Turkey: Recent Precedent On Arbitration In Turkey

Over the past decade, investing in Europe's fastest-growing economy, Turkey, has been an attractive option for foreign companies. Being in the forefront of countries for foreign investment, Turkey adopted various pieces of legislation to facilitate the protection of foreign investment. New legislation on arbitration, coupled with more foreign investment, has resulted in arbitration becoming more popular. Inevitably, this has led to Turkish courts becoming more familiar with international dispute resolution procedures. The Court of Appeals now has more precedent on enforcement of foreign arbitral awards, as well as on set-aside lawsuits for cancelling arbitral awards rendered in Turkey. This article summarizes some of the notable Court of Appeals decisions rendered in 2012, 2013 and the first half of 2014.

(a) Can a preliminary attachment decision be rendered before the finalization of enforcement decision?

On 14 April 2014, the Court of Appeals overruled a local court's decision regarding rejection of a preliminary attachment request.1 On 19 March 2013, the 12th Commercial Court of Istanbul had accepted the claimant's request for the enforcement of a foreign arbitral award. The defendant appealed the enforcement decision. In the meantime, the claimant requested the court to grant a preliminary attachment over the defendant's assets. The local court rejected the claimant's preliminary attachment request, on the ground that the 12th Commercial Court of Istanbul's decision had been appealed and that the enforcement decision could not be executed before finalization of the enforcement decision.

The Court of Appeals held that a preliminary attachment over the debtor's assets has the characteristics of a protection. It rules that, in order for a preliminary attachment request to be accepted, the finalization of an enforcement decision is not required. This is an important decision, because it will set precedent for claimants seeking preliminary injunctions over the defendant's assets, immediately after the first instance court's enforcement decision, without waiting for the end of the appeal stage.

(b) Retroactivity: Which law is applicable?

On 9 January 2014, the Court of Appeals overruled a local court's decision, on the ground that the former Civil Procedure Law2 (the "Former CPL"), instead of the current Civil Procedure Law3 (the "CPL"), must have been applied to the set-aside lawsuit.4 The local court rendered a decision in a set-aside lawsuit filed against an arbitral award in accordance with the current CPL, which entered into force in 2011. The Court of Appeals based its reasoning for this decision on the argument that the parties' intention was to choose the law in force at the time of execution of the contract, as the applicable law. Accordingly, the Court of Appeals overruled the local court's decision on procedural grounds and held that under the former CPL, the legal remedy provided against a domestic arbitral award was not a set-aside lawsuit but an appeal; and ruled that the local court must have dismissed the set-aside lawsuit.

This approach of the Court of Appeals is exactly the same adopted for international arbitral awards. According to the Court of Appeals, the International Arbitration Law5 has no retroactive effect. A set-aside lawsuit cannot be filed against an international arbitral award ordered for a dispute arising from an agreement (including an arbitration agreement) that was executed before the enactment of the International Arbitration Law (i.e. 5 July 2001).6

(c) Is distancing from domestic practice a violation of public policy?

On 16 July 2013, the Court of Appeals overruled a local court's decision, dismissing the enforcement of an arbitral award based on public policy.7 At the end of an arbitration conducted under the rules of the Zurich Chamber of Commerce and Industry, the arbitral tribunal dismissed the losing party's requests, but it ordered the prevailing party to pay the arbitration costs and expenses. The losing party requested partial enforcement of the award.

The local court dismissed the enforcement lawsuit, on the ground that the arbitral award was contrary to Turkish law, because under Turkish law, the losing party should bear the costs and expenses arising from adjudication. The Court of Appeals reversed the local court's decision, stating that the losing party being entitled to claim costs and expenses is not contrary to public policy. By virtue of this decision, it is possible to assert that an award contrary to domestic practice would not (and should not) prevent the enforcement of an arbitral award in Turkey.

(d) Who has competence to hear set-aside lawsuits: Commercial or Civil Courts?

On 27 May 2013, the Court of Appeals issued an important decision concerning competence to hear set-aside lawsuits.8 Upon obtaining an arbitral award that was rendered as a result of arbitration proceedings related to an agency agreement regarding maritime and aerial transportation, the claimant filed a set-aside lawsuit, in the 18th Commercial Court of Istanbul. The Commercial Court of Istanbul decided that, as the dispute was related to maritime and aerial transportation, it lacked competence to hear this lawsuit. Upon the claimant's appeal, the Court of Appeals ruled that under the International Arbitration Law (the "IAL"), set-aside lawsuits must be filed before the civil courts of first instance; not commercial courts.

The Court of Appeals' consistent approach regarding competence was causing some controversy, as, according to several scholars as well as the established understanding amongst practitioners, commercial courts are also among "civil courts" of first instance. The Turkish parliament put an end to this debate. Under Article 45 of Law No. 6545, entered into force on 28 June 2014,9 the competent courts for set-aside lawsuits are the commercial courts.

(e) Are disputes stemming from a company's articles of association arbitrable?

On 5 December 2012, the Court of Appeals overruled a local court's decision dismissing a lawsuit to cancel a general assembly decision, based on an arbitration clause in the company's articles of association.10 The Court of Appeals stated that arbitration is available only for disputes that are subject to the parties' will, i.e. for disputes that the claimant and respondent can settle without a court decision. The Court of Appeals overruled the local court's decision, on the ground that a dispute regarding the cancellation of a generally assembly resolution cannot be resolved by arbitration and must be resolved by the courts. The Court of Appeals further held that an arbitration clause being included in a company's articles of association is invalid.

(f) Would a decrease in the State's income be contrary to public policy?

On 17 April 2012, the Court of Appeals overruled a local court's decision, on the ground that the arbitral award was contrary to public policy.11 The execution of the arbitral award would cause a decrease in the Turkish State's income. By citing doctrine and stating that "decisions that are in violation of the laws which are related to the economic structure of society can also be accepted as a violation of public policy", the Court of Appeals held the following:

"Although the due treasury share and contribution to the Authority's expenses agreed in the agreement are not taxes, they are significant and continuous items of income resulting from the transfer of the public service by the State. In the present case, the exclusion of a discount in wholesales from the gross sales amount [...] which is the basis for the payment of treasury shares and contribution to the Authority's expenses, results in a decrease in the treasury shares and contribution to the Authority's expenses, aiming to provide continuous income. It also disrupts the budget balance. Thus, it is clear that it is going to deteriorate economic balance and is contrary to public policy."

This decision of the Court of Appeals has been heavily criticized. It is an extremely broad interpretation of the concept of public policy. On the other hand, there are also many encouraging rulings, demonstrating the Court of Appeals' narrow interpretation of public policy.

(g) How does the obligatory use of Turkish affect the arbitration agreement?

On 16 March 2012, the Court of Appeals overruled a local court's decision dismissing a lawsuit based on the existence of an arbitration agreement.12In the dispute, two Turkish companies concluded an agreement (including arbitration clause) in English. When one of the parties brought claims before the local court, the other party objected that courts do not have competence to hear this lawsuit. The local court accepted the defendant's arbitration objection and dismissed the lawsuit. Under Article 1 of the Law on the Obligatory Use of Turkish for Financial Institutions13 ("Law No. 805"), "Any kind of company and institution having Turkish nationality must execute all kinds of transactions, agreements, correspondence, accounts and books that are in Turkey in Turkish." The sanction for not complying with this provision is that "documents and papers issued contrary to [this provision] cannot be invoked by the companies and institutions for their benefits." 14

The Court of Appeals overruled this decision, based on the fact that the local court did not take the following into account:

(i) whether or not non-compliance with Article 1 of Law No. 805 causes the agreements to be null and void, or whether or not it only prevents the agreements being used as evidence; and

(ii) whether or not the claimant's challenge against the defendant's arbitration objection is against the good faith principle.

Although the Court of Appeals did not explain the effect(s) of Law of No. 805 on the agreement (and the arbitration agreement), it emphasized that the local court must have considered the above issues in its decision.

(h) Do the Turkish courts have the right to examine the subject matter of the dispute in enforcement lawsuits?

On 8 February 2012, the General Assembly of the Court of Appeals emphasized that the conformity of the foreign arbitral award to Turkish public policy must be taken into consideration by the local courts.15

The dispute was related to Turkish tax law and the Court of Appeals ruled that a taxing issue is related to public policy, and overruled the local court's decision enforcing the arbitral award.

The decision went on to state that during the examination of an enforcement lawsuit, the grounds of the dispute could not be examined: "It is worth emphasizing that, even if it is necessary to analyze the merits of a case, in order to determine whether the award can be enforced, this examination must be limited to the determination of whether or not the award is against public policy, this may not be an examination of the subject matter of the case."

As a novelty, the decision referred to doctrine when defining public policy: "Public policy, as generally held by scholars, is defined as 'the entirety of institutions and rules that determine a society's underlying structure with respect to political, social, economic, moral and legal aspects within a specific time limit; and that protects fundamental interests.' (Süha Tanrıver, "The Role of Public Policy on Enforcement of Foreign Arbitral Awards in Turkey (Yabancı Hakem Kararlarının Türkiye'de Tenfızinde Kamu Düzeninin Rolü), Present to Prof. Dr. Ali Bozer (Prof. Dr. Ali Bozer'e Armağan)", "Public Policy " (Kamu Düzeni), Ankara, 1988, p.152)"

The examination on "public policy" is one of the most invoked grounds for the refusal to enforce a foreign arbitral award. As a result of this important decision, the concept of "public policy", which is very flexible and ambiguous, has become clearer.

Footnotes

1.Decision of the 6th Civil Chamber of the Court of Appeals, E. 2014/3906, K. 2014/4941, dated 14 April 2014.

2.Published in the Official Gazette dated 2-3-4 July 1927 and numbered 622-623-624.

3.Published in the Official Gazette dated 12 January 2011 and numbered 27836.

4.Decision of the 15th Civil Chamber of the Court of Appeals, E. 2013/2388, K. 2014/113, dated 9 January 2014.

5.Published in the Official Gazette dated 5 July 2001 and numbered 24453.

6.Under the International Arbitration Law, the only remedy against an arbitral award is a set-aside lawsuit.

7.Decision of the 11th Civil Chamber of the Court of Appeals, E. 2012/16024, K. 2013/24728, dated 16 July 2013.

8.Decision of the 11th Civil Chamber of the Court of Appeals, E. 2013/6262, K. 2013/10896, dated 27 May 2014.

9.Published in the Official Gazette dated 28 June 2014 and numbered 29044.

10.Decision of the 11th Civil Chamber of the Court of Appeals, E. 2011/13485, K. 2012/19915, dated 5 December 2012.

11.Decision of the 13th Civil Chamber of the Court of Appeals, E. 2012/8426, K. 2012/10349, dated 17 April 2012.

12.Decision of the 11th Civil Chamber of the Court of Appeals, E. 2011/13485, K. 2012/19915, dated 5 December 2012.

13.Published in the Official Gazette dated 22 April 1926 and numbered 353.

14.Unfortunately, there is an ongoing debate on whether or not this sanction affects the validity of the agreements, or whether or not it is only related to the evidentiary value of the agreements.

15.Decision of the General Assembly of the Court of Appeals, E. 2011/13-568, K. 2012/47, dated 8 February 2012.

© Kolcuoğlu Demirkan Attorneys at Law, 2014

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Gökçe İldiri
Burak Eryiğit
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