A Way Out to Enforce Letter of Guarantees under an Arbitration Clause in Turkey

Published 17 January 2020 by Herdem Attorneys At Law

Letter of guarantees are widely preferred as a security since they make it possible to collect the agreed amount as per the transaction without the need to conduct any further proceedings. However, it is possible that such guarantees may be abused by guaranteed parties. In cases where the bank letters of guarantee contains “Collectable upon first request” clauses, once the guaranteed party applies to the bank for enforcement of guarantee, the bank pays the whole amount in order to avoid its nominal value to be damaged. In this respect, if  the enforcement of a letter of guarantee is conducted in bad faith , the beneficiary may encounter certain damages in result.

In order to cope with above-mentioned risks in the practice,  a beneficiary is recommended to appeal to the competent court for interim measures of protection under Turkish law. Hereinafter, this study examines how to apply for interim measures where the parties have agreed to settle in arbitration and the enforcement of interim measures ordered by arbitrators. 

Interim Measures as the Barrier

Arbitration has evolved throughout the years and currently and one of the reasons for the rising of arbitration is considered as the interim protections where the arbitrators also may rule upon.[1] However, the interim protections are required to be reasonably reachable for the protection of parties’ rights.

Before evaluating the procedure in arbitration, there are certain essential characteristics of interim measures that applicants must be aware of. These characteristics are as follows; i)presuppose of the existence of a dispute;ii)the remedy shall be provisional in nature;iii)the legal protection sought as the interim relief aims to complement the final relief.

In brief, interim measures as any provisional measures are deemed to be necessary or appropriate in light of the circumstances of a particular case. 

It should also be noted that there are various types of interim measures nearly in every national jurisdiction and under both public and private international law; however institutional arbitration rules and the UNCITRAL Arbitration Rules[2] for ad hoc arbitration generally refer to the types of interim measures broadly in three groups: i)measures related to the preservation of evidence; ii) measures related to the conduct of arbitration and relations between the parties during arbitral proceeding iii) measures aimed to facilitate later enforcement of an award. Measures related to the conduct of the arbitration are the types which are applicable to avert the encashment of bank letter of guarantees since these measures involve ordering parties to do or refrain from doing something.

Application for Interim Measures before Competent Authorities

There are traditionally two main authorities to seek provisional measures: Arbitral tribunals and Courts. Contracting parties may also determine some other authorities by agreement such as emergency arbitrators, pre-arbitral referees or indeed arbitration institutions to evaluate provisional measure requests. As per the International Chamber of Commerce (“ICC”) rules[3], the arbitral tribunal may at the request of a party order any interim measure it deems appropriate. The parties may apply to any competent judicial authority for interim measures before the constitution of an arbitral tribunal and if appropriate circumstances are met they may make an application for interim measures after the constitution of the arbitral tribunal. Turkish International Arbitration Law numbered 4686 and dated July 5, 2001 (hereinafter will be referred as “Law No 4686”)[4], has similar provisions relating to the interim measures. For instance, according to article 6 of Law No 4686 alike with article 28 of the ICC Rules, upon the request of a party, the arbitral tribunal may order an interim measure during an arbitration proceeding. In addition to this, as per the same article requesting an interim measure from a court shall not be incompatible with the arbitration agreement. ICC also offers this opportunity for applicants to request a national court for the implementation of such measures; however, such application and measures taken by the judicial authority must be notified immediately to the ICC Secretariat. With that being said, ICC is silent about what sanctions will be applied upon a delay of notice.

As an exception, pursuant to article 6(2) Law No 4686, where official authorities are exclusively authorized to grant interim measures of protection by law, arbitrators shall not rule upon interim measure decisions.[5]

In case a need of urgent protection, contracting parties may make an application for such measures to be granted by the “Emergency Arbitrator” pursuant to article 29 of the ICC Rules. These applications shall be accepted only if they are received by the ICC Secretariat. The decision of the emergency arbitrator shall take the form of an order and the parties shall undertake to comply with any order given by the emergency arbitrator.

To emphasize, according to article 10 of Law No 4686, in a case where a party has obtained an interim measure from a court, the party shall commence arbitration within thirty (30) days from the date of the measure ordered. Otherwise, the interim measure shall be automatically removed.

Enforcement Of Arbitral Interim Measure Decisions

Arbitral interim measures, unlike judicial measures, are not self-executing. As per article 17 of UNCITRAL Model Law, an arbitral interim measure, shall be recognized as binding and enforced upon application to the competent court, irrespective of the country in which it was ordered. The party who is seeking or has obtained recognition or enforcement of an interim measure shall promptly inform the court of any termination, suspension or modification of that interim measure.

New York Convention under article 5(1)(e)[6], stipulates that an award or interim measure shall  contractually be binding upon parties either because they explicitly accepted the binding nature of the award or because the authority to grant such measure is vested with the arbitral tribunal. It indicates that the request for recognition or enforcement of the award may be refused if the award is not binding on the parties. As interim measures ordered by arbitrators may be amended, enforcement of interim measures under the New York Convention may be frustrated. Hence, enforceability under the New York Convention is still a controversial issue, both among commentators and national courts.

According to article 6 (3) of Law No 4686[7], if a party does not comply with the interim measure, the other party may request the assistance of the competent court for taking interim protection The competent court, if necessary, may hear the case in question through a substitute court. However, the ‘assistance’ of the competent court shall not be understood as assigning the court to order upon a new decision but rather only helping the arbitral decision to be enforced.

To conclude, every day commercial contracts embodying thousands of transactions are conducted of and the parties benefit from bank letter of guarantees as a safeguard. However, guaranteed parties in a bad faith may encash the bank letter of guarantees even so the obligations and responsibilities deriving from the contracts are due performed. Interim measures of protection is the only remedy in order to avoid wrongful encashment of bank letter of guarantees. As arbitration is generally preferred over litigation in commercial contracts in this era, arbitrators become to order interim measure decisions in order to meet the needs of the business world.

[1] Yeşilırmak, A. Provisional Measures in International Commercial Arbitration (Dissertation submitted to Queen Mary College, University of London, for the degree of doctor of philosophy), London 2003.

[2] United Nations Commision on International Trade Law,UNCITRAL Arbitration Rules, as revised in 2010, New York, 2011.

[3] United Nations Commision on International Trade Law,UNCITRAL Arbitration Rules, as revised in 2010, New York, 2011.

[4] Turkish International Arbitration Law, numbered 4686, 2001.

[5] Turkish International Arbitration Law, numbered 4686, 2001, art.6(2).

[6] New York Convention Guide, 1958, art. 5(1)(e).

[7] Turkish International Arbitration Law, numbered 4686, 2001, art.6(3).

Author: Ezgi Ceren Aydoğmuş