Originally from Dispute Resolution Journal

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ABSTRACT

The purpose of this study is to provide analysis of the different aspects of the complications that use of arbitration clauses in guarantee instruments may lead to, especially in the course of arbitration proceedings. The study makes an initial overview of the specific features of guarantees and letters of credit which sets the background for exploring the operation of these instruments within arbitration. Then it looks into the possible sources of the jurisdiction of arbitral tribunals to deal with issues related to guarantees and letters of credit and the grounds for granting interim relief preventing fraudulent actions regarding guarantees or letters of credit. The study argues that in arbitration between the principal and the beneficiary under the guarantee or letter of credit, which is the most typical situation, issues related to the guarantee or letter of credit can still be within the tribunal’s jurisdiction although the tribunal cannot bind a third party such as the guarantor or issuer. It is suggested that any conflicts and discrepancies in this multiparty situation can be avoided by joinder of all parties and claims into one arbitration proceedings based on a single overarching arbitration clause.

I.    INTRODUCTION

Guarantees and letters of credit are the lifeblood of international trade payments. At the same time arbitration has occupied the forefront of international trade as the preferred means for settlement of cross-border commercial disputes. Hence, these payment instruments can often become entailed in arbitration proceedings. The purpose of this study is to provide analysis of the different aspects of this scenario and the complications related to it. The study makes an initial overview of the specific features of guarantees and letters of credit which sets the background for exploring the operation of these instruments within arbitration. Then it looks into the possible sources of the jurisdiction of arbitral tribunals to deal with issues related to guarantees and letters of credit and the grounds for granting interim relief preventing fraudulent actions regarding guarantees or letters of credit.