Turkish Court of Cassation’s Recent Approach to Public Policy in Enforcement and Setting-Aside of Foreign Arbitral Awards
In general terms, public policy is defined as a set of rules and principles ensuring a smooth conduct of public services, a state’s security and safety, and compliance of the relationship between individuals with the principles of peace and ethics[1]. Due to its conceptual nature and vulnerability to a turmoil of different interpretations, violation of public policy appears as one of the most prevalent counter arguments in enforcement and setting-aside proceedings of foreign arbitral awards. The legislation defines neither the concept of public policy nor the criteria on how it should apply.
Until 2012, this obscurity resulted in inconsistent and restrictive court practices in terms of the enforcement of foreign arbitral awards, which inevitably created precedents against the principle of revision au fond from time to time. In 2012, the Turkish Court of Cassation’s General Assembly on the Unification of Judgments rendered a binding unification decision explaining the definition and correct application principles of public policy.
In the referred decision, the Court of Cassation characterized public policy as a set of rules protecting a society’s fundamental structure and main interests, which covers the basic values of Turkish legal system, sense of justice and general politics underlying the Turkish laws, fundamental rights and freedoms under the Turkish Constitution, rules based on the principle of good faith in private law and common principles internationally, ethical principles adopted jointly by civilized societies and legal principles reflecting the understanding of justice, civilization level of the society, political and economic regime, and human rights and freedoms[2]. The decision stressed that the enforcement of foreign awards cannot be rejected just because the governing law was different than Turkish law or contrary to its mandatory provisions, and a dismissal should only be ordered if the legal consequences of the enforcement would breach Turkish public policy.
The unification decision led to a paradigm shift in the arbitration so to speak, and in parallel with the goals to make Istanbul an attraction center for arbitration and with the foundation of Istanbul Arbitration Centre in Türkiye in the following years, a more enforcement-friendly approach with a minimal risk of setting-aside is adopted for foreign awards.
In this article, we are aiming to shed light on the general rules applicable for enforcement and setting-aside cases and analyse the evolution of the matter in light of the court precedents rendered in the last couple of years.
Public Policy Criterion in Enforcement of Foreign Arbitral Awards
International Private and Procedural Law No. 5718 (“IPPL”) and New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards dated 1958 (“New York Convention”) are the two main legislations regulating the enforcement of foreign arbitral awards in Türkiye.
As Türkiye has reciprocity and commercial reservations to the New York Convention, New York Convention only applies to the recognition and enforcement of foreign arbitral awards arising out of legal relationships which are considered as commercial under its national law and rendered in the territory of another contracting State. Where the New York Convention is inapplicable, IPPL shall govern the enforcement of the foreign arbitral award.
Among other criteria, both legislations acknowledge non-compliance with the national public policy as a ground for refusal of the enforcement request.
As a matter of fact, Article V/(2)(b) of New York Convention sets forth that enforcement of an award may be refused, at the request of the party against whom it is invoked, if that party furnishes to prove that the enforcement of the award would be contrary to the public policy of the country where the enforcement is sought.
Likewise, Article 54 of the IPPL stipulates that, in order to be enforced, a foreign arbitral award must not be explicitly against the public policy.
Public Policy Criterion in Set-Aside Actions
International Arbitration Law No. 4686 (“IAL”) applies to arbitration proceedings concerning the disputes (i) bearing a foreign element which are seated in Türkiye, or (ii) where the parties or the arbitrator(s) designated IAL as the governing law.
Article 15 of IAL stipulates that the parties can apply to the Regional Court of Appeal to set aside an arbitral award. The Regional Court of Appeal can decide to set aside the arbitral award if it deems it contrary to the public policy.
Both in enforcement and setting-aside cases, public policy may be raised by the parties or examined ex-officio by the court.
Court of Cassation’s Approach to Public Policy Criterion
In the past, Turkish courts used to have a quite broad interpretation of this criterion. Indeed, even simple contradictions with the mandatory provisions of the local law used to be deemed contrary to the public policy. Yet, over a decade now, the Court of Cassation moved away from this approach.
The recent decisions indicate that the Court of Cassation only rules violation of the public policy on a limited basis on grounds such as the existence of legal standing, res judicata, or right to be heard. Indeed, the Court of Cassation recently allowed even accrual of compound interest, or excessive penalty clauses, which are not allowed under Turkish law, in spite of the objections as to violation of the public policy. That said, there are still certain precedents following the Court of Cassation’s formerly stricter approach. Some examples to the latest precedents are as follows:
- In the decision dated 21.09.2022 and numbered 2022/628 E., 2022/4258 K., 6th Civil Chamber of the Court of Cassation ruled that legal standing concerns public policy, therefore the setting-aside request must be allowed where the arbitral tribunal did not evaluate the legal standing of the defendant in the arbitration proceedings and then determine whether the defendant had legal entity or whether the arbitration clause was signed by proxy. That said, with the decision dated 21.12.2023 and numbered 2023/688 E., 2023/1348 K., the General Assembly of Civil Chambers of the Court of Cassation revoked this decision on grounds that the assessment on legal entity would not be among the rules concerning public policy, so the setting-aside request must be dismissed. The General Assembly also stressed that, the majority of the General Assembly did not agree that holding the company’s representative liable would breach the public policy by violating the Turkish Code of Obligations and Turkish Commercial Code.
- In the decision dated 12.12.2023 and numbered 2023/3007 E., 2023/4212 K., 6th Civil Chamber of the Court of Cassation examined the arguments that (i) an arbitration agreement executed in German with a foreign company would not be valid under the Law No. 805 on Compulsory Usage of Turkish Language among Commercial Entities, (ii) the arbitrators exceeded their authority by violating the contractual settlement negotiations regulated as mandatory before the arbitration, (iii) the arbitrators restricted the submission of certain evidence for the defendant to prove the claims and (iv) the expert issued the report underlying the award has never seen the disputed facility – and yet no on-site examination was deemed necessary. In the referred decision, the Court of Cassation found no violation of the public policy.
- In the decision dated 8.11.2023 and numbered 2022/660 E., 2023/1066 K., the General Assembly of Civil Chambers of the Court of Cassation examined whether a contradiction between a foreign award subject to enforcement request and a finalized Turkish criminal court decision would qualify as a violation of the Turkish public policy or not. The Court of Cassation stressed that a contradiction between the decisions may be among the circumstances breaching the public policy beyond doubt, as the enforcement of the same would harm the consistency and harmony in the legal system. On the other hand, as per the precedent, the fact that a foreign award and a criminal court decision rendered by Turkish courts on the same incident subject to the arbitral award contains different judgments would not necessarily qualify as violation of the public policy in every case. In the pending case, as the Turkish criminal court’s finalized acquittal decision construed the facts subject to the arbitral award as a civil dispute and contained no determinations about that, and the arbitral tribunal ruled on the defendant’s contractual liability, the Court of Cassation found no violations of the public policy. In the decision dated 09.05.2023 and numbered 2023/1965 E., 2023/1732 , in a case concerning the enforcement request of a foreign award on insolvency, 6th Civil Chamber of the Court of Cassation ruled that only merchants and those qualified as merchants under the Turkish Commercial Code as well as those who are regulated to be subject to insolvency under lex specialis can be subject to insolvency due to public policy, and the enforcement request must therefore be rejected.
- In the decision dated 20.06.2022 and numbered 2021/3492 E., 2022/5025 , 11th Civil Chamber of the Court of Cassation decided that examining the merits of the arbitral award in respect of whether the penalty clause is excessive or not on grounds of public policy would be in breach of the principle of revision au fond.
- In the decision dated 16.06.2022 and numbered 2020/7985 E., 2022/4932 K., 11th Civil Chamber of the Court of Cassation allowed enforcement of an arbitral award ruling on compound interest concluding that it is not contrary to the public policy.
- In the decision dated 15.06.2022 and numbered 2022/2105 E., 2022/4906 K., 11th Civil Chamber of the Court of Cassation evaluated a dispute where the same facts were examined under two different arbitration proceedings by different arbitrators which reached partially different conclusions. The Court of Cassation ruled that the latter arbitral award must be set aside due to violation of the public policy because the arbitrator of the latter case must have evaluated whether the decision in the first case was finalized, and then rendered an award based on the impacts of res judicata.
- In the decision dated 10.05.2022 and numbered 2022/138 E., 2022/3708 K., 11th Civil Chamber of the Court of Cassation stated that the arbitral tribunal had discretion to conduct an expert examination or not, and not conducting an expert examination would not necessarily breach the right to defence or right to be heard, and hence the arbitral award was not contrary to the public policy.
- In the decision dated 27.04.2022 and numbered 2020/8088 E., 2022/3493 , 11th Civil Chamber of the Court of Cassation stressed that establishment of the arbitral tribunal and conduct of the proceedings relate to the principle of equality of the parties and the legal right to be heard, which concern public policy. Access to judiciary and ensuring that all parties are granted with the right to be heard are the most fundamental principles of arbitration. In this regard, in a case where the letter on appointment of arbitrators was served on a lawyer representing the plaintiff before Cyprus courts - who later filed statements that they would not participate in the appointment of arbitrators but not filed a duly executed Power of Attorney - and where the arbitrators failed to evaluate whether the lawyer was authorized or not and yet made all services to an unauthorized lawyer, the Court of Cassation ruled that the letter on appointment of arbitrators and the documents concerning the arbitration proceedings must have been served on the principal first, and the services must have been on the attorney once he provides a duly executed Power of Attorney, thus the proceedings conducted against this procedure was in breach of the public policy in scope of the right to be legally heard.
- In the decision dated 03.2022 and numbered 2022/6087 E., 2023/1475 K., 11th Civil Chamber of the Court of Cassation ruled that enforcement of foreign decisions which contradict with the decisions rendered by several Turkish courts on the same subject as result of mandatory provisions will be explicitly contrary to the public policy, and therefore the enforcement request must be rejected. The Court of Cassation stressed that the foreign court allowed the receivable claims on grounds that there was not a valid partnership in the pending case, but Turkish courts order that “there is no room to render a decision” in these kinds of cases by addressing the explicit legal provision regulating on how to conclude these cases. Therefore, the foreign court’s judgment would be in contradiction with the settled decisions of Turkish courts.
Overall, for some time, both Turkish academics and the court precedents have already acknowledged the fact that the public policy criterion must be applied with a narrow interpretation. Certain Turkish academics argued that public policy must be interpreted even more narrowly in terms of international private law compared to local law[3]. Given the Court of Cassation’s formerly stricter approach and based on the most recent decisions, the Court of Cassation appears to have drawn closer to this idea by narrowing down the scope of public policy. This flexible approach is more consistent with the recent arbitration-friendly trends and gives a certain legal confidence in terms of the enforceability of foreign arbitral awards in Türkiye. However, the decisions examined above indicate that, as Turkish law attributes a great importance to public policy, the courts may still act hesitant from time to time, especially in evaluating a foreign award in scope of mandatory provisions of Turkish law. In this regard, a more unified court practice is crucial to establish legal clarity and certainty in enforcement or setting-aside cases of foreign arbitral awards.
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