Hukuk Hakkı Korumaktır

May-Haz 2019

Letters Of Guarantee And Preliminary Injunction

In daily life, people who sell goods, provide services or undertake indebtedness to manufacture a certain item may receive the price of their work in cash or may have the price payable within a certain period of time. In this case, if the creditor does not have sufficient information about the borrower's solvency and does not know the borrower personally, he may request that a number of guarantees be given to him. Letters of guarantee have arisen to meet such requirements and have been widely preferred in practice. 

LETTER OF GUARANTEE

1.Concepts 

The Letter of Guarantee is a letter issued by a bank to the addressee in order to guarantee the fulfillment of an obligation undertaken by the beneficiary against the addressee. The individual or entity in whose favor the Bank grants a guarantee is called a “beneficiary” and the individual or entity against whom the bank undertakes to indemnify is called “the interlocutor”.

Letters of Guarantee were introduced in the Turkish law for the first time with the Decree numbered 6048 and dated 08.01.1928, which was enacted by the Council of Ministers in accordance with Article 1 of the Law numbered 1025 and dated 12.03.1927 under the name of “definite letter of guarantee and temporary letter of guarantee”. The following statement which is included in all letters of guarantee issued to date which comprises of an immediate payment guarantee upon first request of the interlocutor ‘without the need to issue a protest, have a judgment and consent of the debtor’ was first included in these wordings.

2.Legal Nature Of The Letter Of Guarantee 

Due to the lack of a positive regulation regarding the letters of guarantee, the matter of legal nature has been the subject of discussion in the doctrine and practice. The decision of the Unification of the Supreme Court's Case-laws (11.06.1969, 64/4, 69/6, Official Gazette 03 October 1969, p. 13317) states that “a bank may issue a guarantee letter in the form of a guarantee agreement if it wishes”. It is generally accepted that the legal nature is a guarantee agreement.

Different definitions have been made for guarantee agreements in the doctrine. Reisoğlu defined the guarantee agreement as an independent undertaking, in respect of an enterprise to be undertaken by the guarantor, to take the risk of damage resulting from the failure of an act or event that is more or less suspicious to occur in the future. According to the definition of the Court of Cassation, “the guarantee contract is a secondary contract that the guarantor assumes all or any part of the said enterprise or the risks of the business independently not for obtaining any consideration from the guarantee receiver, but to drive the guarantee receiver to make the attempt or do business guarantees.”  

The bank letters of guarantee will allow for the immediate payment without any delay upon first written request of the guarantee receiver, without the need for a court decision or the consent of the borrower, and will allow for quick and cost-effective encashment. For this reason, bank guarantee letters are preferred in practice. However, the customary way that banks make payment upon first written request by considering the interlocutor's declaration to be sufficient sometimes leads to unjust compensation of the letters of guarantee. The preliminary injunction imposed under a court decision is the only legal possibility to stop the bank from paying the letter of guarantee to the addressee. In the event that the decision of preliminary injunction is notified to the bank, the request for compensation of the letter of guarantee may be rejected. However, as required by its independent nature, the Bank does not have the authority to put forward deficiencies and objections arising from the legal relationship between the beneficiary and the addressee. The Bank is considered to have an independent and substantive nature in the case of a letter of guarantee.

In the wording of the letter to be issued, the statement “the commitment to pay despite the preliminary injunction decision” is of no importance. In the event that payment is made despite the existence of the preliminary injunction, the authorities who fail to comply with the preliminary injunction decision shall constitute an offense under the Code of Civil Procedure.

Letters of guarantee which are included in the freedom of contract during the determination stage are diversified thanks to this feature. Generally speaking, there are two types of letters of guarantee: term and demand letters of guarantee.

Term Letters of Guarantee

Such letters of guarantee are subject to a certain term, and if the compensation of the letter is requested from the bank in writing until the date of maturity, the amount written in the letter shall be paid to the addressee. In such letters where the liability of the banks is limited to a certain maturity, the bank shall be responsible if the risk secured by the letter is realized within the prescribed maturity. Otherwise, the bank shall not be responsible

Demand Letters of Guarantee

These are letters which do not have a certain validity period and remain in force indefinitely. Indefinite letters of guarantee are subject to the general time of prescription of 10 years as specified in the Code of Obligations. Indefinite letters are timed out unless compensation is requested within 10 years of issue.

PRELIMINARY INJUNCTION IN BANK LETTERS OF GUARANTEE

The preliminary injunction is a temporary legal protection granted by the court before or after the action is filed in order to remedy the drawbacks arising from the prolongation of the case for the requesting party until the final judgment is made.

Preliminary injunctions have been regulated in Art. 389 et seq. of the Civil Procedures Code. According to Art. 389/1 of the Civil Procedures Code, “In cases where there is any concern that it will be considerably difficult or completely impossible to obtain the right due to a change in the present situation, or that there will be a drawback or serious damage due to delay, a preliminary injunction shall be issued.

Art. 391/1 of the Civil Procedures Code gives examples of the types of measures that can be ruled: “the court can decide on any measure that will eliminate or prevent harm, such as the protection of the goods or rights subject to the measure, or the deposit or submission to a trustee, or performance or non-performance of anything.”

In order to make a preliminary injunction decision, it is not necessary to have any danger to occur. The purpose of making a preliminary injunction is not to eliminate the damage, but to prevent damages that may be or probably be incurred. Pursuant to Art. 391/1 of the Civil Procedures Code, the judge can rule various measures. The same provisions shall prevail in preventing the interlocutor's request for payment by a preliminary injunction or preventing the bank from compensating the letter of guarantee

IMPOSITION OF PRELIMINARY INJUNCTION ON LETTERS OF GUARANTEE

In bank letters of guarantee, in order to establish a trust relationship between the beneficiary and the addressee, the first request usually includes a non-objectionable payment record. In accordance with this record, the bank to which the interlocutor has demanded payment undertakes to pay the letter of guarantee without claiming any opposition arising from the relationship between the beneficiary and the interlocutor.

The Bank indemnifies the letter of guarantee upon first payment request of the interlocutor in order to prevent the loss of his reputation and confidence in the letters of guarantee given that he is unaware of the relationship between the parties.

The beneficiary may request preliminary injunction to prevent the bank from making payments to the interlocutor before resorting to litigation against the interlocutor for reasons arising from the debt relationship with the interlocutor.

In general, there is a contractual relationship between the bank and the interlocutor in the letter of guarantee relationship, which is a triangular relationship. The relationship between the bank and the interlocutor directly concerns the beneficiary, who is one of the parties in the letter of guarantee. Therefore, it is natural for the beneficiary to intervene in the relationship between the bank and the interlocutor and resort to preliminary injunctions.

  1. Types of Preliminary Injunction that shall be Subject to a Letter of Guarantee

It is accepted that two different preliminary injunctions may be taken to prevent the collection of the letter of guarantee. The first one of these is the precautionary injunction decision that the interlocutor does not ask for the compensation of the letter of guarantee from the bank; the second is the precautionary decision that the bank is banned without paying the letter of guarantee.

In addition, with respect to the fact that the letter of guarantee, which is basically studied in two groups, namely time letter of guarantee and demand letter of guarantee, is subject to two different preliminary injunctions, the Court of Cassation stated in its decision numbered 23. H.D. 2015/2481 E 2015/8540 K, that “However, from the scope of the file, ... a preliminary injunction decision was made to preclude forfeiture of the letter of guarantee which was the subject of the case; it was understood that no defense and evidence was submitted by the defendant that application was made to the bank for encashment of the letter of guarantee. As stated in the decree no. 11-996 E., 1026 K. dated 14.11.2001 of the Supreme Court of Appeals General Law Assembly, ''The preliminary injunction decision may cause problems in the letters of guarantee. In the event that the interlocutor's demand for compensation of the letter of suspended under a preliminary injunction decision and the maturity expires while the preliminary injunction continues, it should be accepted that the term is extended as long as the preliminary injunction continues. Conversely, if only the compensation of the letter was suspended by a preliminary injunction, the interlocutor will have to claim compensation within the period of maturity. (Prof. Dr. Seza Reisoğlu: Major Problems of in Applications of Bank Letters of Guarantee).

In this case, it was not appropriate to make a judgment based on justification in writing, although it must be decided to accept the case based on the justifications that as of the date of the decision the validity of the definite and time bound letter of guarantee has expired, there was no request for indemnification of the letter of guarantee, in other words, for forfeiture of the letter of guarantee, due to the preliminary injunction decision and the letter of guarantee has been invalidated."

If the preliminary injunction to be included in the letter of guarantee suspends indemnification of the letter of guarantee, the interlocutor must demand compensation within the due date. If the claim is made within the due date, the right will not be terminated. On the other hand, if a preliminary injunction decision precludes the interlocutor from demanding compensation, the preliminary injunction is annulled and the period in which the preliminary injunction continues is added on the due date of the letter of guarantee.

It is accepted by the Court of Cassation and in the doctrine that the beneficiary has the right to demand a preliminary injunction to prevent the bank from paying the amount of the letter of guarantee to the interlocutor. The Bank is obliged to comply with the prohibition of payment arising from the preliminary injunction based on the relationship with the counterparty within the framework of the triangular relationship of the letter of guarantee.

According to an opinion in the German Law, with respect to preliminary injunction procedure regarding letters of guarantee, as to whether the conversion of the letter of guarantee constitutes an abuse of the right or whether the proof of the illegality to the extent of full proof and liquid proof is required, in order to decide on a preliminary injunction for preventing the bank from paying the letter of guarantee, it should be clear that the payment request of the interlocutor constitutes the abuse of the right or it must be proved by liquid proofs. Otherwise, the dispute should be rejected, and the dispute review should be settled in the recourse case after payment.

On the other hand, it is another opinion that the preliminary injunction can be considered as a measure of proof which is close to full proof. However, the law provides an approximate measure of evidence in the preliminary injunction procedure. There should also be cases where a measure close to full proof is to be sought, where the danger of harm to the measure is very high. The dominant view in Turkish law is the opinion that accepts the measure of proof which should be reached in the preliminary injunction trial as approximate proof.

  1. CASES WHERE THE AMOUNT OF THE LETTER OF GUARANTEE WILL NOT BE PAID

As a guarantee agreement between the bank and the counterparty, the letter of guarantee will be able to assert its own deficiencies such as the forged bank letter of the contractor, lack of authority of individuals obliging the bank, the risk has expired or not realized, and the letter of guarantee being contrary to the public order.[vii] Cases of non-compliance with general morality and manners, nullity, violation of public order shall constitute the result of the invalidity of the letter of guarantee.

The bank may also reject the payment request ex officio. Cases where the bank should reject the payment demand of the interlocutor are limited to the abuse of the right. It is accepted that the bank's avoidance of payment is included in the obligations of protection and diligence when liquid proofs are clearly presented to the bank against the request of the counterparty to encashment that constitutes the abuse of the right. It is seen that the Turkish doctrine and the Court of Cassation adopted the concept of  “liquid proofs” and that the abuse of the right was proved with liquid proofs and it was accepted that when the letter of guarantee was submitted to the bank by the beneficiary, it would be possible for the bank to avoid making payments.

  1. COMPENSATION OF THE BANK LETTER OF GUARANTEE AGAINST PRELIMINARY INJUNCTION

Article 398 of the Civil Procedures Code regulating the sanction of observing preliminary injunctions reads “Anyone who does not comply with the order regarding the application of the precautionary injunction or acts in contradiction with the injunction shall be sentenced to disciplinary imprisonment from one month to six months. If the case against the merits and the competent court has not yet been initiated, the court that gives the injunction decision shall be the court in which the case is heard.” Pursuant to this, the bank cannot pay the interlocutor after the preliminary injunction decision is notified to the bank. Any act of the bank contrary to Art 398 of the Civil Procedures Code leads to criminal liability.

The legislator envisaged two separate groups of acts as sanctions for non-observance of the precautionary injunction. The first is the implementation of the precautionary injunction, in other words non-compliance with the order; the second is the violation of preliminary injunctions taken. The decision of the Court of Cassation C.D. 7 dated 24.02.2005 and numbered 2003/12578 E. 2005/1140 K. is also in this direction. In article 113/A (Art. 398 of the Civil Procedures Code) of the Code of Civil Procedure, the act was sanctioned and the defendants opposed the decision of Kozan 2nd Civil Court of First Instance on the date of 17.02.2000 and numbered 2000/560 Değişik İş and considering collection of the oranges in the disputed garden by hiring third parties and the judgment made based on deficient investigation is not correct, without determining whether the preliminary injunction decision was executed and whether the oranges were collected after the execution of the preliminary injunction decision, and if collected, by whom was the work performed.

Therefore, pursuant to the provisions of Article 398 of the Civil Procedures Code and the decisions of the Court of Cassation, if the bank pays the letter of guarantee despite the precautionary injunction decision the related responsible persons have to be punished.

  1. RESULTS OF ANNULMENT OF THE PRELIMINARY INJUNCTION

There is a disagreement in the doctrine about whether the bank's obligation to pay arises from this moment or the bank shall make payment if the court sends a letter to the bank if the preliminary injunction decision is abolished. In a decision of the Court of Cassation, it has upheld the decision of the court that the defendant bank has no fault in forfeiture of the letters of guarantee and the letter of guarantee may be forfeited if the Plaintiff applies to the bank with a letter specifying that the preliminary injunction decision has been abolished.

The collateral function in bank letters of guarantee is usually strengthened by payment at first sight. However, since this record also results in payment by the bank even in the event that the principle debt leading to indemnification of the letter of guarantee has never arisen, or the counter obligation has not been fulfilled, causing the beneficiary to suffer considerable loss for this reason.

In order to protect the beneficiary from such consequences, the beneficiary needs a remedy that will provide for a quicker and more effective legal protection than the original trial of the reason for the payment of the letter of guarantee. This remedy is to prevent the interlocutor from collecting the letter of guarantee or paying the bank letter of guarantee through preliminary injunction.

When all these discussions are evaluated, it is seen that it is possible to rule on this type of preliminary injunction decision regarding the letter of guarantee and if there is close evidence, it may be possible to make a preliminary injunction decision at the discretion of the court.

Attn. Sinan TAŞCI