishes performance guarantees, advance-payment guarantees, payment guarantees, warranty guarantees, and retention guarantees. (Eximbank)

The employer should call the correct security instrument for the relevant liability.

11. Advance Payment Guarantee Disputes

Advance-payment guarantees can generate substantial disputes where part of the advance has already been amortized through progress payments.

Suppose the employer initially advances EUR 10 million but EUR 7 million has effectively been recovered through certified work.

Whether the employer can still demand the original EUR 10 million depends on the guarantee wording, reduction mechanism, EPC contract, and circumstances.

Energy contracts should therefore include clear mechanisms for automatic or milestone-based reduction of advance-payment security.

12. Warranty Guarantees

A warranty guarantee may remain effective after provisional acceptance.

Its purpose is commonly to secure the contractor’s obligation to correct defects during the warranty or defects-notification period.

This can become particularly important in solar, wind, and battery projects where equipment or installation defects may emerge only after months of operation.

The expiry date should therefore correspond to the contractual warranty structure.

13. Can the Contractor Simply Tell the Bank Not to Pay?

Generally, a contractor’s instruction to its bank is not enough by itself to neutralize an independent guarantee.

The commercial purpose of an on-demand guarantee would largely disappear if the principal could stop payment merely by disputing the beneficiary’s allegations.

Where the beneficiary submits a compliant demand, the bank’s obligation is assessed principally under the guarantee itself.

This independence is repeatedly emphasized in Turkish guarantee practice. (Ziraat Bankası)

14. Can the Bank Examine the EPC Dispute?

Generally, the bank is not the tribunal deciding the underlying construction dispute.

The bank examines whether the demand satisfies the guarantee’s requirements.

If the guarantee requires a written demand and a statement that the contractor failed to perform, the bank will principally examine whether those documentary conditions have been met.

It does not ordinarily determine whether the contractor deserves a 120-day extension of time under the EPC agreement.

That dispute may later be decided through litigation, arbitration, expert determination, or another agreed mechanism.

15. Wrongful Guarantee Calls

The independence principle does not mean that every guarantee call is automatically lawful as between the employer and contractor.

An employer might make a demand even though:

• no relevant breach occurred;
• the secured obligation had already been performed;
• the guarantee amount should have been reduced;
• the guarantee had expired;
• the employer itself caused the alleged default;
• the call violates an express EPC restriction.

The contractor may therefore have claims against the beneficiary even if the bank’s independent payment obligation has been triggered.

16. Abuse of Rights

Turkish law recognizes the principle prohibiting abuse of rights.

This can become important in exceptional guarantee disputes.

However, an allegation of abuse should not be confused with an ordinary disagreement concerning the EPC contract.

If every disputed construction claim were sufficient to stop an on-demand guarantee, the commercial purpose of the instrument would be undermined.

Accordingly, attempts to prevent payment generally require a substantially stronger factual and legal basis than simply stating that the beneficiary is wrong.

17. Fraud Allegations

Clear fraud may also become relevant in exceptional circumstances.

For example, a beneficiary knowingly demanding payment for an obligation it knows has been fully satisfied may present a materially different situation from a genuine contractual disagreement.

But fraud is a serious allegation.

It should be supported by compelling evidence.

Contractors should avoid relying on generalized accusations where the dispute is actually about delay analysis, variations, or performance interpretation.

18. Can a Court Stop Payment?

A contractor facing an allegedly abusive guarantee call may consider seeking urgent judicial protection.

Whether an injunction or other interim measure is available depends on the specific facts, guarantee structure, jurisdiction, dispute-resolution arrangements, and evidence.

The timing is extremely important.

Once the bank has paid the guarantee, the legal and commercial position changes substantially.

Therefore, a contractor that intends to challenge an imminent call should obtain legal advice immediately after receiving notice of the demand.

19. The Evidentiary Threshold Can Be High

Because independent guarantees are designed to provide rapid payment security, courts should not effectively convert every guarantee dispute into an expedited trial of the underlying EPC contract.

A contractor seeking emergency intervention should therefore present clear documentary evidence demonstrating why the particular call is legally objectionable.

Relevant evidence may include:

• completion certificates;
• guarantee reduction confirmations;
• employer correspondence;
• settlement agreements;
• payment records;
• contractual releases;
• evidence of expiry;
• clear admissions by the beneficiary.

Complex expert evidence about a disputed critical-path schedule may be less suitable for proving obvious abuse at an emergency stage.

20. Expiry Dates

Guarantee expiry is one of the most important practical issues.

A guarantee may contain a fixed expiry date or another expiry mechanism.

The beneficiary should never wait until the final hours to examine its rights.

The demand must comply with the guarantee’s timing requirements.

Likewise, contractors should not assume that expiry of the EPC contract automatically means expiry of the bank guarantee.

The guarantee is a separate instrument and should be examined independently.

21. Extension of Guarantees

Energy projects frequently experience construction delays that require performance guarantees to be extended.

EPC contracts often require the contractor to maintain security until completion or another contractual milestone.

Failure to extend the guarantee before expiry can itself constitute contractual default.

Some contracts permit the employer to call the existing guarantee if a required replacement or extension is not provided before a specified date.

This mechanism should be drafted carefully.

22. Reduction of Guarantee Amounts

Performance security may be designed to reduce as project milestones are achieved.

For example, the amount might decrease after provisional acceptance and then be replaced by a smaller warranty guarantee.

Disputes arise when the employer refuses to authorize reduction despite substantial completion.

The contract and guarantee should specify whether reduction is automatic or requires a beneficiary certificate.

Contractors should negotiate this issue before signing, not after construction is nearly complete.

23. Counter-Guarantees

International energy projects frequently involve foreign contractors and foreign banks.

The employer may require a guarantee from a Turkish bank even though the contractor’s relationship bank is abroad.

A counter-guarantee structure can then be used.

Ziraat Bank explains that under such structures a correspondent bank may issue its own guarantee to the beneficiary against the foreign bank’s counter-guarantee. (Ziraat Bankası)

This creates multiple legal relationships that must be analyzed separately.

24. Foreign Bank Guarantees

Where a foreign bank issues the guarantee directly, the governing law and jurisdiction provisions become particularly important.

The project owner should assess:

bank creditworthiness, enforceability, payment location, governing law, demand mechanics, language, and cross-border enforcement.

A guarantee from a financially weak or difficult-to-enforce foreign institution may provide much less protection than its nominal amount suggests.

25. URDG 758

International guarantees may incorporate the ICC Uniform Rules for Demand Guarantees, URDG 758.

However, these rules do not automatically govern every Turkish bank guarantee.

They apply where appropriately incorporated into the guarantee.

Ziraat Bank’s international trade guidance expressly notes that letters of guarantee may be subject to URDG 758, while standby letters of credit may instead operate under ISP98. (Ziraat Bankası)

The actual instrument should therefore identify the applicable rules.

26. SWIFT Demands

International guarantees may require demands through specified banking or SWIFT channels.

A beneficiary should comply strictly with the prescribed mechanism.

Sending a demand by ordinary email where the guarantee requires authenticated SWIFT communication can create serious payment problems.

The legal team should coordinate with the beneficiary’s bank well before expiry.

27. Bank Guarantee vs. Standby Letter of Credit

International energy projects sometimes use standby letters of credit instead of conventional bank guarantees.

Although both can provide payment security, they should not automatically be treated as legally identical instruments.

Standby letters may incorporate ISP98, while demand guarantees may incorporate URDG 758. (Ziraat Bankası)

The project documents should use terminology consistently.

28. Arbitration Under the EPC Contract

Many international energy EPC agreements provide for arbitration.

The contractor may therefore commence arbitration alleging that the beneficiary’s guarantee call violated the EPC contract.

However, the arbitration agreement governing the EPC dispute does not automatically answer every question concerning the separate bank guarantee.

Counsel must identify:

• EPC governing law;
• arbitration clause;
• guarantee governing law;
• guarantee jurisdiction;
• bank location;
• interim-measure mechanisms.

This jurisdictional mapping should occur before emergency proceedings are initiated.

29. Emergency Arbitration

Where applicable arbitration rules provide emergency-arbitrator procedures, a contractor may consider seeking urgent relief against the beneficiary.

However, even an order against the beneficiary may not automatically bind a bank that is not party to the arbitration agreement.

The legal strategy must therefore distinguish between restraining the beneficiary and preventing the issuing bank from paying.

These are legally different objectives.

30. Compensation After a Wrongful Call

Even if the contractor cannot prevent payment, the dispute may continue.

If the employer’s guarantee call is later found to violate the EPC contract or applicable law, the contractor may potentially pursue repayment or damages, subject to the circumstances.

Potential losses can include the amount improperly retained and, where legally recoverable and adequately proven, related financing or banking costs.

The contractor should document the consequences of the call immediately.

31. Employer Liability for Wrongful Calls

Project owners should therefore avoid viewing a bank guarantee as unrestricted cash collateral.

The ability to obtain payment from the bank and the contractual right to retain the proceeds are not always the same question.

A beneficiary that obtains payment but ultimately fails to establish entitlement under the EPC contract may face repayment or damages exposure.

Before calling a substantial guarantee, the employer should therefore obtain both contractual and guarantee-specific legal analysis.

32. Lender Considerations

Project lenders also have a strong interest in performance security.

A lender may require the project company to maintain EPC guarantees as part of the project’s security and bankability framework.

A guarantee call may provide funds necessary to complete the plant after contractor default.

However, lenders may also require consultation before termination of the EPC contract or settlement of major claims.

The financing documents should therefore be reviewed before decisive action.

33. Insolvency of the Contractor

An independent bank guarantee can become especially valuable when the EPC contractor becomes insolvent.

The beneficiary’s claim is directed against the issuing bank according to the guarantee terms rather than merely relying on recovery against the distressed contractor.

This commercial independence is one of the principal reasons bank guarantees are widely used.

The creditworthiness of the issuing bank is therefore as important as the wording of the instrument.

34. Insolvency of the Issuing Bank

The reverse risk should not be ignored.

A performance guarantee from a financially weak bank may become ineffective precisely when the project needs it most.

Foreign energy investors should therefore consider minimum credit-rating requirements, approved-bank lists, replacement obligations following downgrade, and counter-guarantee structures.

Security should be evaluated for collectability, not merely face value.

35. Practical Checklist Before Calling a Guarantee

Before making a demand, the beneficiary should verify:

• the exact guarantee wording;
• secured obligation;
• guarantee amount;
• expiry date;
• demand deadline;
• required statements;
• required documents;
• permitted delivery method;
• applicable law or rules;
• EPC restrictions;
• evidence of contractor breach.

The demand should be prepared strictly according to the instrument.

Unnecessary statements can sometimes create avoidable disputes.

36. Practical Checklist for Contractors Facing a Call

A contractor receiving notice of an imminent call should immediately obtain the guarantee, EPC agreement, amendments, relevant certificates, correspondence, and evidence concerning the alleged breach.

Counsel should then determine whether:

the demand is compliant, the guarantee has expired, the amount should have been reduced, an injunction is realistically available, arbitration should be commenced, or the dispute should instead focus on post-payment recovery.

Speed is essential.

37. 2026 Risk Management for Turkish Energy Projects

The core legal principles governing bank guarantees remain highly relevant in 2026, but energy projects themselves are becoming increasingly complex.

Storage-integrated solar and wind facilities, sophisticated grid requirements, international EPC structures, foreign equipment suppliers, and cross-border financing can create multiple overlapping guarantees.

Project owners should therefore maintain a guarantee register identifying each instrument’s issuing bank, amount, expiry date, secured obligation, reduction mechanism, governing rules, and notice requirements.

A guarantee worth millions of euros can become commercially useless if it expires unnoticed.

Frequently Asked Questions

1. Can a Turkish energy project owner call a performance guarantee on first demand?

Potentially, yes, where the guarantee is drafted as an on-demand instrument and the beneficiary satisfies its terms. Turkish banking practice recognizes guarantees requiring payment following a complying written demand. (Ziraat Bankası)

2. Does the project owner have to prove the EPC breach to the bank?

It depends on the guarantee. An unconditional first-demand guarantee may require only specified documentary statements, while a conditional guarantee may require additional evidence or certificates.

3. Can an EPC contractor stop a guarantee call?

Potentially in exceptional circumstances, but merely disputing the underlying EPC breach will generally not be equivalent to defeating an independent demand guarantee. Urgent legal review is required where abuse, fraud, expiry, or non-compliance with guarantee terms is alleged.

4. What is the difference between a performance guarantee and an advance-payment guarantee?

A performance guarantee secures contractual performance, while an advance-payment guarantee generally secures repayment or recovery of an advance if the underlying obligations are not fulfilled. (Eximbank)

5. Can a guarantee be called after it expires?

The beneficiary must comply with the expiry and demand requirements stated in the instrument. A late demand can create a fundamental payment problem.

6. Can the employer call the full guarantee for a minor defect?

This depends on the wording of the guarantee and EPC contract. Even where the bank pays under an independent guarantee, a disproportionate or contractually unjustified call may generate a subsequent dispute between the employer and contractor.

7. Does an arbitration clause automatically stop the bank from paying?

No. The EPC arbitration agreement and the bank’s independent guarantee obligations should be analyzed separately. The bank may not itself be a party to the EPC arbitration agreement.

8. Can URDG 758 apply to a Turkish performance guarantee?

Yes, if properly incorporated into the instrument. Turkish banking guidance recognizes that letters of guarantee may be subject to URDG 758. (Ziraat Bankası)

9. Can a contractor recover money after a wrongful guarantee call?

Potentially. Even if payment could not be stopped, the contractor may have contractual or other claims against the beneficiary if the call or retention of proceeds was legally unjustified.

10. When should lawyers become involved in a guarantee dispute?

Ideally before the guarantee is called. Once a demand has been made, payment may occur rapidly. Early review allows counsel to assess the guarantee wording, underlying EPC rights, potential interim measures, arbitration strategy, and settlement options.

Legal Support for Performance Guarantee and Energy Project Disputes in Turkey

A performance guarantee can involve millions of euros and may be called within a much shorter period than required to resolve the underlying EPC dispute. For this reason, bank guarantee disputes, EPC defaults, construction delays, defective works, termination rights, and arbitration strategy must be managed together.

Fırat Fesih Kaya provides legal assistance to foreign energy investors, project companies, EPC contractors, renewable-energy developers, infrastructure funds, equipment suppliers, and international businesses concerning performance guarantee calls, advance-payment guarantees, wrongful calls, EPC disputes, interim measures, compensation claims, construction arbitration, and energy-project disputes in Turkey.

For project owners, careful legal analysis before making a call can reduce the risk of subsequent repayment and damages claims. For contractors, immediate action can be essential because an independent first-demand guarantee may be paid before the underlying EPC dispute is finally resolved.

For a case-specific legal assessment concerning a performance guarantee, threatened bank guarantee call, EPC contractor dispute, or Turkish energy project, you may contact our office.

Phone: +90 312 434 22 22
Mobile: +90 532 769 22 22
Email: info@firatfesihkaya.av.tr
Address: Mevlana Boulevard No: 221, Yıldırım Tower No: 148, 06520 Balgat, Çankaya, Ankara, Turkey