Parties wishing to refer any present or future dispute to arbitration need to consider certain important aspects when drafting an arbitration clause or a separate arbitration agreement. The language of such arbitration clause or agreement gained further significance in light of the decision of the Turkish Court of Appeals1 rejecting the validity of an English language arbitration clause in an English language contract between a Turkish and a foreign company by referring to the provisions of Law No. 805 on the Mandatory Usage of the Turkish Language in Commercial Enterprises published in the Official Gazette numbered 353 and dated 22 April 1926 (the "Law No. 805").
The contract forming the basis of the dispute was executed between a Turkish and a Swiss company and the procedure leading to the decision of the Court of Appeals was initiated by the application of the Swiss company to the 12th Commercial Court of Ankara (the "Commercial Court") for a declaratory judgment that the contract at issue was rightfully terminated by it on the basis of the Turkish counterparty's breach of contract. During the initial proceedings before the Commercial Court, the Turkish party objected to the jurisdiction of the Commercial Court stating that the contract included an arbitration clause, which was accepted by the Commercial Court.
Following the Swiss company's appeal against the Commercial Court's decision accepting the objection of the Turkish company, the Court of Appeals overruled the decision of the Commercial Court on the grounds that the Commercial Court has failed to take due account of the requirements of Law No. 805 providing that commercial transaction of Turkish enterprises must be concluded in the Turkish language.
Article 1 of Law No. 805 provides that the transactions, contracts, communications and ledgers of Turkish enterprises must be in the Turkish language. The prevailing view in the market is that the scope of Law No. 805 however does not apply to contracts including a foreign party as article 2 of Law No. 805 on foreign enterprises does not include any reference to "contracts".
Pursuant to Article 4 of Law No. 805, documents or papers in contradiction to the provisions of article 1 and article 2 will not be taken into consideration in favour of the relevant entity.
The decision of the Court of Appeals, which appears to be in contradiction with prevailing market views, raises uncertainty with respect to the scope of applicability of Law No. 805 in cross-border dealings. Adding to the confusion, is the apparently selective application of Law No. 805 by the Court of Appeals, which has analysed the merits of the contract underlying the dispute, which is also drafted in the English language. The Court of Appeals gave no reasoning as to this contradiction.
The application of article 4 by the Court of Appeals implies that the arbitration clause should have been drafted in the Turkish language in order for the Turkish company to successfully invoke such arbitration clause as a defence in its favour.
The fact that the decision of the Court of Appeals lacks any explanatory reasoning with respect to its selective application of Law No. 805, finding that the Turkish party is unable to rely on the arbitration clause on the basis of the requirements of Law No. 805, further complicates the interpretation and implementation of the Law No. 805. It constitutes an unfortunate decision with respect to the promotion as well as the internationally recognised arbitration practice.
Following the second application of the Turkish company to the Court of Appeals requesting the correction of its decision, the case at issue is currently pending before the Court of Appeals. It is hoped that the final decision of the Court of Appeals will shed light on the exact application of Law No. 805 and its implications on the validity of English language arbitration agreements concluded between Turkish and foreign parties.
In the meantime, as a belt and braces approach, parties may consider to record their arbitration clauses or arbitration agreements in the Turkish language, alongside any version in a foreign language.
1 Court of Appeals, 11th Civil Chamber, File No. 2016/5836, Decision No. 2017/4720, dated 26 September 2017.
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