Decision of the Court of Cassation General Assembly Allowing Bankruptcy Proceedings Before Turkish Courts Despite the Existence of an Arbitration Agreement

30.06.2022 Duygu Öner Ayçiçek
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Introduction

Under Turkish law, parties may agree on the settlement of disputes that have arisen or may arise, regarding the rights that they can freely dispose of, by arbitration. However, disputes which are not subject to the will of parties, such as the disputes relating to in rem rights of immovables, bankruptcy law, family law are considered to be non-arbitrable.

In the decision of the Court of Cassation General Assembly (“CCGA”) dated 21.12.2021, numbered 2019/574 E. 2021/1710 K., these principles were discussed within the framework of the general bankruptcy procedures and bankruptcy proceedings regulated in the Execution and Bankruptcy Law numbered 2004 (“EBL”). The Court discussed whether a bankruptcy case can be examined before the courts despite the existence of an arbitration clause. This Newsletter article examines the relevant decision.

Dispute Subject to the Decision

The dispute arose from a construction agreement in return for a land share. The employer initiated a general bankruptcy proceeding against the contractor with the allegation that the contractor failed to complete and deliver the construction within the prescribed time. The contractor objected to the execution proceeding, and a bankruptcy case was filed by the employer for the annulment of the objection. The defendant contractor insisted on resolving the dispute through arbitration, stating that there was an arbitration clause in the contract signed between the parties.

Evaluation by the Court of First Instance and the Regional Court of Appeal

The court of first instance examining the dispute stated that objection and bankruptcy cases, in general, are unique cases that include several stages. In the first stage, a judgment should be made regarding whether the plaintiff is the creditor and about the amount of the claim. At the second stage, the bankruptcy of the defendant is ordered if legal conditions are met. In that regard, the judgment regarding the debt-credit relationship and the amount of debt between the parties would have to be made by the court dealing with the bankruptcy case unless there is a contrary provision in the contract between the parties, but if there is an arbitration clause in the contract between the parties, the substantive legal issues whether the receivable exists or not and if so, the amount of the same should be resolved before arbitrators in accordance with the arbitration clause stipulated the contract. Based on the above explanation, considering existence of the arbitration agreement in the concrete case, the court of first instance decided that the plaintiff should first resort to arbitration to obtain an award which determines the existence of the debt and amount of the receivable, and then, if necessary, to file a bankruptcy case in court against the defendant contractor based on the arbitrator's decision. The court then dismissed the case on the grounds that the employer was not eligible to initiate bankruptcy proceedings before the execution office against the contractor in a way that would eliminate the choice of authorized place of jurisdiction in the contract.

The Regional Court of Appeal rejected the plaintiff's appeal on the grounds that the decision of the first instance court was lawful.

Evaluation by the Court of Cassation

The 15th Civil Chamber of the Court of Cassation reversed the decision of the Court of Appeal, stating that the rejection of the case based on the arbitration objection was unlawful. The Court of Cassation reasoned that an arbitration clause can only be valid for disputes not related to public order, whereas the rule regarding the hearing of bankruptcy cases before Turkish courts is related to public order. They further explained that the procedure consisting of two stages in which the existence and amount of the claim is decided before arbitrators first and a bankruptcy case before courts is filed consequently, as described by the court of first instance, is contrary to the principle of procedural economy, that there is no justification for the division of bankruptcy cases into two stages in this way, and the case should have been examined and decided as a whole before the courts. In addition, the Court of Cassation further stated that it is one of the fundamental principles of the Code of Civil Procedure to conclude proceedings as soon as possible. Considering the fact that the bankruptcy case is subject to a simple procedure and that such a case should be examined and decided by the commercial court, the Court of Cassation found that forcing the claimant to resort to arbitration before initiating bankruptcy proceedings against the defendant restricts the freedom to seek rights and it is contrary to the principle of procedural economy.

Evaluation by the Court of Cassation General Assembly

The dispute was examined by the CCGA, after the court of first instance resisted the reversal decision given by the Court of Cassation. Referring to some scholars’ views, the CCGA emphasized that bankruptcy cases are cases that have consequences for public order, that they concern all creditors, and that it consists of successive proceedings starting with the execution proceedings with bankruptcy request, lifting of objection and bankruptcy request respectively. In addition, it stated that there is no provision in Article 154 and et al. of the EBL which allows the parties to resort to arbitration to determine the receivables.  It also highlighted that the existence of an arbitration clause is not stated as a reason for objection among the grounds for objection against execution proceedings with a bankruptcy request stipulated in Article 155 of the EBL and that the parties have not set forth a  restriction in the arbitration agreement to the extent that they cannot initiate a bankruptcy proceeding against the counterparty.

Emphasizing that the use of jurisdiction by the courts is the general rule and that resorting to arbitration is an exception, the CCGA held that raising an objection on the existence of an arbitration agreement against the counterparty who initiates execution proceedings with the bankruptcy request as a part of right to remedy, is against the principle of good faith. Accordingly, the CCGA concluded that the dismissal of the case due to the existence of the arbitration clause was unjustified.

Conclusion

Considering the principle of right to remedy and the characteristics of the execution proceedings with the bankruptcy request that are regulated by the EBL, in its decision the CCGA allowed a dispute to be resolved before the courts. However, the decision is open to discussion and subject to criticism, as it makes arbitration agreements inapplicable in case a party to the agreement prefers to initiate execution proceedings with a bankruptcy request.


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