Turkey: The Effect Of The Principle Of Separability On Determination Of The Law Applicable To Arbitration Agreements - II

Last Updated: 24 November 2017
Article by Fatih Işık

Introduction

The effect of the principle of separability on determination of the law applicable to arbitration agreements was examined, and the doctrine and court opinions were summarized in the July, 2017, issue of the Newsletter1. As mentioned in the said article, the arbitration agreement may be governed by the law applicable to the underlying contract, or by a different law. In such case, the arbitration agreement can often be governed by the law of the seat of arbitration or some national laws and international principles. In this article, certain court decisions and arbitral awards supporting the aforesaid opinions have been compiled.

Application of Law Applicable to the Underlying Contract and also to the Arbitration Agreement

By default of a choice of law by the parties regarding the law applicable to the arbitration agreement, some court decisions and arbitral awards consider the law applicable to the underlying contract as the law applicable to the arbitration agreement.

This point of view is confirmed in earlier awards of the ICC. For instance, in 1977, an ICC tribunal stated that the choice of law to be applied to the underlying contract should also apply to the arbitration agreement2: "It is accepted by the majority that unless there is a special provision, the choice of law to be applied to the underlying contract also regulates the arbitration clause."

Such point of view is followed in some recent court decisions. Where no choice of law is made for the arbitration agreement by the parties, the Hamburg Court of Appeal decided in 2003 that the arbitration agreement shall be governed by the law applicable to the underlying contract3. The Court of Appeal in Thüringen, Germany, ruled on 13 January 2011 that the choice of law for the underlying contract was an implicit choice of law for the arbitration clause4: "Since the main contract and the arbitration agreement are separate contracts that must be examined separately, it is first necessary to clarify the question of the law applicable to the arbitration agreement. The contract does not contain an express provision on this point. The main contract contains, however, a choice of law (the law to be applied is the law of the Principality of Liechtenstein). This circumstance is a strong indication that the parties also intended to agree on a choice of law for the arbitration agreement (implied choice of law [konkludente Rechtswahl]), and the Court so assumes. The courts of appeal in Dresden, Celle, Bremen and Berlin also held the same (...)".

Similarly, in a judgment of the High Court of Calcutta (India) dated 20 March 2012, the Indian law was applied to the arbitration agreement, as well as to the underlying contract5.

Earlier, the English courts held this point of view, and ruled that where the choice of law for the underlying contract is made, this choice of law should implicitly apply to the arbitration agreement6. However, the approach of the English courts has changed recently7.

Until recently, the Turkish Supreme Court did not declare its opinion on the subject. A dissenting opinion pronounced in a decision in 2000 of the General Assembly of the Civil Chambers of the Supreme Court stated that the authority to make an arbitration agreement should be determined in accordance with the parties' choice of law for the underlying contract, which was not Turkish law8. In this case, however, the Supreme Court directly applied Turkish law without further discussions as to the applicable law.

Determination of the Law Applicable to the Arbitration Agreement Separately from the Underlying Contract

According to a strongly supported point of view, the law applicable to the arbitration agreement should be determined separately from the underlying contract. The ICC expresses this approach as follows; "The applicable law to determine the scope and the effects of an arbitration clause providing for international arbitration do not necessarily coincide with the law applicable to the merits of a dispute submitted to arbitration. Although this law or these rules of law may in certain cases concern the merits of the dispute as well as the arbitration agreement, it is perfectly possible that in other cases, the latter, because of its autonomy, is governed - not only as to its scope, but also as to its effects - by its own specific sources of law, distinct from those that govern the merits of the dispute"9.

Two approaches stand out in determination of law applicable to the arbitration agreement separately from the underlying contract. The first approach represents that the law of the seat of arbitration should apply to the arbitration agreement, while the second approach accepts the principle of direct applicability of national law or international principles as the law applicable to the arbitration agreement. Despite some differences amongst them, the second approach is adopted by the laws of Switzerland, Turkey and France.

Application of the Law of the Seat of Arbitration in the Arbitration Agreement

By default of a choice of law by the parties regarding the law applicable to the arbitration agreement, the most common method is to apply the law of the seat of arbitration to the arbitration agreement, since the law of the seat of arbitration is accepted as the most proper law of the arbitration agreement. This approach is expressed in a decision dated 28 June 2007 of the Commercial Court of England as follows10: "The question then arises whether, if there is no express law of the arbitration agreement, the law with which that agreement has its closest and most real connection is the law of the underlying contract or the law of the seat of arbitration. It seems to me that if (...) this is a relevant question, the answer is more likely to be the law of the seat of arbitration than the law of the underlying contract."

In England, The High Court of Justice decided in its Sulamérica decision in 2012 that the law of the seat of arbitration is the law applicable to the arbitration agreement11. In this decision, the High Court has set out the three steps that are to be taken in determining the proper law of the arbitration agreement. Pursuant to this decision, if there is no express choice, the law applicable to the arbitration agreement should be determined through the parties' implicit choice of law, and in default of an implicit choice of law by the parties, the agreement shall be governed by the law of the country with which the agreement has the closest connection. In this direction, the court ruled that the law of the seat of arbitration is the most closely related law to the arbitration agreement. The Patent Court of London took the same approach in its decision dated 19 December 2013 against Habaş Sınai ve Tıbbi Gazlar İstihsal Endüstrisi A.Ş.12

The courts of other countries also take this approach. For instance, in a Swedish Supreme Court decision of 27 October 2000, the court decided that even though the parties determined to govern the underlying contract by Austrian law, the arbitration clause should be governed by Swedish law13. On 28 September 1995, the Court of First Instance in Rotterdam decided that New York law was applicable to the arbitration agreement in consequence of the parties' choice of the seat of arbitration as New York14. Likewise, even the Court of First Instance decided that the arbitral clause is invalid as per the Swiss law, which was the law applicable to the underlying contract. The Swiss Supreme Court reversed the decision stating that the law applicable to the arbitration agreement should be determined separately from the law applicable to the underlying contract considering the principle of separability, and the scope of the arbitration agreement should be determined as per the Swedish law, which was the law of the seat of arbitration15.

The Turkish Supreme Court confirmed in 1995 that the law of the seat of arbitration was applicable to the arbitration agreement16: "In the event that a choice of law has been made between the parties, the validity of the arbitration agreement shall be determined in accordance with the law of the seat of arbitration which is Bulgarian law in the case at hand."

In some ICC awards, the validity of the arbitration agreement is determined by the law of the seat of arbitration17. In some awards, it is confirmed that the parties' choice of the seat of arbitration is also the implicit choice of law applicable to the arbitration agreement18. In 2005, the German Maritime Arbitration Association stated that the parties did not make a choice of law, and in default of a choice of law by the parties, the agreement shall be governed by the law of the seat of arbitration pursuant to the New York Convention since the parties' countries of origin are both signatories to the New York Convention; therefore, the law applicable to the arbitration agreement itself would be German law, which is the law of the seat of arbitration19.

Application of the State Laws and International Principles to the Arbitration Agreement

Some state laws determine the national law or internationally accepted principles, such as the principle of good faith, as the law applicable to the arbitration agreement. The clear provisions of the laws of Switzerland, Spain, Iran and Turkey refer to their national laws as the law applicable to the arbitration agreement20; whereas, the law of France accepts that arbitration agreements shall be held subject to supranational principles and jurisprudence of the courts.

For instance, with the Dalico case in 1993, the Paris Court of Appeal adopted that it is not necessary to apply the substantive law of any country to the arbitration agreement, that the common interests of the parties is to make a valid arbitration agreement, and that the validity of the arbitration agreement is based on the will of the parties, but this validity must be in accordance with the French public order21. This point of view has been upheld in many decisions of the French courts22.

This approach taken by the French courts is also confirmed in some arbitral awards in France. As the ICC pointed out this approach in an award dated 2008: "In default of a clear choice of law for the arbitration agreement by the parties (...) the arbitral tribunal shall determine the scope and effects of the arbitration agreement based on the common will of the parties and the customs of international arbitration, without any particular national law being enforced in particular. The arbitral tribunal will, however, observe (...) that the grounds for non-compliance with the judgment are in accordance with the French law and the international public order, in particular the place of arbitration.23"

Conclusion

When the law applicable to the arbitration agreement is not specifically determined by the parties, there are several approaches for the courts and arbitral tribunals to reach a decision. However, the most strongly supported point of view is application of the law of the seat of arbitration to the arbitration agreement. On the other hand, the common approach adopted in French practice is likely to become widespread.

Footnotes

[1] Please see: Işık, Fatih, "The Effect of the Principle of Separability on Determination of the Law Applicable to Arbitration Agreements", Newsletter July, 2017, http://www.erdem-erdem.av.tr/publications/newsletter/the-effect-of-the-principle-of-separability-on-determination-of-the-law-applicable-to-arbitration-agreements/ (Access date: 05.10.2017) For more information regarding the topics in this article, doctrine opinions, arbitral awards and court decisions, please see Işık, Fatih, Milletlerarası Ticari Tahkimde Tahkim Anlaşması Yapma Yetkisi ve Bu Yetkiye Uygulanacak Hukuk (Authority to Conclude Arbitration Agreements and the Applicable Law in International Commercial Arbitration), On İki Levha, May, 2015, p. 83-97.

[2] ICC Award no. 2626, Collection of ICC Arbitral Awards ("Collection"), Volume I, p. 316 et seq. Please see: ICC Award no. 6379, XVII Yearbook of Commercial Arbitration ("YBCA") 1992, p. 212-220; ICC Award no. 6840, Collection III, p. 467 et seq,; NOFOTA award dated 5 September 1977, IV YBCA 1979, p. 218-220; ICC Award no. 7047, 13 ASA Bulletin 1995, p. 301-357.

[3] Please see: XXX YBCA 2005, p. 509-523. For more information regarding the topic please see: the Hamburg Court of First Instance decision dated 16 March 1977 (III YBCA 1978, p. 274-275) and the Hamburg Court of Appeal decision dated 22 September 1978 (V YBCA 1980, p. 262-263) upon appeal against this decision.

[4] Please see: XXXVII YBCA 2012, p. 220-222.

[5] Please see: The High Court of Calcutta's Coal India Limited v. Canadian Commercial Corporation decision dated 20 March 2012, XXXVII YBCA 2012, p. 242-243.

[6] Please see: The Commercial Court of England decision dated 28 June 1999 and numbered UK No. 57, XXVI YBCA 2001, p. 869-885.

[7] For more information regarding the approach of the English courts, please see: Pearson, Sabrina "Sulamérica v. Enesa: The Hidden Pro-validation Approach Adopted by the English Courts with Respect to the Proper Law of the Arbitration Agreement", Arbitration International, Volume: 29, Issue: 1, p. 118.

[8] Please see: Turkish Supreme Court General Assembly Decision dated 11.10.2000 and numbered 2000/19-1122 E. 2000/1256 K. (Kazancı İçtihat ve Bilgi Bankası).

[9] Please see: Dow Chemical France et al. v. Isover Saint Goben award of the ICC dated 23 September 1982 and numbered 4131, IX YBCA 1982, p. 131 et seq. For similar ICC awards please see: ICC Award no. 13921, Collection VI, p. 795 et seq.; ICC Award no. 4504, Collection II, p. 279 et seq.; ICC Award no. 5730, Collection II, p. 410 et seq.

[10] Please see: XXXIII YBCA 2008, p. 752-778.

[11] Please see: The High Court of Justice in England Sulamérica Cia Nacional de Seguros S.A. et al. v. Enesa Engenharia S.A. et al. decision dated 16 May 2012, XXXVII YBCA 2012, p. 464-467. For a similar decision please see: High Court of Justice in England's XL Insurance Limited v. Owens Corning decision dated 28 July 1999, XXVI YBCA 2001, p. 869-885.

[12] Please see: The Patent Court of London Habaş Sınai ve Tıbbi Gazlar İstihsal Endüstrisi AŞ v. VSC Steel Company Ltd decision dated 19 December 2013 and numbered 2012-1055, Kluwer Arbitration ITA Arbitration Report, Volume XII, Issue 1 (www.kluwerarbitration.com).

[13] Please see: Swedish Supreme Court's Bulgarian Foreign Trade Bank Ltd. v. A.I. Trade Finance Inc. decision dated 27 October 2000, XXVI YBCA 2001, p. 291-298.

[14] Please see: The Court of First Instance Rotterdam Petrasol BV v. Stolt Spur Inc., decision dated 28 September 1995 XXII YBCA 1997, p. 762 ed seq.

[15] Please see: Swiss Supreme Court decision dated 21 March 1995, XXII YBCA 1997, p. 800-806.

[16] Please see: The decision of the 19th Chamber of Supreme Court dated 15.11.1995 and numbered 1995/9108 E. 1995/9685 K.

[17] Please see: ICC Award no. 4392, Collection I, p. 473 et seq.

[18] Please see: ICC Award no. 5730, Collection II, p. 415. Please also see the comments of Yves Derains on ICC Award no. 4392, Collection I, p. 475-476.

[19] Please see: The German Maritime Arbitration Association award dated 8 November 2005, XXXI YBCA 2006, p. 66-71.

[20] Please see: Işık, Fatih, "The Effect of the Principle of Separability on Determination of the Law Applicable to Arbitration Agreements", Newsletter July, 2017, http://www.erdem-erdem.av.tr/publications/newsletter/the-effect-of-the-principle-of-separability-on-determination-of-the-law-applicable-to-arbitration-agreements/ (Access date: 05.10.2017)

[21] Please see: The Paris Court of Appeal Comité populaire de la Municipalité d'El Mergeb v. société Dalico contractors decision dated 26 March 1991, Revue de l'arbitrage, Year: 1991, Issue: 3, p. 456-461.

[22] Please see: The French Court of Appeal Renault v. Société V. 2000 (Jaguar France) decision dated 21 May 1997, Revue de l'arbitrage, Year: 1997, Issue: 4, p. 537-543. Please also see: The French Court of Appeal Société Uni-Kod v. Société Ouralkali decision dated 30 March 2004, Revue de l'arbitrage, Year: 2005, Issue: 4, p. 959-960; The Paris Court of Appeal Société Sidermetal SRL v. Société Arcelor International Export decision dated 24 February 2005, Revue de l'arbitrage, Year: 2006, Issue: 1, p. 210-213.

[23] Please see: ICC Award no. 14753, Collection VI, p. 973-983. Please also see: ICC Award no. 8910, Collection IV, p. 569-579; ICC Award no. 4131, IX YBCA 1982, p. 131 et seq.; ICC Award no. 5065, Collection II, p. 330 et seq.; ICC Award no. 8910, Collection IV, p. 569-579; ICC Award no. 5721, Collection II, p. 404.

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