Global Development

Introduction

The 15th Civil Chamber of the Court of Cassation (‘Court of Cassation’), with its 26 September 2019 decision no. 2019/3640 and file no. 2019/2474, advanced the relatively arbitration-friendly transformation of Turkish jurisprudence by reversing a decision of the Regional Court of Appeal (‘Regional Court’) that had set aside an arbitral award.

Background

The Court of Cassation’s decision concerns a construction agreement wherein the plaintiff, a Turkish company, requested the setting aside of an arbitral award issued by the Regional Court (acting as the first instance court) in favour of the defendant, another Turkish company. The parties had chosen Turkish law as the applicable law and agreed to arbitration under the Istanbul Chamber of Commerce Arbitration and Mediation Center (ITOTAM) Rules of Arbitration (ITOTAM Rules). The place of arbitration was Istanbul and the arbitral proceedings were conducted in Turkish. The defendant was a joint stock company established in Turkey and was a part of international conglomerate, and therefore the arbitral tribunal acknowledged that the foreign element criterion under the Turkish International Arbitration Law No. 4686 (TIAL)¹ was satisfied.

Regional Court’s (subsequently reversed) Decision

The Regional Court wrongly decided to set aside the arbitral award by stating that the following issues were contrary to public policy, the law and procedure:

• not attaining an expert report and not conducting an on-site examination;
• not commissioning the translation of the underlying agreement into Turkish through a sworn translator; and
• not preparing the terms of reference in the arbitration proceedings.

Not Attaining an Expert Report or Conducting an On-Site Examination

The plaintiff alleged that the arbitral tribunal’s failure to appoint experts or conduct an on-site examination were a violation of its right to be heard, and that the award should be set aside accordingly. In its decision, the Regional Court stated that the arbitral tribunal could have assessed the plaintiff’s claims by appointing an expert and also by conducting an on-site examination. Yet, as the arbitral tribunal did not do these, the Regional Court, regardless of assessing whether the arbitral tribunal was required to do so, decided that this was a deficiency that would constitute a violation of Turkish public policy.

However, what the Regional Court did not take into account was that the concept of public policy and the way in which the arbitral tribunal had exercised its discretion in procedural issues are entirely two different concepts. If the arbitral tribunal is not satisfied with the issues in question, it may appoint one or more experts for discovery or examination after consulting parties based on its discretion and power on conduct of arbitration in accordance with the ITOTAM Rules. Consequently, if the arbitral tribunal is convinced by the evidence/pleadings submitted and thus did not find it necessary to appoint experts, as was in the said arbitration, setting aside an arbitral award for not attaining an expert report or conducting an on-site examination is certainly extravagating the situation in an unjustified way.

Not Commissioning the Translation of the Agreement via a Sworn Translator

A related concept that was discussed was the use of Turkish language in the agreement between the parties. The Regional Court stated that not commissioning the translation of the agreement into Turkish was contrary to the public policy based on the ground that the proceedings require the translation of the agreement into Turkish to comply with the Law No. 805 on the Mandatory Use of Turkish in Economic Enterprises (‘Law No. 805’) which provides (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; and (ii) foreign companies and enterprises to use the Turkish language in transactions, correspondence and contact with Turkish companies and persons, and to disclose documents and company books to Turkish government bodies and officials in Turkish. The Regional Court further stated that the agreement should have been translated by a sworn translator, as this was the only way to eliminate any discrepancies between several translations, and concluded that this was a procedural deficiency that might have affected the substance of the case in regards to public policy that needs to be taken into consideration ex officio.

Unfortunately, numerous conflicting Regional Court and Court of Cassation decisions concerns the Law No. 805. In fact, the Law No. 805 came into force in 1926 when Turkish citizens could not participate and compete with foreigners in the business life and had managerial positions due to not knowing foreign language. Consequently, as it is mentioned in the reasoning, the Law No. 805 was published to reverse the conditions in favour of Turkish citizens and encourage the use of Turkish language in business life in the early years of the Republic. Comparing today's Turkey with 1926's Turkey as if the conditions are same and interpreting and applying the law in such a strict way will exceed the purpose of the law determined in 1926 and will be contrary to the today's needs since the Turkish citizens do not need the same protection of law. Indeed, the law does not serve its purpose after a centennial lifetime. In addition, and in any event, this issue does not relate to Turkish public policy and the approach that all agreements should be signed in Turkish or translated into Turkish are unacceptable under today's conditions.

If there was a discrepancy between the parties and the arbitral tribunal’s understanding of the translation, the arbitral tribunal could have asked the parties to provide a sworn translation. Likewise, the parties could have raised this issue during the arbitral proceedings, which they did not. However, the Regional Court concluded otherwise without assessing the parties' arguments, the impact of the parties and the tribunal being able to understand English and the fact that the parties actually submitted Turkish version of the agreement they translated by their lawyers (without having it translated by a sworn translator) during the arbitration proceedings in its decision and set aside the award. We believe this interpretation of the Regional Court exceeds the purpose of the Law No. 805 itself, and in any event not having the agreement translated by a sworn translator should not be deemed as contrary to public policy and there were no grounds to set aside an award under those circumstances.

Not Preparing the Terms of Reference

One of the arguments the plaintiff raised was that the arbitral tribunal did not prepare the terms of reference in the arbitration proceedings and the Regional Court concluded that failure to prepare the terms of reference is contrary to public policy, procedure and the law.

ITOTAM Rules do not foresee execution of terms of reference. In addition, the TIAL grants parties the freedom to have terms of reference. Since both ITOTAM Rules and the TIAL do not require parties to execute terms of reference mandatorily, the parties can agree not to have a terms of reference, and thus not having a terms of reference cannot be related to public policy. Consequently, if the place of arbitration is in Turkey but the parties choose a set of rules other than the TIAL to be applicable to the arbitration proceedings, and if these rules do not require the drafting of the terms of reference, there is no need for it to be drafted.

By resorting to the ITOTAM Rules, the parties exercised their freedom to not have a terms of reference. The Regional Court nevertheless concluded that such a decision goes against procedure and the law, and decided to set aside the arbitral award based on the grounds mentioned above. Needless to say, this approach threatens all arbitral proceedings conducted in line with the ITOTAM Rules where no terms of reference were prepared or may cause parties to ask the arbitral tribunal to unnecessarily prepare terms of reference.

Court of Cassation’s Decision and Its Approach to Public Policy

The Court of Cassation accepted the defendant’s appeal and reversed the Regional Court’s decision by adopting a much more reasonable and correct public policy approach.

Importantly, the Court of Cassation explained the necessity of public policy review, as well as the difference between arbitration and court proceedings from a state’s sovereignty point of view. It referred to Jean Bodin who defined the concept of sovereignty as an unlimited, absolute, exclusive, indivisible and non-transferable power, and declared that Turkey exercises its sovereignty through the authorized organs. Although the judicial power stems from such sovereign right and the state exercises such right through the courts, the state also permits exercise of judicial activity by arbitration. As a result of such permission, public policy review by the courts aims to make sure that arbitral awards are not contrary to the fundamental rules of the nation, which constitute its raison d'être, fundamental social structure, general morals and customs, fundamental rights and freedoms of individuals and the fundamental international rights and conventions that safeguard the foregoing.

When considering the elements of public policy and the theory behind it to be a ground for set aside lawsuits in limited circumstances, the Court of Cassation decided that it is insufficient to set aside an award solely due to the (mis)application of a legal provision (if any, at all). Rather, this violation should also be contrary to the core values of society, general morals and precedents/practice, as well as core values such as the fundamental rights and freedoms protected in the Turkish Constitution. Subsequently, for a decision to be considered contrary to public policy, the decision must injure social conscience, which then constitutes a social disturbance.

After discussing the reason for taking public policy into consideration, the Court of Cassation clarified the method to interpret such a broad term. There is no definition of the notion of public policy under Turkish legislation. In addition, it is difficult to create a definition of "public policy" which would be acceptable by everyone and whose validity could be maintained at all times. However, it is possible to state that there is a difference in the meaning of public policy between international private law and domestic law. According to the Court of Cassation, it is important to establish (i) why the contradiction to public policy is considered a ground for setting aside the arbitral award; (ii) the purpose in setting it aside; and (iii) what interests are safeguarded by setting aside. Indeed, the evaluation of public policy as a ground for set aside would only be meaningful after analysing these elements in a specific and limited way.

The Court of Cassation concluded that the Regional Court’s reasons for setting aside were not enumerated among the grounds for setting aside an award under the TIAL and these reasons cannot be taken into account ex officio, as there is no violation of public policy. Furthermore, the Court of Cassation explained that considering these issues alleged as grounds for setting aside would result in a review of the arbitral awards on the merits in a setting aside lawsuit, and this would be contrary to the numerus clausus principle article 15² of the TIAL, as well as the general purpose of the legislator. In light of the foregoing issues, the Court of Cassation dismissed the set aside lawsuit, and reversed the Regional Court's decision in favour of the defendant.

Consequently, the Court of Cassation held that (i) not attaining an expert report and not conducting an on-site examination; (ii) not commissioning the translation of the underlying agreement into Turkish through a sworn translator; and (iii) not preparing the terms of reference in the arbitral proceedings, are all related procedural issues and none of these issues are listed as grounds for a set aside lawsuit under article 15 of the TIAL. Furthermore and in any event, none of these issues are related to public policy and therefore cannot be taken into account ex officio. Consequently, the Court of Cassation reversed the Regional Court's decision.

Conclusion

The Regional Court’s decision and reasoning were rather unexpected and discouraging for international arbitration practitioners in Turkey. It hinders not only all efforts to develop and promote arbitration but it is also not in line with the public policy interpretation of Turkish legislation. The Court of Cassation's decision was well received because it defined public policy in a reasonable way and differentiated the issues related to procedure and has also confirmed that "public policy" related interventions can only be made in very limited circumstances. Since the Law No. 805 has become a bleeding wound for arbitration practitioners in Turkey, the Court of Cassation also relieved practitioners by not considering the ‘execution of the agreement in a foreign language’, as a breach of public policy. This assessment further supports the dominant interpretation that the Law No. 805 should not concern public policy. The Court of Cassation’s standing in this case is important for the advancement of the arbitration practice in Turkey as the strict interpretation of public policy and the assessment of the grounds for setting aside an award can narrow the limits of the courts’ broad interpretation of public policy and highlighted the prohibition of the revision on the substance of the award.

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