In one of relatively recent decisions of the Court of Appeals, the Court overruled the arbitration objection based on the Law on the Obligatory Use of Turkish ("Law Numbered 805"), which stipulates that two Turkish companies should execute their agreements in Turkey in the Turkish language.1
Although the intention of the parties to the said agreement to arbitrate their disputes was clear in the Agreement, the Court of Appeals ruled that the First Instance Court should have considered the effect of Law Numbered 805 when evaluating the arbitration objection.
Facts
The merits of the case are related to a claim arising from a subcontract signed in 2007 between the plaintiff and defendant ("Agreement"). The plaintiff and defendant, although they were both companies incorporated under Turkish law, executed the Agreement in English.
The Agreement included an arbitration clause stipulating that any disputes arising between the parties should be finally settled under the Rules of Arbitration of the International Chamber of Commerce with London as the seat of arbitration.
Despite the arbitration clause in the Agreement, plaintiff claimed its receivables arising from the costs of its performance that have not been paid by the defendant before the Court of First Instance. Defendant made an arbitration objection and claimed that the dispute shall be resolved by an arbitral tribunal as per the Agreement.
The Court of First Instance accepted defendant's arbitration objection and dismissed the case on procedural grounds.
Plaintiff appealed the decision and the Court of Appeals reversed the decision of the Court of First Instance.
Decision of the Court of Appeals
The Court of Appeals decided that it was not pertinent for the Court of First Instance to dismiss the case based on the arbitration clause in the Agreement without taking the following issues into account;
- Pursuant to Law Numbered 805, two Turkish parties should execute their agreements in Turkey in Turkish.
- Whether or not as a consequence of not being executed in Turkish, the Agreement should be deemed to be invalid or, alternatively, should be deemed valid but not considered as evidence as per Law Numbered 805.
- Whether or not the plaintiff's opposition to defendant's arbitration objection constitutes breach of good faith regulated under Article 2 of the Turkish Civil Code.2
The Law Numbered 805
Law Numbered 805, which dates all the way back to 1926 (shortly after the foundation of the Turkish Republic), was issued in order to promote and protect the use of the Turkish language.
Article 1 of the said Law regulates:
"Any kind of companies and institutions having Turkish nationality shall execute any kinds of transactions, agreements, correspondence, accounts and books that are in Turkey in Turkish."
The sanction of not abiding by the above provision is stipulated under Article 4 of the same Law as follows:
"Following the entry into force of this law; documents and papers issued contrary to the provisions of Articles 1 and 2 shall not be considered in favor of the companies and institutions."
While the wording of Article 4 of Law Numbered 805 is clear, there is still a debate on whether the sanction regulated under this article affects the validity of the agreements in question or whether it only relates to the evidentiary value of the agreements.
This is the issue that the Court of Appeals in the case at hand urges the Court of First Instance to discuss.
Comment
The decision of the Court of Appeals is surprising and therefore noteworthy.
Although the Court of Appeals did not definitely rule on the validity/invalidity of the Agreement as a consequence of not being executed in Turkish as per Law Numbered 805, it deemed that the issue should have been considered by the Court of First Instance despite the arbitration clause in the Agreement.
According to text of the decision, it seems that the parties to the Agreement clearly indicated their intent to resolve any disputes arising out of the Agreement, which should also cover the question of validity, before an arbitral panel rather than before state courts.
It is therefore surprising that the Court of Appeals questioned such clear intention of the parties and ignored the principle of severability, one of the main principles in international arbitration.
Footnotes
1. Court of Appeals Decision dated 16.03.2012 numbered E. 2012/3122 - K. 2012/4073.
2. Turkish Civil Code numbered 4721 as published in the Official Gazette dated 08.12.2001 numbered 24607.
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