Turkish Law Blog

Selected Issues Related to Subject-Matter Arbitrability According to Turkish Law

Emir Bayramoğlu Emir Bayramoğlu/ Forensis Law Firm
23 October, 2019

A) Introduction

Notwithstanding that the principle of party autonomy constitutes the essence of arbitration; states are entitled to reserve their right to settling disputes. One of the most significant limitations to party autonomy is based on subject-matter[1]. Whether a matter is arbitrable is being determined in accordance with the relevant state’s public order and political and economic policies of that country[2]. In general, subject-matter arbitrability approaches can be classified under three main groups[3]:

  • Some countries regard a dispute arbitrable if the dispute is derived from an economic interest[4]. This concept brings out a liberal criterion that makes subject-matter arbitrability independent from restrictive regulations of the internal law[5]. However, despite it eliminates uncertainty to a large extent, different meanings attributed to economic relations also arise some disputes.
  • The second approach deems a matter arbitrable if it is at parties’ free disposal of their rights. If the parties are not allowed to freely settle a dispute or to decide on its fate, such subject-matter is regarded as non-arbitrable[6]. This approach is still being adopted by important economies of the world, either only for national arbitration[7] or for both national and international arbitration[8].
  • Some countries describe the subject-matter arbitrability very broad or vague terms or providing lists of issues pertaining to the disputes which might be resolved by arbitration or not. In some countries such as the UK and the USA, there is even no regulation about subject-matter arbitrability and the gap is filled by court decisions.

Following is going to provide a general overview of the Turkish legal framework as to subject-matter arbitrability.

B) Regulations and Principles Governing Subject-Matter Arbitrability in Turkish Law

Article 408 of the Turkish Code of Civil Procedure (“HMK”) and Article 1/4 of the International Arbitration Act (“MTK”) are the main provisions govern the subject-matter arbitrability in terms of the local and international arbitration, respectively. Both provisions stipulate that a matter is arbitrable only if the matter is at parties’ free disposal of their rights and if it is not about rights in rem over the immovable property which are located in Turkey. Therefore, it would not be wrong to infer that issues related to property, easement, usufruct, and lien cannot be resolved via arbitration. Moreover, in the past, the Turkish Court of Cassation, rendered some decisions regarding to immovable rental value declaratory actions and evacuation cases, stating that these are non-arbitrable. Conversely, in its one decision, the Turkish Court of Cassation ruled that “the parties may freely decide on the restitution of an ownership share and they may make the required amendments. These kinds of transactions are considered to be dependent on the parties’ wishes. There is no illegal aspect to the resolution of the dispute by arbitrators. It is not related to public policy.”[9].

Apart from these vague criteria, mandatory rules of Turkish law, public policy rules[10] and compulsory jurisdiction rules for Turkish courts also restrict arbitration eligibility, as per the Turkish Court of Cassation’s decisions[11]. In addition, Turkey is a party to 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“NYC”)[12] and European Convention on International Commercial Arbitration of 1961 Done at Geneva[13]. Thus, relevant provisions of these conventions apply in case of claims related to recognition and enforcement of foreign arbitral awards. As a consequence of provisions of international conventions and Turkish International Private and Civil Procedure Law (“MÖHUK”), the absence of subject-matter arbitrability has a preventive function when it comes to the enforcement of the foreign arbitral awards[14].

Last but not least, well established international arbitration principle, the kompetenz-kompetenz principle which confers arbitral tribunals to the ability of rule on the question of whether it has jurisdiction before intervention by national courts is recognized by Article 7/H of the MÖHUK and the Turkish Court of Cassation. Hence, “It should be taken into consideration that the authority to decide on whether an arbitration clause incorporated into a contract is valid or not belongs to competent arbitral tribunal.[15]

1) Interpretation of the Free Disposal Criterion

The “free disposal” criterion has two different dimensions: Procedural and substantive.

According to Turkish procedural law, free will exists if the parties to a dispute are able to compromise or waive their claims before the courts. Moreover, parties may only recourse to arbitration if the dispute falls in the scope of competence of the civil courts. In this sense, disputes are exclusively being resolved by independent autonomous authorities[16] or criminal matters are not arbitrable. Notwithstanding that, one should forget that the scope of the “private law” is dynamic. For example, the amendment to the Turkish Constitution in 1999, changed the mentality towards concession contracts which were used to be considered as administrative contracts and the related disputes were being resolved by the administrative courts. At the present time, concession contracts are also arbitrable under the MÖHUK.

Other dimension of the subject-matter arbitrability is substantive. It means that parties have to have discretion over the right which is subject to litigation. As per this dimension, disputes arising from contracts, compensation claims, and ownership claims shall fulfill the arbitrability criteria. In contrast with that, disputes related to the law of persons, family law, criminal law, enforcement, and bankruptcy law[17] and disputes that are going to change the legal situation of third parties[18] do not fall within the scope of arbitration. Furthermore, the Turkish Court of Cassation rules in its different decisions that the disputes pertaining to the determination of immovable lease payments, tax disputes, evacuation of property and labor law disputes (afterward some exceptions are provided by law) are non-arbitrable.[19].

However, subject-matter arbitrability is not always clear and there are some grey areas such as competition law, corporate law, and matters related to the protection of weaker parties (such as consumer law[20], labor law). The following will address some of them.

C) Crisis Areas in Subject-Matter Arbitrability

1) Competition Law

Notwithstanding it is commonly acknowledged that disputes arising from competition law can be resolved through arbitration efficiently, approaches towards issues such as identifying the competent authority for determining the arbitrability, determining the limits of court intervention in arbitration proceedings and the limits of judicial review on arbitral awards and specifying the scope of tribunals’ obligation to apply national or supranational competition rules differ jurisdiction to jurisdiction[21].  Furthermore, an only certain groups of competition law disputes might be subject to arbitration, since mostly, the parties cannot foresee such an event and conclude an arbitration agreement before the arise of a certain event. For instance, it would not be very probable to see an arbitration agreement between the members of a cartel or a monopol enterprise and their competitors, which would entitle competitors to recourse arbitration to claim compensation damages arised from the actions of the cartel or monopol[22].

In Turkish law, there are no court decisions explicitly allow or prohibit arbitration of competition law disputes. In our opinion, competition law disputes must be divided into two different groups. Law on the Protection of Competition numbered 4054 (“RK”) assigns two competent authorities: the Turkish Competition Authority (“TCA”) and courts. As a general principle, when TCA has exclusive power over an issue, the issue would be deemed non-arbitrable[23]. On the other hand, disputes related to civil law consequences of unfair competition should be regarded arbitrable. If we set the compulsory jurisdiction obstacle aside, there is no other concrete consideration that prevents arbitrability of competition law disputes. European states have similar legislations with Turkey and considerations such as public policy and mandatory rules do not constitute a problem for the arbitrability. However, it should not be forgotten that the recognition and enforcement of an arbitral award is a different story. If the objectives of the competition law are really jeopardized, the court would refuse the enforcement request[24]. All in all, at the current state of Turkish law, EU case law would provide guidance for the court as well as the Second Look Doctrine[25].

2) Corporate Law

Turkish corporate law is under the influence of the German and Swiss laws; however as it was previously mentioned, the criteria are a bit different. In principle, corporate law matters fulfill the free disposal criterion. Nonetheless, there are some restrictions regarding mandatory rules and compulsory jurisdiction of the state courts. Moreover, incorporating arbitration clauses into the company’s article of association (or M&A agreements) and rendering them binding on all company stakeholders and organs is a problematic issue.

In Turkish law, article of association (AoA) provisions that can be subject to official registration and announcement are provided with numerous clauses principle. The arbitration clause is not included in that list and therefore it is disputable that whether an arbitration clause incorporated into the AoA would be regarded valid. Even if it is regarded valid, it is also not clear whether it would be binding all present and past stakeholders or the binding effect only comes into question for the signatory parties. When it comes to the M&A agreements, Share purchase agreements and shareholders’ agreement are the most fundamental ones. However, it is not easy to conduct efficient arbitration proceedings for the disputes arising from these contracts. Not only the decision would be binding for only signatory parties, but also there is a risk of parallel proceedings and contradictory decisions.

Last but not least, parallel proceedings and contradictory judgments are always a threat.  As covering all these topics would go beyond the scope of this paper, we are only going to give a roadmap and provide some examples of the Turkish Court of Cassation’s decisions.

In order to assess whether a certain corporate law matter is arbitrable, a 3 step analysis is recommended:

1) Is the subject-matter arbitrable?

2) Is the arbitration clause valid?

3) Is the clause binding on all relevant parties in terms of the practical enforcement considerations?

According to the Turkish Court of Cassation:

-  Shareholders’ case with a registry request to the stock ledger against the company is arbitrable[26].

- With respect to the signatory directors, the compensation case filed by a limited liability company’s shareholder due to company loss is arbitrable[27].

- According to a highly criticized decision, company general assembly cancellation cases are not arbitrable[28].

- Cases with a request for dissolution of a company also regarded as non-arbitrable[29].

3) Labour Law

Even though it is being noticed that both Turkish doctrine and courts have a tendency to expand the scope of subject-matter arbitrability gradually, the public policy stays as a significant deterrent in front of arbitration and especially shows itself along with the objective of protection of the weaker parties. Public policy is not a term described in Turkish legislation. However, the General Assembly on the Unification on the Judgments defined the term as follows: “The entirety of the rules that protect the fundamental structure and interests of the society.” [30]

In this sense, considering the employee as the weaker party of a labor relationship, the Turkish Court of Cassation consistently rules that labor law disputes are not arbitrable[31]. The underlying concern is the imbalances between the economic and bargaining power of the employer and employee which might cause arbitration proceedings to operate in favor of the employer and mandatory provisions might be ignored[32].  In other words, since the control over the arbitral awards is minimal, courts worry that the employer might escape from the application of mandatory rules by the medium of arbitration and encroach on the employee’s rights. However, this fully restrictive approach has been commonly criticized recently. For instance, it is not easy to justify a dispute rendering non-arbitrable which arises between an educated and wealthy chief executive and his company, under the rationale of protection of the weaker parties.

In addition, one should note that 2017 amendment of Article 20 of the Labour Code numbered 4857 enables arbitration of the labor law disputes, limited with the subject-matters of the termination of the employment contract and the consequences of the termination of the employment contract, such as severance payment, payment in lieu of notice, etc.

D) Conclusion

In order to realize projects such as Istanbul Arbitration Center (ISTAC) and Istanbul Finance Center, Turkey has made a significant amount of investment recently; and has the ambition to increase its portion in international trade while becoming a regional arbitration hub. Therefore, Turkey should revise its legislation and adopt a more liberal approach. Our suggestions are as follows:

  • As the Swiss example, all disputes derived from economic interest must be regarded arbitrable.
  • If a dispute carries an element of foreignness, instead of the local public policy, courts should take the “international public policy” into consideration.
  • When it comes to the effect of the compulsory jurisdiction of state courts, teleological interpretation is a must. The judge must evaluate whether a competence rule was enacted with the only intent of distribution of roles between state courts or if there is an intention to prevent arbitrability.

[1] This criterion is also being called “objective arbitrability” in the literature.

[2] Erdem, Ercüment, Tahkim Anlaşması, Prof. Dr. Hamdi Yasaman’a Armağan, Istanbul 2017, p. 187.

[3] Huysal, Burak, Milletlerarası Ticari Tahkimde Tahkime Elverişlilik, Istanbul 2010, p. 2.

[4] Switzerland is the pioneer of this approach. Swiss Federal Statute on Private International Law, Article 177(1): “Any dispute of financial interest may be subject of an arbitration”.

[5] Lew, J.D.M. / Mistelis, L.A. / Kröll, S. M., Comparative International Commercial Law, Hague, London, New York 2010, p. 194.

[6] CMS Guide to Arbitration – Turkey, 2012, available at: https://eguides.cmslegal.com/pdf/arbitration.pdf (last visited: 03.02.2019), p. 927.

[7] Germany, Austria, Switzerland etc.

[8] Turkey, Sweden Belgium etc.

[9] 15th Civil Chamber of the Turkish Court of Cassation- The decision dated 31.05.1979 and numbered 1979/1195 E. 1979/1330 K. Akıncı, Ziya, Arbitration Law of Turkey: Practice and Procedure, 2011, p. 41.

[10]On the other hand, parties to an agreement may choose to resolve the disputes not subject to public policy, and which are subject to their own will, through arbitration.” 11th Civil Chamber of the Turkish Court of Cassation – The decision dated 12.04.2005 and numbered 2004/6686 E. 2005/3600 K.

[11]  Huysal, Burak, Milletlerarası Ticari Tahkimde Tahkime Elverişlilik, Istanbul 2010, p. 487.

[12] Full text is available at: https://www.uncitral.org/pdf/english/texts/arbitration/NY-conv/New-York-Convention-E.pdf (last visited: 10.02.2019).

[13] Full text is available at: http://www.sloarbitration.eu/Portals/0/Arbitrazno-pravo/Evropska-konvencija-o-mednarodni-trgovinski-arbitrazi-iz-leta-1961.pdf (last visited: 10.02.2019).

[14] Pursuant to the Article 15/A of the MÖHUK, an arbitral award may be set aside due ton on-arbitrability of the dispute. Ekşi, Nuray, Yargıtay Kararları Işığında ICC Hakem Kararlarının Türkiye’de Tanınması ve Tenfizi, Ankara Barosu Dergisi, 67-1,  Winter 2009, pp. 54-74, p. 64.

[15]  15th Civil Chamber of the Turkish Court of Cassation- The decision dated 01.07.2014 and numbered 2014/3330 E. 2014/4607 K. See also: 15th Civil Chamber of the Turkish Court of Cassation- The decision dated 27.06.2007 and numbered 2007/2145 E. 2007/4389 K.

[16] Such as Competition Authority, Energy Market Regulatory Authority etc.

[17]Bankruptcy cases are non-arbitrable, since they are not subject to the free will of two parties.”  23rd Civil Chamber of the Turkish Court of Cassation – The decision dated 21.04.2014 and numbered 2013/9183 E. 2014/3124 K.

[18]Especially, this is an important benchmark for arbitrability of intellectual property law disputes. In principle, IP disputes are arbitrable in Turkish law. Yet, decisions will have a binding effect only on the parties of to the arbitration agreement.

[19] Erdem, Ercüment, Relationship between Arbitrability and Public Policy in Light of the Decisions of the Court of Cassation, January 2017, available at: http://www.erdem-erdem.av.tr/publications/newsletter/relationship-between-arbitrability-and-public-policy-in-light-of-the-decisions-of-the-court-of-cassation/ (last visited: 10.02.2019).

[20] In Turkish law, consumer law is a sui generis example in terms arbitrability. For disputes does not exceed a certain threshold which is updated every year by a comminique, arbitration is compulsory. As per the Consumer Protection Law numbered 28835, consumer arbitration tribunals were established at sub-governorship and governorships, all around Turkey. A tribunal consist of 5 persons, however only one of them is a jurist.

[21] Weigand, Frank-Bernd / Baumann, Antje: “Introduction”, Practitioner’s Handbook on International Commercial Arbitration (Weigand, Frank-Bernd, Ed.), Oxford University Press, Oxford 2010, pp. 47-48.

[22] Bolatoğlu, Hilmi, Rekabet Hukuku Uyuşmazlıklarının Tahkime Elverişliliğine İlişkin Hukuki Çerçeve, Hacettepe Hukuk Fakültesi Dergisi , 7(2) 2017, 305-332, p. 321.

[23] For example, the TCA enjoys exclusive power for implementation of administrative fines.

[24] OECD, Arbitration and Competition, related to a hearing on Arbitration and Competition, Working Party No.3 Meeting of 26 October 2010. Available at: http://www.oecd.org/competition/abuse/49294392.pdf (last visited: 17.02.2019).

[25] Erdem&Erdem Law Office, Arbitrability of the Competition Law Disputes, November 2015, available at: http://www.erdem-erdem.av.tr/publications/law-post/arbitrability-of-the-competition-law-disputes/ (last visited: 17.02.2019).

[26] 11th Civil Chamber of the Turkish Court of Cassation – The decision dated 07.04.1983 and numbered 1983/1595 E. 1983/1780 K.

[27] 11th Civil Chamber of the Turkish Court of Cassation – The decision dated 15.02.2010 and numbered 2008/9429 E. 2010/1648 K.

[28] The court had 3 reasons for such decision. First, the court that these cases are not at parties free disposal. Second, exclusive jurisdiction of the commercial courts excludes arbitration. And lastly, consolidation of the cases would not comply with arbitration. 11th Civil Chamber of the Turkish Court of Cassation – The decision dated 05.12.2012 and numbered 2011/13485 E. 2012/19915 K.

[29] 11th Civil Chamber of the Turkish Court of Cassation – The decision dated 09.04.2014 and numbered 2014/141 E. 2014/6951 K.

[30] The Board of The Unification of Case Laws of The Cassation decision no: E. 2010/1 K. 2012/1 T. 10.2.2012. Moreover, importantly, the General Assembly ruled that “The cases which would constitute as a violation of the Turkish public order will often be considered in the event of an explicit violation of a compulsory legal rule. However, it is not possible to say that in the event of violation of every compulsory legal rule, the Turkish public order is violated.”   

[31] Akıncı, Ziya, Arbitration Law of Turkey: Practice and Procedure, 2011, pp. 39-40.

[32] Huysal, Burak, Milletlerarası Ticari Tahkimde Tahkime Elverişlilik, Istanbul 2010, p. 205.

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