Court of Cassation Decision on the Application of the Wrong Law in Arbitral Proceedings Not Constituting a Ground for Setting Aside

The Facts Subject to the Decision and the Proceedings

The dispute subject to review concerns the request for setting aside the arbitral award rendered because of arbitration proceedings conducted before the ICC. The dispute arose from two agreements executed between the parties and referred to as “sales agreements” in the text of the agreements.

In the proceedings initiated pursuant to the arbitration clause, the sole arbitrator appointed by the ICC International Court of Arbitration examined the dispute and concluded that the contractual relationship between the parties was a sales agreement. The arbitrator therefore ordered the refund of the advance payment made under the agreement due to non-performance of the obligation.

The claimant argued that, in resolving the dispute, the arbitrator applied the provisions of the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) instead of the Turkish law chosen by the parties. The claimant further argued that the parties had not demonstrated an express intention for the CISG to apply and that the arbitrator should instead have applied the provisions of the Turkish Code of Obligations. Accordingly, the claimant argued that the arbitrator’s reliance on the CISG constituted a breach of the parties’ intention. The claimant further maintained that the true nature of the agreements is not sale; rather, they are contracts for work or mixed contracts also containing elements of manufacturing, assembly, furnishing, and implementation. For this reason, the claimant considered the application of the CISG provisions to the dispute inappropriate.

The claimant further requested setting aside under Article 15/A of the IAL, arguing that the reasoning in the arbitral award was insufficient, that its defenses were not duly assessed, and that the award was contrary to public order. In response, the respondent argued that the arbitral award was lawful and that the grounds for setting aside asserted in respect of the nature of the agreements, the applicable law, and the arbitration procedure had not been established in the present case.

The Istanbul Regional Court of Appeals examined the dispute in its capacity as the court of first instance. The Court emphasized the limited nature of setting-aside review and stated that arbitral awards cannot be re-evaluated in terms of substantive law. The Court further stated that the parties’ choice of Turkish law did not exclude the application of the CISG provisions, which form part of Turkish law. It also held that the CISG could apply because the parties did not provide any exception excluding its application in the agreements. In addition, the Court accepted that the relationship could be characterized as a sales agreement, since the predominant obligation under the agreement was the supply and delivery of goods. The Court concluded that these matters did not constitute a breach of public order and therefore rejected the request for setting aside.

Upon the appeal of the claimant’s counsel, the 11th Civil Chamber of the Court of Cassation examined the file and, stating that the decision of the Regional Court of Appeals was in accordance with procedural rules and the law, rejected all appellate objections of the claimant’s counsel and upheld the decision. In this respect, the Decision constitutes an important precedent that clearly sets forth the limits of setting-aside review in arbitral proceedings.

The Limits of Setting-Aside Review and the Exclusion of Substantive Law Review

The grounds for setting aside regulated under Article 15/A of the IAL are provided in a limited number, in accordance with the nature of arbitral proceedings. This limited system aims to prevent an action to set aside from turning into an appeal mechanism.

In this context, setting-aside review is limited to whether the arbitral proceedings were conducted in compliance with fundamental procedural safeguards. In other words, the matters that may be examined in an action to set aside are limited to fundamental issues such as equality of the parties, the right to be heard, the validity of the arbitration agreement, the authority of the arbitrators, and breach of public order. Whether the rules of substantive law were correctly applied is, as a rule, excluded from this review. For this reason, in an action to set aside, the court does not re-examine the merits of the dispute or review the substantive correctness of the arbitral award. Rather, it only examines whether the limited grounds for setting aside listed in the law exist.

This approach differs significantly from the understanding adopted during the period of the repealed Code of Civil Procedure No. 1086 (“eCCP”), which considered arbitrators’ rendering a decision contrary to substantive law as an excess of authority. 

In the decision[2] of the General Assembly of Civil Chambers on the Unification of Judgments of the Court of Cassation dated 28.01.1994 and numbered E. 1993/4, K. 1994/1 (“Unification of Judgments Decision”), it was accepted that, where the parties agreed that the dispute would be resolved in accordance with the rules of substantive law, the arbitrators’ rendering a decision contrary to such rules could constitute a ground for appeal. However, the modern arbitration system adopted under the Code of Civil Procedure and the IAL has abandoned this approach and regulated the grounds for setting aside within a narrowly interpreted and limited framework.

Evaluation of the Approach That an Arbitral Award Cannot Be Set Aside on the Ground of Contrariety to Substantive Law

In the Decision, the claimant’s main allegation is that the arbitrator incorrectly determined the substantive law applicable to the dispute and thereby exceeded his authority. In response, the Regional Court of Appeals clearly established that this allegation could not be assessed within the scope of an action to set aside and emphasized that, as a rule, arbitral awards cannot be reviewed in terms of substantive law. Within this framework, it was accepted that, in cases where the parties’ right to a fair trial or fundamental procedural safeguards have not been violated, whether the rules of substantive law were correctly applied cannot be examined through an action to set aside.

It is also noteworthy that the Decision indicates that the Unification of Judgments Decision from the eCCP period can no longer find application under the current system. Indeed, the Unification of Judgments Decision adopted an approach prioritizing the adjudicatory aspect of arbitration. It accepted that, where the parties agreed that the dispute would be resolved in accordance with the rules of substantive law, the arbitrators were bound to render their decision within the framework of such rules.

The Unification of Judgments Decision further stated that the parties limited the authority of the arbitrators by providing for the application of substantive law. Accordingly, an arbitrator’s rendering of a decision contrary to the rules of substantive law was regarded as exceeding that limit. Within this framework, contrariety to substantive law was considered an excess of authority and accepted as a ground for appeal.

However, this approach results in arbitral awards being subjected to a comprehensive substantive law review by state courts and is incompatible with the finality of arbitral proceedings. Indeed, the historical development and function of the setting-aside mechanism demonstrate a clear parallel between the review of arbitral awards and the review applied in the recognition and enforcement of foreign court judgments and arbitral awards. Within this framework, state courts do not review the substantive correctness of the decision. Rather, they confine themselves to examining whether the proceedings were conducted in compliance with fundamental procedural safeguards and whether the decision is contrary to public order.

For this reason, modern arbitration law does not recognize review of arbitral awards for conformity with substantive law, and setting-aside review is limited to restricted and exceptional cases. 

Indeed, the Decision clearly establishes that the approach adopted in the Unification of Judgments Decision during the eCCP period no longer applies under the current system. In this context, the Regional Court of Appeals emphasized that, as a rule, the arbitrator’s application of substantive law cannot be reviewed. The Court further stated that, unless the parties’ right to a fair trial or other fundamental procedural safeguards are violated, whether the rules of substantive law were correctly applied cannot be examined through an action to set aside.

In addition, it was accepted that the parties’ choice of Turkish law in the arbitration agreement also encompassed the application of the CISG provisions, which form part of Turkish law. The Court stated that international treaties duly put into effect have the force of law pursuant to Article 90 of the Constitution. Since the CISG was not expressly excluded in the agreement, the arbitrator’s application of the Convention could not be regarded as unlawfulness or excess of authority.

Accordingly, an arbitrator’s misapplication of substantive law does not constitute ground for setting aside an arbitral award. It further confirms that the broad understanding of review adopted during the eCCP period has lost its validity under the current arbitration system.

Doctrinal Debates

The issue of whether the arbitrator’s misapplication of substantive law constitutes ground for setting aside has led to differing views in doctrine.

One view adopts a narrow interpretation approach, arguing that the grounds for setting aside are limited and that substantive law review does not fall within this scope. According to this view, the efficiency and finality of arbitral proceedings can only be preserved in this manner.

By contrast, another view argues that, where the parties have determined the applicable law, the arbitrator’s acting contrary to this choice should be assessed as an excess of authority or a procedural irregularity affecting the merits. This approach prioritizes the protection of party autonomy and emphasizes that the arbitrator must be bound by the chosen law.

Within this framework, the Decision under review adopts the approach that the grounds for setting aside should be interpreted narrowly, contrary to the broad interpretation approach advanced in doctrine. Indeed, the Decision expressly states that the allegation that the arbitrator misapplied substantive law cannot be assessed within the scope of an action to set aside.

Conclusion

In conclusion, the Decision clearly sets forth the limits of setting-aside review in arbitral proceedings. Accordingly, an arbitral award cannot be set aside solely on the grounds that the arbitrator allegedly misapplied substantive law.

An action to set aside is not a mechanism for reviewing the correctness of an arbitral award. Rather, it is a limited review mechanism that examines only whether the proceedings were conducted in compliance with fundamental procedural safeguards.

Within this framework, only serious violations such as breach of the right to a fair trial, impairment of the right to be heard, or clear violation of public order may be accepted as grounds for setting aside. The misapplication of substantive law, however, does not fall within this scope.

In this respect, the Decision clarifies the limits of setting-aside review and expressly confirms the approach that arbitral awards cannot be reviewed in terms of substantive law.