Ercüment Erdem Prof. Dr. H. Ercument Erdem

Relationship between Arbitrability and Public Policy in Light of the Decisions of the Court of Cassation

January 2017

The issue of arbitrability defines whether a dispute may be resolved through arbitration by the free will of the parties, instead of through the state courts. The disputes that are held to be arbitrable are set forth under the Code of Civil Procedure numbered 6100 (“CCP”), with regard to domestic arbitration, and in the International Arbitration Act numbered 4686 (“IAA”), with regard to disputes having a foreign element.

In this newsletter article, we analyze the relationship between arbitrability and public policy in light of the decisions of the Court of Cassation.

In General

The issue of arbitrability manifests itself as the most important condition for validity pertaining to the substance of the arbitration agreement[i]. The issue of whether a dispute is arbitrable is related to the applicable law. As a result, a dispute that is held to be non-arbitrable in a given jurisdiction may be resolved through arbitration in another jurisdiction.

As the issue of arbitrability is also grounds to refuse recognition and enforcement of arbitral awards, the recognition and enforcement of an arbitral award given on a non-arbitrable matter would not be possible. As a result, the arbitrability of the dispute that the parties aim to resolve through arbitration is of great importance.

In terms of domestic arbitration, pursuant to Article 408 of the CCP, disputes pertaining to rights in rem on immovable property, or disputes arising out of issues that do not depend on the will of the parties are not arbitrable. In terms of international arbitration, arbitrability is regulated under Article 1/4 of the IAA. This article is in parallel with Article 408 of the CCP, and sets forth that the IAA shall not be applied to those disputes pertaining to rights in rem on immovable property located in Turkey, and to the disputes that are not subject to the will of the parties. As both of these provisions set forth that the disputes pertaining to rights in rem on immovable property are not arbitrable, the disputes that relate to issues such as property, usufruct, easement and liens may not be resolved through arbitration under Turkish law. The disputes that are not subject to the will of the parties cover issues upon which the parties do not have freedom of contract. These issues are either regulated through mandatory rules, or are not subject to the will of the parties, based on their characteristics. For instance, criminal law issues and disputes on enforcement and bankruptcy law are held to be non-arbitrable. In addition, the Court of Cassation opines that the disputes pertaining to determination of lease payments, evacuation of property, tax disputes, and labor law disputes are non-arbitrable[ii].

The issue of arbitrability is analyzed under two different categories, namely, procedural law and substantive law[iii]. The arbitrability pertaining to substantial law provides that the parties may dispose of the subject matter through their free will. Accordingly, if procedures, such as settlement, acceptance and waiver are possible concerning the subject matter, the dispute is arbitrable in terms of procedural law. A dispute is arbitrable in terms of substantive law in the event that the parties to the dispute may dispose of the right that is subject to dispute.

The Relationship between Arbitrability and Public Policy

Whether a dispute is arbitrable or not is determined in accordance with public policy and the political and economic policies of the relevant country[iv]. Accordingly, there is a close link between arbitrability and public policy. On the other hand, arbitrability is not the same issue as public policy, and conducting a review of public policy during the review pertaining to arbitrability is insufficient.

Indeed, the necessity of analyzing these two issues, separately, manifests itself in terms of recognition and enforcement proceedings. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958), (“New York Convention”) regulates these two issues under different provisions. Article V(2) of the New York Convention distinguishes between the issue of arbitrability and public policy. Subsection (a) of the relevant article sets forth that recognition and enforcement of an arbitral award may be refused if the subject matter of the difference is not capable of settlement by arbitration under the law of that country. On the other hand, the subsection (b) sets forth that the enforcement may be refused if it would be contrary to the public policy of that country.

On the other hand, as generally accepted by the Court of Cassation, as the issues pertaining to public policy may not be subject to the free disposal of the parties, it would not be possible to conclude an arbitration agreement on issues pertaining to public policy[v]. Accordingly, the refusal of arbitration agreements on issues pertaining to public policy manifests itself as a practice of the Court of Cassation.

This perception of the Court of Cassation setting forth that issues unrelated to public policy are arbitrable is subject to criticism by the Turkish doctrine. Accordingly, in the doctrine, it is stated that the acceptance of a parameter, such as public policy, which does not find its justification under codified sources, has survived until this day as a manifestation of the distrust in arbitration[vi].

The Precedents of the Court of Cassation

In many precedents of the Court of Cassation in which the issue of arbitrability has been analyzed, a review on public policy has been conducted. As a matter of fact, in some of its decisions, the Court of Cassation makes use of statements implying that the matters not pertaining to public policy are arbitrable[vii].

In a decision of the General Assembly on the Unification of Judgments dated 1994, an arbitration agreement is defined as an agreement whereby natural or legal persons leave the resolution of their disputes that are not subject to public policy, which have arisen or are to arise, to one or several arbitrators[viii].

One of the interesting decisions of the Court of Cassation on this matter concerns a dispute upon which the arbitrators decided on an issue of value added tax (“VAT”) during arbitration proceedings. In the relevant arbitration proceedings, the arbitrators decided that the claimant shall be entitled to the right of recourse from the other party with regard to VAT paid by the claimant. In the enforcement phase concerning this arbitral award, at the end of the enforcement lawsuit, the court of first instance admitted the request of enforcement[ix]. On the other hand, the Court of Cassation, on its review, reversed the decision of the court of first instance, stating that the arbitral award concerns a taxation issue, and, as a result, it relates to public policy and it is subject to administrative jurisdiction, and it, therefore, reversed the decision of the court of first instance.

This decision is open to criticism as the relevant arbitral award does not directly relate to tax issues, but to the right of recourse of the tax amounts paid by one of the parties from the other party. This issue is among the issues that the parties may freely dispose of, and it may not be asserted that this is a public policy issue.

In another decision, the Court of Cassation decided that the disputes pertaining to determination of lease payments are not arbitrable. In its analysis, the Court of Cassation made reference to the criterion of whether the parties may conclude an agreement of their free will on the subject matter of dispute and, in addition, it asserted that the matter of determination of lease payments is not subject to the parties’ free will, as it concerns public policy and, therefore, it is not possible to resolve this dispute through arbitration[x].

Conclusion

Arbitrability is one of the conditions of validity pertaining to the substance of the arbitration agreement, and is important not only in terms of validity of the arbitration agreement, but also in terms of recognition and enforcement lawsuits. Accordingly, the determination of whether a dispute is arbitrable or not is important. In many of its decisions, the Court of Cassation has a practice to accept that disputes are non-arbitrable, if the subject of dispute is of public policy. Indeed, one of the elements that determine arbitrability is public policy. However, the criteria of public policy is not found in the legal provisions that regulate this issue of arbitrability. Accordingly, it is important not to ground the issue of arbitrability solely on public policy, and not to give rise to confusion between these two concepts, which are distinct grounds for refusal of recognition and enforcement of arbitral awards.

[i]   Ercüment Erdem, Tahkim Anlaşması, Prof. Dr. Hamdi Yasaman’a Armağan, İstanbul 2017, p.189 (“Erdem”).
[ii]  Erdem, p.189.
[iii]  Burak Huysal, Milletlerarası Ticari Tahkimde Tahkime Elverişlilik, İstanbul 2010, p.197 (“Huysal”).
[iv]  Erdem, p.189.
[v]   Huysal, p.199.
[vi]  Huysal, p. 203.
[vii] On the other hand, the 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.” The Decision of the 11th Civil Chamber of the Court of Cassation dated 12.04.2005 and numbered 2004/6686 E., 2005/3600 K. Source: www.kazanci.com.
[viii] Decision of the General Assembly of the Unification of Judgments of the Court of Cassation dated 28.01.1994 and numbered 1993/4 E., 1994/1 K. Source: www.kazanci.com.
[ix] The decision of the Istanbul 3rd Commercial Court dated 25.07.2005 and numbered 2004/922 E., 2005/646 K. Source: Huysal, p.198.
[x]  Decision of the 3rd Civil Chamber of the Court of Cassation dated 02.12.2004 and numbered 2004/13018 E., 2004/13409 K. Source: www.kazanci.com.