Turkey: Public Policy Defence and Arbitration in International Commercial Law

Last Updated: 16 December 2015
Article by Serap Zuvin and Mehmet Ali Akgun

Geneva Convention & New York Convention

Since the public policy criterion is of fundamental significance, it is not a surprise that the Geneva Convention1 contained a restriction for the recognition and enforcement of foreign arbitral awards on public policy grounds. However, pursuant to Article 7(2) of the New York Convention2, Geneva Convention ceases to have effect among contracting states of the New York Convention. Therefore, the focus of this article is on the New York Convention and especially on its article number V (2) (b), where the "public policy" exception on the enforcement of awards finds its place. Such article of the New York Convention is "probably the most misused ground of non-enforcement of all,"3 since it states the following:

Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that:...

(b) The recognition or enforcement of the award would be contrary to the public policy of that country.

Obviously, the Contracting States' freedom to define their own national public policy standard inevitably impedes the predictability and consistency of the enforcement decisions. Therefore, while discussing the article V (2) (b) of the New York Convention, one should explore on the respective public policy standard of the contracting state where the award's recognition and enforcement is sought.

In this article, application of the public policy defences of various national courts will be analysed and the formation of new "international" and "transnational" public policy exceptions to replace the single, "national" public policy approach, will be advocated.4

Purpose and Relevance of the Public Policy Defence

Public policy serves the purpose of providing the contracting states with a "safety- valve" allowing them to prevent the enforcement of awards which they consider irreconcilable into their legal system5 which finds its legal source in article V(2)(b) of the Convention for the contracting states. By defining public policy broadly, contracting states could effectively deny any undesired award recognition and enforcement. The Convention's enforcement-friendly approach could thus be circumvented through the back door of public policy.6

What is the Relationship between Arbitrability and Public Policy?

For an arbitration agreement to be enforceable, the subject matter must be arbitrable. That is, it must be a subject that a state considers it appropriate to be arbitrated. In most jurisdictions, for example, issues such as criminal matters and child custody are not arbitrable. To arbitrate the cases in these areas of law would be against the law or the public policy of the local jurisdiction. So, what is the difference between these two terms? Arbitrability and public policy are bundled in Article V (2) since both serve to a similar purpose. While both instruments are interchangeable as to their functions, their effects are different. Lack of arbitrability invalidates arbitration agreements. However, public policy replaces arbitrability's absolute prohibition with the unpredictability immanent to public policy. Therefore, it reduces the attractiveness of arbitration.7

Public policy has different definitions in different jurisdictions, mostly it is concluded that an award could be vacated if it is not consistent with the fundamental principles of justice, honesty, and fairness. Thus, corruption, fraud, or lack of integrity in the process is likely to be considered a violation of public policy, requiring the award to be annulled.8 Because of the States' sovereignty over defining public policy, the concept of public policy evades a general precise definition.

In most Model Law jurisdictions, fraud or corruption would probably be considered a proper ground for challenging an award as a violation of public policy. The U.S Federal Arbitration Act ("FAA") is quite explicit in this respect. It provides specifically that grounds for vacating an award containing the following facts: (1) the award was procured via corruption, fraud or undue means, (2) there was evident partiality or corruption in the arbitrators, (3) the arbitrators were guilty of misconduct...or...other misbehaviour by which the rights of any party have been prejudiced.9 Similarly, the English Arbitration Act provides that a party may challenge an award based on "serious irregularity affecting the tribunal, the proceedings or the award."10

There are a few exceptions to the general rule in arbitration that the only grounds for challenging an award are based on jurisdiction, procedural irregularities, arbitrability, or public policy. These exceptions are found generally in common law legal systems. In England, for example, a party may appeal an arbitral award on a point of law, unless the parties agree, or unless the parties have agreed otherwise.11 This right of appeal, however, is subject to substantial limitations. The appeal cannot be brought unless all the parties agree, or unless the court grants leave to appeal. The court should grant leave only if the tribunal was obviously wrong on the point of law, or the question is of general public importance and the decision of the tribunal is open to doubt.12

In the United States, courts have created some non-statutory grounds for challenging an award. For example, an award can be vacated if it violates public policy, a non-statutory ground under the FAA. Public policy is a non-statutory ground for setting aside an award in the United States because it is not one of the grounds for non-enforcement provided under the FAA.13

Under the Convention, recognition or enforcement of an arbitral award may be rejected if a court deems that the award would be contrary to the policy of that country. However, public policy is not defined in the Convention, and thus presents the possibility of another broad ground for the court to reject the enforcement. On the other hand, however, most of the courts view such a defence narrowly, by sticking to the Convention's pro-enforcement purpose.14 Even though a number of countries take a narrow approach in interpreting the public policy defence, there is room for it to be used parochially to protect national political interests.15 For instance, in 1995 the Turkish Supreme Court refused to enforce an ICC award in which the tribunal in Zurich applied Turkish substantive law, but applied the procedural law of the canton of Zurich. According to the Turkish Court the arbitrator had violated Turkish Public Policy by not applying Turkish procedural law.16

Domestic Public Policy and International Public Policy

Public policy is one of the important mechanisms which balance the need for freedom from the constraints of various states' domestic law with the legitimate desire of those states and the international community to protect and preserve basic notions of morality and justice.17

Courts face a dilemma while deciding between voiding an arbitration agreement or award because it violates public policy, on the one hand, or advancing the contractual intention of the parties, on the other.18

In a purely domestic arbitration, a national court needs to consider only of its own domestic policy. Since the arbitration is connected to only one nation, only that nation's public policy is considered. However, the situation is different for international public policy issues since more than one nation's public policy is relevant. In this case, the national court must consider the international dimensions of the arbitration when applying its domestic public policy limitations. Therefore, it would be fair to conclude that international public policy are those rules of a nation's domestic public policy, that will also be applied by that nation in an international context.19

As Curtin states in his referred article, national courts should consider not only their own domestic public policy, but also the public policy of interested nations and the needs of international commerce. International public policy is a test of balancing of interests. At this point, a reference is made to the U.S Supreme Court decision on Mitsubishi Motors Corporation v. Soler Chrysler- Plymouth Inc.20

"we conclude that concerns of international comity, respect for the capacities of foreign and transnational tribunals, and sensitivity to the need of the international commercial system for predictability in the resolution of disputes require that we enforce the parties' agreement, even assuming that contrary result would be forthcoming in domestic context."21

As stated above, the court reasoned that the needs of international commerce for predictability in the resolution of disputes required the enforceability of the arbitration agreement, although a contrary result might be reached in a domestic context.22

Furthermore, France declared that the standard of review in an international context is whether arbitration would violate "international" public policy.23 Furthermore, typical of courts distinguishing between domestic and international standards for the review of arbitration awards are decisions from Germany, Korea and Luxembourg which are listed below: 24

Germany: "The recognition of foreign arbitral awards thus is governed normally by a less stringent regime than domestic awards"25

Korea: "As due regard should be paid to the stability of international commercial order, as well as domestic concerns, should be interpreted narrowly. When foreign legal rules applied in an arbitral award are in violation of mandatory provisions of Korean law, such a violation does not necessarily constitute a reason for refusal."26

Luxembourg: "The case here concerns the effect in Luxembourg of rights acquired abroad; hence, public policy intervenes only in its attenuated form and is less stringent than if the case concerned the acquisition of the same rights in Luxembourg" 27

How Narrowly Can Public Policy be interpreted?

Even though there is a general bias on interpreting Article V (2) narrowly in favour of enforcement of international arbitral awards under the New York Convention, there are still certain limits which arbitrators may not go beyond. An award can be contrary to the public policy both for procedural and substantive reasons. It can violate substantive public policy or procedural public policy. Substantive public policy goes to the subject matter of the award28 while procedural public policy relates to the process by which the matter was adjudicated.29 From this explanation, it can be understood that fundamental principles pertaining to justice and morality would be an issue under substantive public policy. Also, recognising or enforcing awards which do not comply with the rules serving the State's essential political, social or economic interests would infringe on such a State's substantive public policy.

To exemplify these limits, Troy L. Harris lists the cases, shown below, from different jurisdictions.

Two examples for substantive limits:

Austria: A sale/purchase on margin was void as a gambling contract.30

Germany: Enforcing a contract which violated German exchange laws would violate public policy.31

Two examples for procedural limits:

Germany: Enforcement of award rendered after parties settled dispute would violate public policy because it is contrary to duty of good faith.32

Netherlands: Failure of arbitral tribunal to follow own rules and inability of party to challenge partiality of arbitrator amounted to due process violations of public policy.33

Conclusion

As arbitration becomes more and more international and transnational, arbitrators have the duty to maintain vigilance so that arbitration does not become a method by which the legitimate interests of states are defrauded.34 Although public policy probably plays a much greater role in the theory of arbitration than in actual practise, there are occasional examples of misuse of the public policy defence. In most countries, courts have been reluctant to refuse enforcement on public policy grounds. In fact, awards are so rarely refused enforcement on grounds of public policy.35 Professor Felix Dasser's article illustrates this with statistics: According to his article, public policy was invoked 142 times and dismissed in 100% of those instances in Switzerland from 1989 to 2009.36

Even though the public policy exception to enforcement has been interpreted narrowly by the certain states as the statistics provided above states, practitioners still must be cautious because of the fact that most countries have not indicated one way or the other how they view article V(2).

There is little doubt that international commercial parties have little patience with such ideas as state sovereignty.37 They demand laws to facilitate their transactions, and if states are loath to do so in a timely fashion, they have not been hesitant in creating international commercial law using "soft law" instruments that in actuality have even more potency than "hard law".38 National states worry because there is a limited role for them in the creation of international commercial law which means a loss of sovereignty for them, as they are being managed by the rules made by someone else, but they also want to facilitate commercial transactions. However, nation states do not appear to understand the demands of modern international commerce and as Gopalan stated at the end of his article, "If they cannot take the heat, they should get out of the kitchen".39 On the other hand, as arbitration becomes more and more international and transnational, arbitrators have the duty to maintain vigilance so that it does not become a method by which the legitimate interests of the states are defrauded.40 Otherwise, arbitration will lose its national backing, and old judicial hostility towards arbitration will return to destroy the utility of arbitration as an alternate dispute resolution technique. Even though it is not possible to state that public policy has no place in the arbitration of international commercial law, the notion of public policy is unnecessarily broad and open to misinterpretation. Therefore, international and transnational public policy notions must be adopted by the states in order to keep the development pace of international/transnational commercial law at the same level.

It should always be kept in mind that arbitration is opted for its neutrality, speed, economy and privacy, and not as a method to avoid mandatory laws. Increased use of international and transnational public policy will further the parties' intentions to arbitrate disputes, but it also could spell the ultimate downfall of international arbitration. Therefore it cannot and must not become a vehicle through which parties attempt to avoid mandatory national laws, otherwise, international arbitration will lose its national backing, and awards will not be enforced.41

Footnotes

[1] 1927 Geneva Convention on the Execution of Foreign Arbitral Awards ("Geneva Convention")

[2] Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 ("New York Convention")

[3] Harris, T. L. (2007). The "Public Policy" Exception to Enforcement of International Arbitration Awards under the New York Convention. Journal of International Arbitration, 24(1), PP 9-24. P-10

[4] Related definitions about International and Transnational Public Policy can be found in Curtin, K. M. (1997). Redefining Public Policy in International Arbitration of Mandatory National Laws. Def. Counsel J., 64, pp271-284

[5] Supra. Wolff, R. P-406

[6] Ibid.

[7] Ibid.

[8] Moses, M. L. (2012). The Principles and Practice of International Commercial Arbitration. Cambridge University Press. P-206

[9] Moses, M. L. (2012). The Principles and Practice of International Commercial Arbitration. Cambridge University Press p-206 & U.S. Federal Arbitration Act, 9 U.S.C 10(a)

[10] Ibid. Moses, M. L. P-207 &English Arbitration Act of 1996 68(1). The Swedish Arbitration Act also permits a challenge based on "an irregularity....which probably influenced the outcome of the case." 34(6)

[11] Ibid. Moses, M. L. P-207 & English Arbitration Act of 1996 69(1)

[12] Ibid. Moses, M. L. P-207 & English Arbitration Act of 1996 69(2),(3)

[13] Ibid. Moses, M. L. P-208

[14] To see that how narrowly the term public policy is understood by courts also check "United States . 23 December 1974. U.S. Court of Appeals, Second Circuit / Parsons & Whittemore Overseas Co. v. Societe Generale de L'Industrie du Papier (RAKTA) / 74-1642, 74-1676" accessible on http://www.newyorkconvention1958.org/index.php?lvl=author_see&id=115

[15] Ibid. Moses, M. L. P-208

[16] Ibid. P-208

[17] Buchanan, M. A. (1988). Public policy and international commercial arbitration. American Business Law Journal, 26(3) p-531

[18] Curtin, K. M. (1997). Redefining Public Policy in International Arbitration of Mandatory National Laws. Def. Counsel J., 64, pp271-284 p-281

[19] Ibid. Curtin, K. M.

[20] Mitsubishi Motors Corp. v. Soler Chrysler- Plymouth, Inc., 474 U.S 614 (1985)

[21] Mitsubishi Motors Corporation v. Soler Chrysler- Plymouth Inc

[22] Supra. Curtin, K. M. (1997) p-273

[23] The Paris Court of Appeal .Societe Almira Films v. Pierrel es Quai . 4 Rev. Arb. 1989, 711 (1989)

[24] Harris, T. L. (2007). The "Public Policy" Exception to Enforcement of International Arbitration Awards Under the New York Convention. Journal of International Arbitration, 24(1), PP 9-24. P-9

[25] Federal Supreme Court of Germany, January 18, 1990, 27 Year Book Commercial Arbitration p-503 (1992)

[26] Adviso N.V. v. Korea Overseas Constr. Corp., Supreme Court of Korea, February 14, 1995, 21 Year Book Commercial Arbitration p- 612(1996)

[27] Sovereign Participations Int'l SA v. Chadmore Devs. Ltd., Court of Appeal. Luxembourg, January 28, 1999, 24 Year Book Commercial Arbitration p-714 (1999)

[28] Sheppard. A., (2003). 19 Arbitration International.pp-217-248. P-230

[29] Ibid. Sheppard. A.

[30] [Dutch party] v [Austrian party], Supreme Court of Austria, May 11, 1983, 10 Year Book Commercial Arbitration.P-421 (1985)

[31] [German individual] v [New York Corporation], Federal Supreme Court of Germany, June 15, 1987, 19 Year Book Commercial Arbitration. P-653 (1954)

[32] [Seller] v [Buyer], Higher Court of Appeal Bavaria, November 22, 2001. 29 Year Book Commercial Arbitration. P-771 (2004)

[33] Goldtron Ltd. v. Media Most B.V., District Court of Amsterdam, August 27, 2002, 28 Year Book Commercial Arbitration. P-814 (2003)

[34] Ibid. Curtin, K. M. p-284

[35] Supra. Moses. P-229

[36] Dasser, F. (2007). 25(3) ASA Bulletin. Pp-444-472 p-453/ also check updated statistics on Dasser, F. (2010) 28(1) ASA Bulletin. P-87

[37] Gopalan, S. (2004). "Creation of International Commercial Law: Sovereignty Felled", 5 .The San Diego Int'l LJ, pp. 267-322. p-321

[38] Ibid. Gopalan, S. p-321

[39] Ibid. Gopalan, S. p-322

[40] Supra. Curtin, K. M. p.285

[41] Supra. Curtin, K. M. p-283

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Serap Zuvin
Mehmet Ali Akgun
Similar Articles
Relevancy Powered by MondaqAI
Guzeloglu Attorneys-at-law
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Guzeloglu Attorneys-at-law
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions