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Legal Alerts

18/05/2020

Court of Cassation Takes Significant Step for Arbitration: Court Sustained an Arbitral Award with Strict Interpretation of Public Policy

Legal Alerts
Dispute Resolution
General

Recent Development

The role of the courts in the development of arbitration proceedings is undeniably crucial. In the case where we represented the defendant, the 15th Civil Chamber of the Court of Cassation, with its decision dated September 26, 2019, under file No. 2019/2474, and decision No. 2019/3640, reversed the annulment of an arbitral award decision given by the Regional Court of Appeals (“Regional Court”) in the capacity of a first instance court. In its reasoning, the Court of Cassation concluded that the failure to conduct an on-site examination and obtain an expert report of the examination, the failure to have an agreement in a foreign language translated into Turkish, and issue a terms of reference do not breach 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. Therefore, the Court of Cassation’s decision is a significant step, especially in terms of the Law No. 805 on Compulsory Use of Turkish in Economic Enterprises (“Law No. 805“).

Dispute between the Parties

The Court of Cassation decision concerned a construction agreement dispute in which the plaintiff requesting the annulment of the arbitral award is the sub-contractor and the defendant is the contractor. Under their agreement, the parties chose Turkish law as the applicable law to the merits of the agreement and agreed to arbitration as a dispute resolution for disputes arising out of the agreement. Within this scope, the dispute would be resolved before an arbitral tribunal consisting of three arbitrators pursuant to the Regulation on Arbitration-Mediation-Expert Arbitrator of the Istanbul Chamber of Commerce Arbitration and Mediation Center (“ITOTAM”).

Consequent to a dispute arising between the parties, the parties resorted to arbitration and the arbitral tribunal rendered an award with a unanimous vote in favor of the defendant. The plaintiff initiated an annulment action before the Regional Court requesting the annulment of the arbitral award.

The Regional Court assessed the request for annulment in the context of public policy and determined the following:

  • A breach of public policy is a ground for an annulment, which the court should consider ex-officio according to the International Arbitration Law no. 4686 (“IAL”).
  • The concept of public policy is interpreted differently in domestic law and international private law.
  • Provisions regarding public policy are established for the benefit of the state and these provisions should be protected from the parties’ will.
  • Public policy must be assessed according to the law applicable to the arbitration.
  • Even though the IAL prohibits revision au fond (i.e., the reassessment of the merits of the case) of the arbitral awards in annulment actions, an assessment of the merits of the case may be necessary while evaluating the concept of public policy.

After its foregoing determinations on public policy, the Regional Court annulled the arbitral award and rendered that the award was against public policy.

The Regional Court’s Grounds for Annulment

The Regional Court stated that the matters that restrict or remove the right of defense might be against public policy in accordance with the procedural law, and annulled the arbitral award based on the following grounds:

  1. The arbitral tribunal did not appoint an expert and conduct an on-site examination: The Regional Court’s reasoning: Under the IAL, the arbitral tribunal has the power to appoint an expert and conduct an on-site examination, and according to the ITOTAM rules, the arbitral tribunal has the obligation to safeguard the parties’ right to be heard. Even though the arbitral tribunal could assess whether the plaintiff’s allegations are rightful by appointing an expert or conducting an on-site examination, rendering an award while there were contradictory expert reports in the case file is a procedural deficiency affecting the merits of the case. As this deficiency is directly connected to the right to a fair trial and the right to be heard, it is also connected to public policy and is a ground for annulment that the courts must take into consideration ex officio.
  2. The agreement signed between parties is in English and the arbitral tribunal did not request a certified translation of the agreement: The Regional Court’s reasoning: The Law No. 805 requires that the documents of transactions between two Turkish parties be made in Turkish. Moreover, a certified translation of the agreement must be submitted to the case file, thereby eliminating any inconsistencies between translations and ensuring that not only the parties but also the arbitral tribunal and the court can read and understand the content of the agreement. Agreements must be translated by a certified translator because it affects the applicable substantive rules. The lack of a certified translation is a procedural deficiency that affects the merits of the case and concerns public policy. Therefore, the arbitral award should be annulled because it breaches public policy.
  3. The arbitral tribunal did not issue terms of reference: The Regional Court’s reasoning: Under article 10 of the IAL, the arbitral tribunal must prepare terms of reference, and failure to do so is against procedure and the law.

The Regional Court stated that the arbitral award is against public policy, the law and procedure, and decided on the annulment of the arbitral award based on the three grounds mentioned above.

The Court of Cassation accepted the defendant’s appeal and reversed the Regional Court’s decision.

The Court of Cassation’s Decision of Reversal

In its reversal decision, the Court of Cassation stated that the definition of public policy is controversial in Turkish law and concluded the following. Neither the IAL nor the other laws define public policy since the nature of its concept does not allow for a general definition. The concept of public policy directly relates to governmental and social structure; hence, as these two terms change, so does the definition of public policy. The Court of Cassation, by referring to the precedents of the Constitutional Court and the Court of Cassation, stated that public policy relies upon concepts such as the fundamental values of Turkish law; common understanding of customs and morals; sense of justice that the laws rely on; society’s level of civilization; and political and economic regime.

According to the Court of Cassation, to define public policy as a ground for the annulment of an arbitral award, it must identify the reasoning behind considering public policy as a ground for the annulment at an arbitral proceeding. Judiciary activities are a part of the state’s sovereignty. However, the state allows judiciary activities to be carried out via arbitration and outside its judiciary bodies. Therefore, the state prevents any rulings arising out of its control that are in conflict with the state’s fundamental principles. In consideration of this purpose, a breach of law does not suffice as a ground for the annulment of an arbitral award due to public policy. In addition, the misapplication or disregard of a provision of law, regardless of whether it is mandatory, is also an insufficient ground for annulment. This breach should also constitute a breach of society’s fundamental values; common understanding of customs and morals; and fundamental values like the fundamental rights and liberties granted under the Constitution.

In consideration of its statements, the Court of Cassation assessed the Regional Court’s annulment decision and reversed it, emphasizing the following:

  • Conducting an on-site examination and obtaining an expert report of the examination, having an agreement in a foreign language translated into Turkish, and issuing a terms of reference are all procedural matters, and the law does not list them among the grounds for annulment. As they are not among the grounds for annulment, the court cannot ex-officio consider them. The merits of the dispute cannot be assessed in an annulment action; otherwise, this would contradict with the legislator’s general objective as well as violate the numerus clauses principle under Article 15 of the IAL.
  • In light of the explanations on public policy, these issues concern the collection of evidence and not public policy. There are also no breaches of the mandatory rules in terms of domestic law.
  • In light of the above, there are no grounds for annulment that can be ex-officio taken into consideration; in other words, there are no grounds for annulment based on a breach of public policy.

The Court of Cassation decided to accept the defendant’s appeal and the reversal of the Regional Court’s decision to annul the arbitral award.

Conclusion

The Court of Cassation’s decision indicated that the concept of public policy as a ground for annulment should be interpreted in a narrow way. Moreover, when the reasoning of the decisions of the Regional Court and the Court of Cassation are taken into consideration, they refer to similar sources and definitions concerning the definition of public policy. However, the fact that the two courts reached different conclusions result from the Court of Cassation’s narrow interpretation of the public policy, wherein it interpreted only the purpose of public policy considering the case at hand. This demonstrates the importance of court practice, especially for the development of arbitration.

One of the most important results of the Court of Cassation’s reversal of the Regional Court’s grounds for annulment is the emphasis that the preparation of terms of reference and the arbitral tribunal’s appointment of experts and conduction of on-site examination are related to procedure. The Court of Cassation stated that these issues do not concern the public policy. The conclusion drawn by the Court of Cassation is a significant step in terms of the Turkish jurisdiction’s stance on arbitration.

Lastly, it must be emphasized that the Court of Cassation concluded that the failure to have an agreement executed in a foreign language translated into Turkish concerns procedure and is not a violation of public policy. The Court of Cassation’s conclusion also supports, although not explicitly mentioned in the decision, the opinion that taking an agreement executed between two Turkish parties in a foreign language into consideration would not violate public policy.  In fact, the Court of Cassation, implicitly did not consider the “execution of the agreement in a foreign language”, which is among the first instance court’s grounds for annulment, as a breach of public policy. This assessment supports the interpretation that the Law No. 805 may not cover public policy.