Government Contracts: A Landmark Decision by Turkish Constitution Court, Interim Injunction Against Liquidation of Letter of Guarantees
Particularly in huge government projects in aerospace &defense, infrastructure and healthcare, the letter of guarantees can be a significant point of initiating a legal action as it is a hallmark of securing the fulfilment of contractual obligations and easily be encashed by the government authorities.
In Turkey, many types of government contracts contain “letter of bank guarantees” sections that set forth provisions pursuant to the Public Procurement Law 4734 in which the certain provisions of the law restrict courts to decide on injunction and precautionary distraint on letter of guarantees given to the government authorities.
This has been a longstanding discussion of unconstitutionality as the contractors are prevented to secure their rights upon unilateral termination of the contract by government agencies.
In 2008, Turkish Constitutional Court (“TCC”) handled the case upon unconstitutionality claim of Ankara 11th Civil Court of First Instance and unanimously dismissed the case. This article focuses on the grounds of the case and the reasoning of the TCC to dismiss the case.
Facts
Upon termination of the contract by the government agency on the ground that the contractor firm has not fulfilled its undertaking in accordance with the tender document and contract rules, the contractor filed a lawsuit with the demand for interim injunction decision for prevention of liquidation of its guarantee and for compensation of its loss it has incurred due to the termination, and the Court in the lawsuit, having concluded that the objected rule is contrary to the Constitution, has applied for cancellation of the said rule.
Grounds for Objection
The grounds section of the application decision is as follows:
“The Counsel for the Plaintiff has requested in his claim petition that an interim injunction be imposed with regard to liquidation of the guarantee in the first place, so that liquidation of the guarantee of his client company is prevented and that no irreparable loss occurs as a result of the unilateral termination by the defendant agency of the contract signed between his client and the General Directorate of Highways, and that its loss of TRY 100,000.00 in total be compensated, without prejudice to their rights to claim further sums.
The lawsuit is related to the claim for compensation of the loss incurred due to the unilateral termination of the contract and for imposition of an interim injunction with regard to liquidation of the guarantee.
Interim injunctions are regulated in articles 101 et seq. of the Civil Procedure Law, and pursuant to article 103 thereof, “where it is understood that any deferral may jeopardize the situation or cause significant loss, the judge may decide on enforcement of interim injunctions necessary to eliminate the jeopardy or the loss.” Pursuant to article 105/2, “in urgent cases, decision of immediate interim injunction may be granted.”
In the claims, it is asserted that liquidation of the letter of guarantee would lead to an imminent loss which is hard to compensate, and it is requested to prevent the liquidation thereof through interim injunction. Indeed, in the case that the letter of guarantee is actually liquidated, there is a probability that the concerned party cannot ever receive letters of guarantee from any bank again. Therefore, the plaintiff requests an interim injunction in order for its letter of guarantee not to be liquidated until the end of the lawsuit pursuant to article 103 of the Civil Procedure Law. However, the last sentence of article 34 of the Public Procurement Law reads, “Under no circumstances may the guarantees received by the administration be subjected to attachment or interim injunction.”, which hinders the Court’s authority to impose interim injunction in the present case. On the other hand, in the preamble of the Constitution, paragraph 4 states: “the separation of powers, which does not imply an order of precedence among the bodies of the State, but refers solely to the exercise of certain State powers and performance of certain State duties, and is a civilized cooperation and division of functions limited as such, and only the Constitution and the laws have the supremacy”; paragraph 6 states: “every Turkish citizen has an innate right and power to lead an honourable life and to improve his/her material and spiritual wellbeing under the aegis of national culture, civilization, and the rule of law, through the exercise of the fundamental rights and freedoms set forth in this Constitution, in conformity with the requirements of equality and social justice”.
Within the framework of this stipulation as emphasized in the preamble of the Constitution, pursuant to article 2 of the Constitution, “The Republic of Turkey is a State governed by the rule of law.” Again, pursuant to article 10 of the Constitution, “Everyone is equal before the law”, and pursuant to article 11, “The provisions of the Constitution are fundamental legal rules that are binding upon all legal and natural persons and laws cannot be contrary to the Constitution.” In other words, the Republic of Turkey is a State governed by the rule of law that is based upon the principle of separation of powers, and the rules of the Constitution are the supreme legal norm.
As such, the fact that the precautionary injunction decision which the judge is allowed to impose pursuant to articles 101 et seq. of the Civil Procedure Law cannot be imposed for the guarantees in the contracts to which the administration is a party is contrary to the principles of separation of powers and equality laid down in the preamble of the Constitution. As a matter of fact, the article 125 of the Constitution has expressed the principle of separation of powers and the judicial control much more clearly by stating “recourse to legal remedies shall be available against all acts and procedures of the administration”.
In addition, as article 36 of the Constitution acknowledges that everyone who thinks they have been subjected to injustice can duly seek their rights before the judicial authorities, by stipulating “Everyone has the right of litigation either as plaintiff or defendant, by way of raising a claim or a defense, and the right to a fair trial before judicial authorities through legitimate means and procedures”, the stipulation that interim injunction cannot be imposed on guarantees received by the administration is contrary also to article 36 of the Constitution. This stipulation that limits the authorities of judicial bodies in favor of the administration and without reason is also contrary to article 6 of the European Convention on Human Rights regulating the fair trial besides also being contrary to the rule of law, separation of powers, and equality and freedom to resort to legal remedies, and pursuant to the last paragraph of article 90 of the Constitution, it is compulsory to comply with the duly- promulgated International treaties.
On the other hand, in article 18 et seq. of the Code of Obligations regulating the freedom of contract, parties are in equal position in any contract, and superiority of either party over the other is not allowed without reason. As a matter of fact, article 48 of the Constitution secures the freedom of contract by stating “Everyone has the freedom to work and conclude contracts in the field of his/her choice.” It is doubtless that securing of a freedom will mean protection of that freedom from arbitrary practices. In this case, given that the stipulation “guarantees received by administration may not be subjected to interim injunction” in the last sentence of article 34 of the Public Procurement Law provides an advantage in favour of the administration without a legally valid reason, it is doubtless that it is contrary to the protection which should be provided within the scope of the freedom of contract and the principle of equality of the parties.
Conversely, it may be asserted that the legal provision that is the subject of the cancellation has been stipulated so as to prevent imposition by the counter-party of interim injunction, mortgage, lien/attachment, etc. on guarantees given to the administration, in bad faith and through collusion with third parties, in the tenders made by public agencies. However, this opinion is not appropriate in the face of the strictness of the phrase “under no circumstances” prescribed in the article. The reasoning provided for the Law reads, “as guarantees are received to ensure that the undertaking is fulfilled in accordance with the provisions contained in the tender document, it has been stipulated that guarantees cannot be attached and subjected to interim injunction for liquidation when a problem arises in this regard”. However, this stipulation in article 34/last sentence of the Public Procurement Law is seen to have been taken verbatim from article 26/c of the State Procurement Law dated 08.09.1983, no. 2886, which had been in force until the Public Procurement Law entered into force and which was promulgated in a state of emergency. Although it is understood from the words of Paşa Sarıoğlu, the spokesman for the Economic Affairs Commission, who took the floor in the First Session of the 137th Sitting of the Advisory Council on 01.08.1983, that the aim in article 26/c of the State Procurement Law is “for the soundness of the tender, to prevent establishment of mortgage in any way on guarantee given by the company participating in the tender during the evaluation”; as emphasized above, it was seen that the stipulation “under no circumstances” goes beyond this aim, that it led to confusions as to whether or not injunction may be applied even in the period when the State Procurement Law was in effect, that it granted authority to the administration beyond what was intended, that this confusion in practice did not pass through the inspection of the Court of Cassation (Supreme Court of Appeals), either, as required by the operation of law, and that despite this, it has been conveyed and used with the same risks during promulgation of the Public Procurement Law. It is evident that the expressions in the grounds for both laws do not suffice to explain the stipulation which is contrary to the spirit of the rights and freedoms in the articles. However, it is possible to draft this stipulation, which is open to arbitrary use, in such a way that contractors cannot, by acting in collusion with third parties, cause loss to the public agency which is party to the contract, and cannot disrupt the tender process. Therefore, the current stipulation allowing arbitrariness is contrary to the Constitution and needs to be abolished.
Due to the reasons explained hereinabove and as the last sentence of article 34 of the Public Procurement Law no. 4134 is contrary to the 4th and 6th paragraphs of the preamble of the Constitution and to articles 2, 10, 11, 12, 36, 48 and 125 thereof, and to article 6 of the European Convention of Human Rights as referred to by article 90 of the Constitution, it was decided with assent to apply to the Constitutional Court for its cancellation with the request of stay of execution as required by the urgency of the matter, and to submit a certified copy of each of the documents contained in the file to the Office of President of the Constitutional Court.04.10.2005”
Provision Subject to Objection
The last paragraph of article 34 of the Public Procurement Law no. 4734, dated 4.1.2002, subject to objection is as follows:
“Under no circumstances may the guarantees received by the administration be subjected to attachment or interim injunction.”
Review of Merits
Having read and reviewed the application decision and its appendices, the report as to the merits of the case, the objected provision, the Constitutional rules relied upon and the grounds thereof, and other legislative documents, it was ordered and adjudged as follows:
In the application decision, it was asserted that the Court’s authority of imposing interim injunction was hindered, that an advantage was provided in favor of the administration without a legally valid reason, that for these reasons, the rule is contrary to the Preamble and articles 2, 10, 11, 12, 36, 48, 90 and 125 of the Constitution.
Pursuant to article 29 of the Law on Establishment and Trial Procedures of the Constitutional Court, no. 2949, as the Constitutional Court is not bound by the grounds brought forward by concerned persons in respect of contradiction of the laws with the Constitution, the rule which is asked to be canceled was reviewed also in terms of article 35 of the Constitution due to its relevance.
The objected last paragraph of article 34 of the Law no. 4734 states “Under no circumstances may the guarantees received by the administration be subjected to attachment or interim injunction.”; and the grounds for the article in the legislative documents state “The assets which can be accepted as guarantee have been determined by taking into account the economic and financial developments and the delivery and return terms of the guarantees have been set out in the article. Moreover, as guarantees are received to ensure that the undertaking is fulfilled in accordance with the provisions contained in the tender document, it has been stipulated that the guarantees cannot be attached and subjected to interim injunction for liquidation when a problem arises in this regard.”.
The state governed by rule of law as specified in article 2 of the Constitution is a state the acts and procedures of which comply with the law, which respects human rights, protects and empowers these rights and freedoms, establishes, improves and maintains a fair legal order in every field, refrains from such situations and attitudes that are contrary to the Constitution, considers itself bound by the supreme rules of the Constitution and law, is open to judicial review, is aware of the fact that there are basic legal principles and the Constitution which the legislator should also comply with above the laws.
The principle of equality before the law as set forth in article 10 of the Constitution applies to those whose legal statuses are same. No action-based, but legal equality is prescribed by this principle. The purpose of the principle of equality is to ensure that those who have the same status are subjected to the same treatment before the laws, and to prevent discrimination and granting of privileges. Pursuant to this principle, it is prohibited to breach equality before the law by applying separate rules to certain persons and groups of persons who have the same status. Equality before the law does not mean that everyone will be subjected to the same rules from every aspect. Characteristics associated with their status may require different rules and practices for certain persons or groups. If the same legal statuses are subjected to the same rules and different legal statuses are subjected to different rules, the principle of equality prescribed by the Constitution is not impaired.
In the Public Procurement Law no. 4734, article 33 states “A bid bond shall be received in tenders in an amount to be given by bidder, being not less than 3% of the bid price.”; article 43 states “In order to ensure that the undertaking is fulfilled in conformity with the provisions of the contract and of tender document, a performance bond shall be received from the successful bidder at the rate of 6% to be computed on tender price before the signing of the contract.”, and article 44 states “The successful bidder is obliged to sign the contract by submitting performance bond according to articles 42 and 43. The bid bond shall be returned immediately after signing of the contract.”.
Article 35 of the Constitution states “Everyone has the right to own and inherit property. These rights may be limited by law only in view of public interest. The exercise of the ownership right may not contravene public interest.”. Accordingly, the right of ownership is not limited, and is a right that can be limited in view of public interest. In this context, it is clear that the rights of receivable that are within the scope of the right of ownership can also be limited in view of public interest. Receiving guarantee for the purpose of ensuring that the undertaking is fulfilled in conformity with the provisions in the tender document by paying regard to the public interest in performance of public services regularly without disruption and limiting the rights of receivable by prohibiting imposition of attachment and interim injunction on the guarantee against the possibility of suffering a problem in this regard, are not contrary to the Constitution.
On the other hand, as the contracts which the administration is a party to and the others do not bear the same legal characteristics; comparison of equality may not be made between their parties who do not have the same legal status.
In article 36 of the Constitution titled “Freedom to claim rights”, it is stated that everyone has the right of litigation either as plaintiff or defendant and either by raising a claim or a defense, and the right to a fair trial before judicial authorities through legitimate means and procedures. By virtue of the objected rule, the constitutional rights possessed by the individuals as plaintiff or defendant before judicial authorities have not been hindered, the courts have not been prevented from reviewing the lawsuits filed and granting the necessary decisions, and judicial remedies have not been blocked in any way.
For the aforementioned reasons, the objected rule is not contrary to articles 2, 10, 35 and 36 of the Constitution. The claim for cancellation should be dismissed.
The rule has not been found to have any relevance with the Preamble and articles 11, 12, 48, 90 and 125 of the Constitution.
Decision
It is unanimously decided on 19.6.2008 that the last paragraph of article 34 of the Public Procurement Law no. 4734, dated 4.1.2002, is not contrary to the Constitution, and that the objection is dismissed.
Şafak Herdem
