Ercüment Erdem Att. Melissa Balikci

The Effect of the Turkish Language Requirement on the Validity of Arbitration Agreements

October 2018

Introduction

The validity of arbitration agreements is vital to their enforcements, particularly when one of the parties to the dispute files a lawsuit before a local court. In this instance, the other party who wishes the dispute to be resolved by way of arbitration, objects to the jurisdiction of the local court, and states that the dispute is subject to arbitration under the agreement. The local court then reviews and determines the validity of the arbitration agreement and, if it accepts the objection, refers the parties to arbitration[1].

In cases of an analysis made by Turkish courts, it is noteworthy to mention that the validity of arbitration agreements is subject to very strict requirements. In a not so recent case, the Turkish Court of Cassation declared that a party could not rely on an arbitration agreement contained in a contract pursuant to Law numbered 805 on the Mandatory Use of the Turkish Language in Commercial Enterprises (“Law No. 805”) as the clause was not written in Turkish. The case is important as it should be taken as a warning by Turkish parties who wish to arbitrate their disputes, but sign contracts in a language other than Turkish.

Legislation

Law No. 805 was accepted on 10 April 1926, and entered into force through publication in the Official Gazette dated 22 April 1926 and numbered 353. This Law introduced several obligations on Turkish commercial enterprises as to the usage of Turkish. Simply stated, the Law requires Turkish companies and enterprises to use Turkish in all transactions, agreements, correspondences, accounts and books. This old law contains only nine articles, and its application does not extend to contracts which are to be performed outside of Turkey.

The Court of Cassation has previously declared that in respect of a contract signed in a foreign language, the validity of the contract should be examined pursuant to Law No. 805[2].

In cases of non-compliances with the said Law, a judicial fine may be imposed in accordance with Article 7 of the Law.

There are two points that we wish to highlight within the context of the validity of arbitration agreements:

The first is that where one of the contracting parties is a foreign company, there is no requirement for agreements to be signed in Turkish. The obligation to use Turkish is limited to transactions and communications. Although there are different interpretations of the word “transaction,” and some argue that this includes agreements, the debate is ongoing. However, it seems plausible to argue that it does not include agreements as, in the preceding article the regulator expressly states “agreements,” and it seems that this exclusion was intended by the drafters.

Secondly, Article 4 stipulates that documents that are prepared contrary to the provisions of this Law shall not be taken into account in favor of companies and commercial enterprises. Since the decision that is analyzed below, makes reference to this article, a question arises: Is arbitration more favorable than courts that would result in a jurisdictional objection not being considered, as it is not drafted in Turkish?

The Facts

This newsletter will only examine the section related to the jurisdictional objection based on an arbitration clause contained in the contract executed between the parties and will not give further factual details.

Briefly, the dispute arises from a contract for licensing and distribution of certain products in Turkey, signed between a Turkish party and a Swiss company, and was signed in English. The contract included an arbitration clause, which was drafted only in English.

The Decision

The Swiss party initiated a lawsuit before the Turkish courts for a declaration of the rightfulness of its termination of the contract due to breaches of the Turkish party, and latter then justly filed a jurisdictional objection. The Turkish Commercial Court accepted this objection. However, the Swiss party appealed the decision of the Commercial Court which brings us to the decision of the Court of Cassation. The Court of Cassation ruled that Law No. 805 should have been considered in determining the validity of the arbitration agreement when deciding on the rightfulness of the jurisdictional objection and remanded the file to the lower court[3]. The Commercial Court then re-examined the case, and rendered a decision on the merits of the case, as well. The Commercial Court decided that the Turkish party should not be allowed to base its jurisdictional objection on an arbitration agreement drafted in English.

The decision was appealed again by the Turkish party who alleged that Law No. 805 was not applicable to agreements where only one of the parties was Turkish. However, this allegation was not accepted by the Court of Cassation. On 26 September 2017, the Court of Cassation upheld the Commercial Court’s decision[4].

Application of Law No. 805

The decision of the Court of Cassation makes a passing mention of Law No. 805, which reads as follows:

“... in light of the fact that the contract has been drafted in English, contrary to Article 4 of Law No. 805, the defendant cannot rely on an arbitration clause drafted in English, …”

This is contradictory as the Court of Cassation rejects the application of the arbitration clause, but allows the application of other provisions of the contract. In this respect, it is important to note that the choice of law clause was enforced, but the arbitration agreement was not. As the court has not provided its legal reasoning, it is difficult to determine the grounds the decision is based upon, and what kind of distinction was drawn between these clauses.

Conclusion

This decision of the Court of Cassation will surely raise debate. However, as Law No. 805 is not applicable in cases where a contract is signed between a Turkish party and a foreign party, the arbitration agreements included in contracts which are written in a foreign language should not be deemed contrary to this Law. The conflicting decisions rendered by the Turkish courts in relation to the application of Law No. 805 are, unfortunately, not helpful. The Turkish party in this case, whose jurisdictional objection was rejected, has requested a correction of the decision.

The Court of Cassation is expected to be more flexible and arbitration-friendly in cases concerning the validity of arbitration agreements included in contracts which are written in a foreign language and executed between Turkish and foreign parties thus, outside the scope of Law No. 805.

[1] Fatih Işık, The Applicable Law to the Substance of an Arbitration Agreement, Erdem & Erdem Newsletter, October 2013, http://www.erdem-erdem.av.tr/publications/law-post/the-applicable-law-to-the-substance-of-an-arbitration-agreement/ (Access date: October 2018).

[2] 11th Civil Chamber of the Court of Cassation decision dated 4.12.2007, No: 2006/89 E. and No: 2007/15338 K.

[3] 11th Civil Chamber of the Court of Cassation decision dated 4.03.2013, No: 2012/4088 E. and No: 2013/3972 K.

[4] 11th Civil Chamber of the Court of Cassation decision dated 26.9.2017, No: 2016/5836 E. and No: 2017/4720 K.