Turkey: Requirement Of Specific Authority For Representatives To Arbitrate In Turkish Law

Introduction

The issue of authority for representatives in arbitration is among the preliminary questions that require assessment both by arbitrators and national courts, if the lack thereof is alleged. The lack of authority causes numerous problems, including the arbitration agreement being null and void, any award thereunder being subject to annulment and not being enforceable. Such nullity will result in a dispute, mandatorily being resolved by national courts regardless of the intention to submit a legal dispute to arbitration.

Turkish law provides for certain requirements in order for a party to execute an arbitration agreement, or refer a matter to arbitration through a proxy. Voluntarily appointed proxies of such a party need to be expressly and specifically authorized to arbitrate within their powers of attorney.

This Newsletter article shall assess the specific authority requirement for representation in arbitration under Turkish law.

Specific Authority for Representation in Arbitration under Turkish Law

Authority and the provisions governing the formation, scope and effects of a power of attorney are regulated mainly under two principle codes, Turkish Code of Obligations no. 6098¹ ("TCO") and the Civil Procedure Code no. 6100² ("CPC").

Art. 71 et seq. CPC is comprised of provisions³ governing the power of attorney. Art. 72 CPC states that the former Code of Obligations no. 818 ("Former CO") provisions shall apply to powers of attorney. The subsequent provisions regulate both the scope of a power of attorney and matters that require specific authority in procedural law. Art. 74 CPC foresees that an attorney must be specifically authorized in order to realize certain actions, which include "conclud[ing] an arbitration or arbitrator agreement". Therefore, a generic power of attorney is insufficient unless it expressly authorizes the attorney to conclude arbitration or arbitrator agreements.

The TCO regulates the power of attorney, its establishment, scope and effects in its Art. 502 et seq. Art. 504/3 TCO also states that a proxy may not realize certain transactions, unless specifically authorized for such transaction in the power of attorney. "Refer[ring] to the arbitrator" falls within the scope of those transactions that require specific authority to be provided in a power of attorney.

The above statutory provisions thus provides for limits to the general representative authority of voluntarily appointed proxies to conclude arbitration agreements. A representative may not realize certain specific transactions on behalf of its principle that includes the execution of an arbitration agreement, based on a generic power of attorney, which does not provide specific authority for such actions.

Legal Persons

Real persons realize transactions on behalf of themselves personally. Legal entities, on the other hand, act through their bodies, who realize transactions on behalf of the legal entity. The transactions realized by the bodies of a legal entity are deemed to be made by the legal entity itself, rather than through proxies. Therefore, persons forming the bodies of legal entities, who are authorized to act on behalf of the legal entity, do not act as representatives, but the principal legal entity itself. Thus, specific authority is not required for the board of directors of a joint stock company or a manager of a limited liability company to conclude arbitration agreements.

The bodies of the entity are not required to be specifically authorized to execute an arbitration agreement. They execute such agreements as the principal, not as the representative. Hence, the specific authority requirement under the CPC and the TCO as assessed, above, is not binding on the bodies of a legal entity.

Notwithstanding, should a legal entity specifically authorize a third person as an attorney or proxy to execute an agreement with an arbitration clause, or an arbitration agreement on its behalf, such power of attorney must include specific authorization regarding the arbitration agreement.

Commercial Auxiliaries

The authority of commercial auxiliaries of a merchant to conclude arbitration agreements on behalf of the principals is a matter that requires assessment with regard to specific authority. Commercial representatives, as foreseen under Turkish law, may be classified as dependent or independent auxiliaries, or auxiliaries with or without representative powers. This classification sheds light on the authority of such auxiliary to execute an arbitration agreement on behalf of the merchant.

Commercial representatives, who both are a dependent auxiliaries and have representative powers, are persons appointed and authorized by the merchant in order to manage the commercial enterprise and represent the merchant in transactions governing the enterprise (Art. 547 TCO). The commercial representative is defined as the alter ego of the merchant. Therefore, instead of defining the scope of authority, the exceptions to authority of the commercial representative must be specified. In fact, the authority of a commercial representative may be limited solely in two ways: by conferring it to the transactions of a branch office, or through foreseeing joint representation with another person. Therefore, it is accepted that the authority to execute an arbitration agreement on behalf of the merchant is inherent in the commercial representative.

Commercial proxies are persons appointed by the merchant to manage the enterprise or certain operations thereof, without conferring the authority to act as a commercial representative (TBK m. 551). The authority granted shall comprise of the ordinary business of an enterprise. The authority of commercial proxies may be limited, as opposed to that of the commercial representatives. Unless expressly authorized, commercial proxies may not realize certain transactions, including filing of lawsuits or participating in and following up pending lawsuits. It is accepted that the execution of an arbitration agreement may not be considered to be an ordinary task. Therefore, unless expressly specifically authorized to do so, commercial proxies may not execute arbitration agreements on behalf of the merchant.

Commissioners and marketers are subject to the rules governing the power of attorney (Art. 520/2 and 532/2 TCO). Therefore, specific authority is required for them to execute arbitration agreements.

Agencies that are independent auxiliaries contractually undertake to permanently act as intermediary for agreements, or execute agreements on behalf of the merchant regarding a commercial enterprise within a designated territory (Art. 102 Turkish Commercial Code No. 6102⁴ ("TCC")). An agent must be expressly authorized in order to conclude agreements on behalf of the merchant (Art. 107 TCC). Therefore, specific authority is necessary for execution of arbitration agreements by agents.

Consequence of Lack of Specific Arbitration

The rulings of the Supreme Court of Turkey requires the existence of specific authority in order for a representative to execute an arbitration agreement, and to declare arbitration agreements concluded in the absence of such specific authority as null and void. A ruling of the Assembly of Civil Chambers dated 22.2.2012 and no. 11-742/82⁵, which reads "... Accordingly, in order for a representative to conclude an arbitration agreement, specific authority must be granted. Otherwise, the arbitration agreement [to which its] principal [is a party] is legally null and void..." approved the dismissal of a local court's decision that declared there was no authority to review a dispute due to the existence of an arbitration agreement. Scholars also believe that a lack of authority relates to public policy that needs to be assessed ex officio by arbitrators or local courts and that arbitration agreements or arbitration clauses in other agreements executed by unauthorized representatives (for example agents without specific authority) should be deemed invalid.

In this regard, an arbitral award rendered under such arbitration agreement may be annulled, or its enforcement may be refused. The invalidity of the arbitration agreement, or incapacity, is among the reasons specified under Art. V of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (also known as the New York Convention) for refusing recognition and enforcement of an award. Under Turkish law, lack of authority is not the equivalent to a lack of capacity, and it gives the principal the right not to be bound by an act that is realized by an unauthorized representative. Nevertheless, a lack of authority is regarded as incapacity in commercial arbitrations, and within the scope of Art. V/1/a of the New York Convention. Additionally, pursuant to Art. V/2/b of the New York Convention, the recognition and enforcement of an award that would be in violation of public policy may also be denied.

Nevertheless, a party who fails to assert any objection regarding lack of authority throughout the arbitral proceedings, bringing the matter to the attention of the judges at the enforcement stage of an award, may be deemed as an abuse of its rights. In fact, a Supreme Court 11th Civil Chamber ruling dated 09.04.2004 and no. 6774/3751 declared such objection asserted for the first time at the enforcement stage to be in violation of the good faith principle, and overruled the local court's enforcement decision.⁶

Moreover, there is an inclination towards the apparent authority theory in the practice of arbitration. Accordingly, if a party created the appearance of authority of its representative, leading the counter-party to believe in such authority, such party may be bound by the arbitration agreement of its unauthorized representative. In addition, it is argued that the "public policy," the violation of which is among the reasons to refuse enforcement under the New York Convention, should be construed in a narrow, strict, and exceptional manner, accepting supranational, international, and fundamental principles of law, as public policy. It is also accepted in the practice of international arbitration that a party may not be disadvantaged, due to a lack of specific authority of its counterparty under the laws applicable to it, and that such limitations governing authority under local laws shall not be given effect to in international arbitration.

In assessing the consequences of a lack of specific authority, the separability principle must also be underlined. Accordingly, even if the arbitration agreement is in the form of an arbitration clause in another agreement, the underlying contract, and the arbitration agreement/clause, are considered to be separate, severable and autonomous. Therefore, the invalidity of the underlying agreement will not necessarily impact the validity of the arbitration agreement. The same principle applies if the arbitration agreement is invalid, then the underlying agreement may continue to be valid and in force.

The lack of specific authority will result in the invalidity of the arbitration agreement due to the provisions of Turkish law assessed above. Nevertheless, if no specific authority is required for the execution of the underlying agreement, it will continue to bear effect, except for its arbitration clause.

Conclusion

The CPC and the TCO require the granting of specific authority to voluntarily appointed representatives, in order for such representative to execute an arbitration agreement on behalf of their principals. Specific authority is not required for commercial representatives, who are accepted as the alter ego of a merchant. The bodies of a legal entity are not regarded as representatives or proxies, as they act as, and on behalf of, the legal entity itself. Nevertheless, if a representative is voluntarily appointed, this requirement shall apply.

If an arbitration agreement is concluded by a representative in the absence of such specific authority, it shall be deemed null and void, as accepted in Supreme Court rulings. Any arbitration award rendered under such agreements may be annulled, or their recognition or enforcement may be refused. Nevertheless, alleging lack of authority at the enforcement stage, after participating in arbitral proceedings, without presenting any such objections, will be deemed to be an abuse of a right.

If the arbitration agreement is executed in the form of an arbitration clause in another agreement, the same principal shall apply. Nevertheless, the invalidity of the arbitration clause shall not affect the validity of the main agreement, as the arbitration clause is considered to be a separate and autonomous agreement.

Article of December 2014

Footnotes

1.Official Gazette 4 February 2011, No. 27836. The TCO entered into force on 1 July 2012.

2.Official Gazette 4 February 2011, No. 27836. The CPC entered into force on 1 October 2011.

3.The Former CO to which Art. 72 CPC refers was abrogated by and replaced with the TCO.

4.Official Gazette 14 February 2011, No. 27846. The TCC entered into force on 1 July 2012.

5.www.kazanci.com (accessed on 5 January 2015).

6.Supreme Court 11. Civil Chamber ruling dated 09.04.2004 and no. 6774/3751, Nuray Ekşi, Milletlerarası Deniz Ticaret alanında "Incorporation" Yoluyla Yapılan Tahkim Anlaşmaları, İstanbul 2010, p. 69, 70.

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.