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TURKEY

Yalin Akmenek, Demet Kasarcioglu, Ceyda Sıla Cetinkaya

A. LEGISLATION AND RULES

A.1       Legislation

The International Arbitration Law of 2001 (IAL)[1] governs international arbitration[2] in Turkey, while the Code of Civil Procedure of 2011 (CCP)[3] deals with domestic arbitrations seated in Turkey. Both acts were inspired by UNCITRAL Model Law and contains fairly standard and arbitration-friendly provisions. In addition, the Law on International Private Law and Procedural Law of 2007 (IPPL)[4] includes the principles and procedure concerning the recognition and enforcement of foreign arbitral awards, and it has never been amended since its enactment. The New York Convention, which also regulates the same matter as the IPPL, has been in force in Turkey since 30 September 1992.

No legislative amendment was made to the IAL and the IPPL in 2020. However, a couple of significant amendments to the CCP were made within the scope of the third package of the Judicial Reform Strategy Document produced by the Strategy Development Authority of the Ministry of Justice. Specifically, the amendments regarding interim measures, the notification of the arbitral award and the arbitrator’s fee are significant for the arbitration practice in Turkey.

The arbitrator’s power to grant interim measures does not restrict the parties’ right to make an application to the court according to the CCP and article 6 of the IAL. Therefore, amendments made regarding interim measure provisions, namely articles 391/3, 393/1, and 398/5 of the CCP, also affect arbitration practitioners.

The amendment to article 391/3 of the CCP sets forth that an interim measure decision should be a justified decision. The amendment to article 393 of the CCP regulates that the one-week application period for the enforcement of the interim measure order commences on the date of the pronouncement or service of the decision to the party that requested the interim measure. In the former regulation, the period for the application of enforcement used to begin as of the date of the decision.

Pursuant to another significant amendment which was made under article 398 of the CCP, a person who does not comply with the court’s implementation of the interim measure order or who violates the interim measure decision may be punished with non-judicial imprisonment up to six months if a complaint has been filed against them within six months as of learning about the violation. The former version of article 398/1 of the CCP contained similar wording regarding the disciplinary imprisonment sanction in case of the failure or violation of the interim measure decisions; however, the Constitutional Court of Turkey abolished the disciplinary imprisonment sanction on the ground that the CCP is unclear as to whether a person subject to an interim decision may appeal the decision or not. This ambiguity constitutes a violation of the freedom to claim rights and the principle of clarity and definiteness. [5] The new amendments to the CCP reintroduced the disciplinary imprisonment sanction to article 398/1. With this new article 398, the legislature took into account the grounds of the Constitutional Court’s decision and inserted eight new paragraphs to the provision in order to clarify litigation, appeal, and the enforcement processes of the disciplinary imprisonment sanction.

Another important change affecting arbitration was made to article 436/3 of the CCP titled “Form, content, and deposit of the arbitral award [by the court].” Pursuant to the former regulation, the sole arbitrator or the president of the arbitral tribunal should notify the parties about the arbitral award. The amendment added “the relevant arbitral institution” to the list of persons who will notify the parties about the arbitral award.

Article 440/5 of the CCP stipulating the arbitrator’s fee was changed. The amendment introduces the wording “unless otherwise agreed” to the former provision, which said, “no additional fees are payable for the correction or interpretation of the award or issuing an additional (complementary) award.” Consequently, the new provision regulates that the parties can decide on the payment of the arbitrator’s fee for the issuance of correction or additional (complementary) award.

A.2       Institutions, Rules and Infrastructure

Turkey hosts various arbitral institutions, and the most frequently used are the Istanbul Arbitration Centre (ISTAC), the Istanbul Chamber of Commerce Arbitration Center (ITOTAM), and the Union of Chambers and Commodity Exchanges of Turkey (TOBB) Court of Arbitration.

ISTAC is the most prominent arbitral institution in Turkey, providing efficient dispute resolution services for both domestic and international arbitrations. ISTAC also established the Med-Arb Rules for mediation-arbitration, a two-tier alternative dispute resolution method. Following the introduction of the Med-Arb Rules in 2019, ISTAC signed a cooperation protocol with 130 mediation centers at a ceremony held on 24 June 2020 within the scope of the Med-Arb project. This protocol was the first step to quickly and easily resolve commercial disputes that cannot be settled before the mediation institutions by directing them to arbitration. Furthermore, while the COVID-19 pandemic has greatly impacted global industries and commerce, ISTAC has taken significant steps to use widely available online methods to mitigate unnecessary delays to arbitration proceedings by introducing Online Hearing Rules and Procedures on 17 April 2020. The Online Hearing Rules and Procedures are a guideline for parties and arbitrators consisting of ten provisions that address issues such as hearing preparations, attendees, conducting a hearing, and witnesses and experts’ testimony.

Another frequently preferred arbitral institution in Turkey is ITOTAM, which has been providing its members with arbitration services since its establishment in 1979. If parties would like to benefit from ITOTAM arbitration services, at least one of them must be a member of the Istanbul Chamber of Commerce. ITOTAM has been working on certain amendments to ITOTAM Rules 2017 that are expected to be published in 2021 and translated into other languages such as German, French, and Arabic. Concerning the effects of the COVID-19 pandemic on the arbitration proceedings, ITOTAM decided to suspend the time limits in arbitration proceedings until 15 June 2020 with its decisions on 30 March 2020 and 30 April 2020. The time limits were reinstated on 15 June 2020, and ITOTAM also supports parties and arbitral tribunals in conducting the arbitral proceedings online.

Another option for parties is TOBB Court of Arbitration for dispute resolution. The rules of TOBB Court of Arbitration are unchanged since 2016. With regards to the COVID-19 pandemic, although TOBB did not introduce any special guideline to avoid negative effects of COVID-19 on the arbitration, in practice, they support arbitral tribunals and parties to conduct arbitral proceedings online.

B. CASES

B.1       Turkish courts determined that an arbitration agreement involving a foreign element is not a violation of Law No. 805

The 15th Civil Chamber of the Court of Cassation reversed the decision of the Regional Court, setting aside an arbitral award decision given by in the capacity of a court of first instance, where it ultimately concluded that having an agreement in a foreign language would not violate the Law on Mandatory Use of Turkish in Economic Enterprises (“Law No. 805”)[6], which requires mandatory use of Turkish language in agreements both between (i) Turkish parties and (ii) Turkish and foreign parties.[7]

The dispute between the parties arose from an arbitral award rendered for a dispute relating to a construction agreement between two Turkish companies. The parties chose Turkish law as governing law, and arbitration under ITOTAM arbitration rules seated in Turkey and conducted in Turkish. Since the defendant was an affiliate of an international conglomerate, both the arbitral tribunal and then Turkish courts (in set aside proceedings) acknowledged that the dispute had a foreign element. Therefore the IAL should have been applicable to the dispute. Following the plaintiff having initiated the set-aside lawsuit, the Regional Court set aside the arbitral award on the ground that, among others, the agreement between the parties, upon which the arbitral award was rendered, was concluded in English and the certified translation of the agreement was not submitted to the arbitral tribunal. Therefore, the award violated public policy. The significance of Law No. 805 is, it requires that (i) all Turkish companies to conduct their business transactions, conclude their agreements, and keep their correspondence, records, and books within Turkey in the Turkish language (article 1); and (ii) foreign companies and enterprises to use the Turkish language in transactions, correspondence and contacts with Turkish companies and persons, and to disclose documents and company books to Turkish government bodies and officials in Turkish (article 2). Although this law was enacted in 1926 when the Republic of Turkey was very young and the aim of the government was to extend the use of Turkish in commercial life and does not serve its purpose anymore, it is still in force. Therefore, the Regional Court concluded that the arbitral award rendered based on which the agreement is not concluded in Turkish violated Law No. 805 and, thus, the public policy.

The Regional Court’s decision was appealed to the Court of Cassation, and the latter reversed the award (“Reversal Decision”) on the grounds that, among others, the failure to not having a foreign language agreement translated into Turkish does not violate Turkish public policy. The Court of Cassation did not consider the agreement in a foreign language executed between two Turkish parties as a violation of public policy in the lawsuit in question.[8] After the Reversal Decision, the Regional Court reassessed the case within the scope of the Court of Cassation’s interpretations, and it sustained the arbitral award in line with the Reversal Decision.[9] The plaintiff appealed this decision. As a result of the appellate review, the 15th Civil Chamber of the Court of Cassation dismissed the plaintiff’s appeal request and rendered a final judgment that the arbitral award is not in violation of public policy.[10]

Different from the Reversal Decision, the Court of Cassation explicitly stated in the final judgment that there is no violation of Law No. 805. The reasoning behind the Court of Cassation’s decision was due to the dispute involving a foreign element as per article 2 of the IAL.

The Court of Cassation rendered a significant judgment for both arbitration and the implementation of Law No. 805, which led to important discussions regarding agreements executed with Turkish parties and foreigners. The Court of Cassation explicitly stated that the execution of an agreement subject to arbitration, which was signed between two Turkish parties and involved a foreign element in a foreign language, would not constitute a violation of Law No. 805.

B.2       The validity of the arbitration objection in a case where the parties are Turkish but the arbitration clause is in English

The 15th Civil Chamber of the Court of Cassation ruled that if Turkish parties executed the arbitration clause in English, although the agreement containing the arbitration clause was executed in Turkey and the parties were Turkish, the arbitration objection cannot be taken into consideration in favor of the party who relies upon the arbitration agreement (i.e., the party raising the preliminary arbitration objection) based on the ground that it violates Law No. 805.[11]

The dispute between the parties arose from a construction contract. The plaintiff (subcontractor) initiated the lawsuit to request compensation of damages arising out of the delay of payments, additional works, and construction products that remained on the defendant’s (contractor) worksite. The defendant raised a preliminary arbitration objection since there is an arbitration clause under the agreement. The court of first instance accepted the objection and dismissed the case. The plaintiff appealed the court of first instance’s decision to the Regional Court. The Regional Court upheld the decision of the court of first instance, and then the defendant appealed the decision to the Court of Cassation.

The Court of Cassation stated that the parties are not foreign, and the agreement was concluded in Turkey, but the agreement, including the arbitration clause, was drafted in English, contrary to Law No. 805. The Court of Cassation evaluated that whether the plaintiff was abusing their right by arguing the invalidity of the arbitration clause as the parties performed their obligations under the main agreement or not. The Court of Cassation ruled that the arbitration clause is separable from the main agreement. Therefore, performance of the main agreement does not mean the performance of the arbitration clause. Consequently, the Court of Cassation concluded that there was no abuse of rights.

That being said, the Court of Cassation reversed the Regional Court’s decisions by determining that the arbitration objection should be dismissed on the grounds that: (i) it is a requirement to execute the arbitration clause and main agreement in Turkish as per article 1 of Law No. 805 since the parties are Turkish, the agreement was executed in Turkey and it relates to a business conducted in Turkey, so the agreement was drafted in English contrary to this provision, (ii) raising this claim cannot be evaluated as an abuse of right since the parties did not initiate arbitration, and the party who drafted the arbitration clause is not the defendant and (iii) as per article 4 of Law No. 805, the arbitration clause drafted in English should not be taken into consideration to the benefit of the defendant who relied upon the arbitration clause and therefore, the court should have rejected the defendant’s arbitration objection and reviewed the merits of the case. Consequently, the Court of Cassation’s decision is noteworthy, especially in terms of evaluating article 4 of Law No. 805. Having said that, this decision still brings questions to the practitioner’s minds as to the Court of Cassation’s approach.

B.3       The validity of the arbitration clause under a fixed-term agreement if the agreement transforms into an indefinite term agreement

The Regional Court accepted that the arbitration clause in a fixed-term agreement (belirli süreli sözleşme) remains valid even if a fixed-term agreement transforms into an indefinite term agreement (belirsiz süreli sözleşme) due to the parties’ actions.[12] The dispute between the parties arose from a distributorship agreement. The plaintiff initiated the lawsuit to request compensation for damages arising out of the termination of the distributorship agreement and goodwill compensation. The defendant claimed that the parties executed three consecutive distributorship agreements in 2005, 2007, and 2008. After the latest distributorship agreement expired, the parties did not conclude any other agreement extending its term or setting forth a new distributorship relationship. Still, their relationship de facto continued in accordance with the latest distributorship agreement as the parties continued to perform their obligations in line with the terms of the agreement. Since the agreements between the parties contained an arbitration clause, the defendant argued that the relationship between the parties shall continue to be regulated pursuant to the latest distributorship agreement, which also contained an arbitration clause; therefore, the defendant raised a preliminary arbitration objection. The court of first instance accepted the defendant’s arbitration objection and dismissed the case, stating that the distributorship agreement transformed into an indefinite term agreement, and the arbitration clause in the agreement has remained valid. The plaintiff appealed the decision of the court of first instance.

The Regional Court ruled that the latest distributorship agreement remained valid even after expiry since the parties’ intention was to extend the agreement by performing their obligations under the agreement. Since there is no provision under the agreement that foresees a form requirement to extend the agreement, and the parties acted as if they were bound with the latest agreement under the same circumstances, arguing the contrary would constitute a violation of the good faith principle. Therefore, the Regional Court rejected the plaintiff’s appeal and upheld the decision of the court of first instance.

B.4       Waiving the right to set aside of the arbitral award

The 19th Civil Chamber of the Court of Cassation ruled that parties who are Turkish or whose domicile or habitual residence are in Turkey cannot waive the right to initiate a lawsuit to set aside an arbitral award.[13] The plaintiff initiated a lawsuit before the 7th Civil Chamber of the Regional Court to set aside an arbitral award. The Regional Court rejected the lawsuit because the parties waived their right to initiate a lawsuit to set aside the arbitral award in their agreement. The plaintiff appealed the decision before the Court of Cassation.

The Court of Cassation stated that as per article 15/A of the IAL, the parties may waive their right to initiate a lawsuit to set aside an arbitral award as long as their domicile or habitual residence is outside of Turkey. In this case, the parties waived their right to initiate a lawsuit to set aside the arbitral award in their agreement. However, the parties are Turkish companies registered with the Turkish Trade Registry, and their domiciles or habitual residences are in Turkey. Therefore, the waiver provision is invalid in accordance with article 15/A of the IAL. Since the provision regarding the waiver of the right to initiate a set-aside lawsuit is invalid, the Regional Court should have reviewed the grounds for setting aside arbitral awards. The Court of Cassation reversed the decision of the Regional Court.

In light of this decision, it should be noted that if the parties are Turkish or their domicile or habitual residence is in Turkey, any agreement regarding waiving the right to initiate a lawsuit to set aside of arbitral award is not valid under Turkish law. This approach is also a reflection of a general principle that prohibits a waiver of a right that has not been born yet.

 

[1] International Arbitration Law No. 4686 of 21 June 2001.

[2] The IAL is applicable to disputes with a foreign element and where the place (seat) of arbitration is Turkey. It is also applicable if the parties agreed to its application or if the arbitral tribunal determines that the arbitral proceedings should be conducted pursuant to the IAL.

[3] Code of Civil Procedure No. 6100 of 12 January 2011.

[4] Law on International Private Law and Procedural Law No. 5718 of 27 November 2007, Articles 60-63.

[5] Constitutional Court, File No. 2018/1, Decision No. 2018/83 of 11 July 2018.

[6] Law No. 805 came into force in 1926 when Turkish citizens could not participate and compete with foreigners in business life and were not chosen for managerial positions due to not knowing foreign languages. Therefore,

Law No. 805 was published to reverse the conditions in favor of Turkish citizens and encourage the use of the Turkish language in business life in the early years of the Republic. Violating Articles 1 and 2 of Law No. 805 result in consequences stipulated in Article 4 of the same law, which states: “Documents and papers that are drafted after this Law becomes effective and are in violation of the above articles will not be taken into consideration for the benefit of companies and enterprises.” However, there are still numerous conflicting Regional Court and Court of Cassation decisions concerning the scope of Article 2 and the meaning of “will not be taken into consideration”. Until the Court of Cassation clarifies this ambiguity, foreign and Turkish parties doing business in Turkey should be cautious and may wish to execute their arbitration agreements as separate contracts in both English and Turkish.

[7] In principle there are three instance courts under Turkish law, the courts of first instance; regional courts; and Courts of Appeal. However, according to Article 439 of the CCP and Article 15 of the IAL, an application to set aside should be initiated directly before the Regional Court, and the Regional Court will act as a court of first instance. There are two instance courts for set aside lawsuits.

[8] Court of Cassation, 15th Civil Chamber, File No. 2019/2474, Decision No. 2019/3640 of 26 September 2019.

[9] Istanbul Regional Court, 15th Civil Chamber, File No. 2019/23, Decision No. 2020/2 of 23 January 2020.

[10] Court of Cassation, 15th Civil Chamber, File No. 2020/1714, Decision No. 2020/2652 of 2 October 2020.

[11] Court of Cassation, 15th Civil Chamber, File No. 2019/3156, Decision No. 2020/2913 of 5 November 2020.

[12] Istanbul Regional Court, 14th Civil Chamber, File No. 2019/2499, Decision No. 2020/248 of 26 February 2020.

[13] Court of Cassation, 15th Civil Chamber, File No. 2019/2927, Decision No. 2019/3987 of 17 October 2019.

Author

Yalin Akmenek is co-leading the Dispute Resolution Practice of Esin Attorney Partnership with several years' experience working on and leading various aspects of substantial disputes. Yalin has extensive experience in disputes with an international element or disputes arising from complex commercial transactions. His practice is mostly focused on commercial and capital markets disputes, with a specific focus on shareholder and M&A disputes, in Turkish courts and also arbitral tribunals. In addition, Yalın has solid experience concerning Turkish clients' disputes outside of Turkey as well as contentious multinational projects.

Author

Demet Kaşarcıoğlu, is a senior associate of the Dispute Resolution group of Esin Attorney Partnership (Istanbul) in cooperation with Baker McKenzie. Her practice focuses on commercial arbitration, disputes arising out of commercial contracts and corporate conflicts, particularly complex M&A transactions, shareholder disputes, as well as construction and infrastructure projects. She represents her clients before arbitral tribunals and local courts regarding enforcement proceedings of foreign arbitral awards. Demet Kaşarcıoğlu can be reached at [email protected] and +90 212 376 64 00.

Author

Ceyda Sıla Çetinkaya is an associate at Esin Attorney Partnership, a member firm of Baker McKenzie where she focuses on dispute resolution. She is a member of the Istanbul Bar Association.