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Pelin Baysal
Gün + Partners, Istanbul
pelin.baysal@gun.av.tr

Bilge Kagan Çevik
Gün + Partners, Istanbul
bilgekagan.cevik@gun.av.tr

 

So, you think you can arbitrate with a Turkish party based on a non-Turkish contract?

Although parties to international transactions frequently agree to arbitrate, they can often change their minds when an actual dispute arises and instead look to challenge the validity of the arbitration agreement.

Relying on the separability presumption, the courts and the tribunals insulate the arbitration agreements from any attacks on the underlying contract and uphold arbitration. However, the separability presumption sometimes backfires, particularly if the case involves arbitrating with a Turkish party when a contract is in a language other than Turkish.

Law No. 805 on compulsory use of Turkish language in economic enterprises

Old-fashioned mandatory legislation under Turkish law opens a door for those who want to renounce their earlier decision to arbitrate, provided that one of the parties is Turkish and that the contract was made in Turkey but not drafted in the Turkish language.

Under Law No. 805, every contract must be drafted in the Turkish language if one of the parties is Turkish and the contract itself was concluded in Turkey. Some suggest that Law No. 805 does not require foreign companies to comply with the Turkish language requirement when dealing with Turkish parties. However, the latest decisions of the Turkish Court of Cassation show that the Turkish language has to be used in every type of contract, document, and accounting book where at least one party is Turkish and the contract was concluded in Turkey. The sanction for non-compliance with this law is as excessive as the obligation it imposes. Any agreement executed in violation of the Turkish language requirement cannot inure to the benefit of the party invoking that agreement.

Turkish courts’ circumvention of Law No. 805

The rationale behind Law No. 805 is for the protection and the promotion of the use of the Turkish language. The law may have held more relevance when it was enacted in 1926, since Turkey was actively promoting the use of the language as state policy. Presently, it is hard to reconcile the requirement for the mandatory use of the Turkish language with the needs of a globalised business world.

The Turkish courts appear to embrace the notion that the application of Law No. 805 is outdated. In examining decisions in which Law No. 805 has been applied, it appears that the Turkish courts, as far as possible, try to circumvent the application of the mandatory provisions of this law. Even though the provisions of Law No. 805 are mandatory, Turkish courts refrain from their ex officio application. It is only when a party raises the Turkish language requirement that the Turkish courts examine whether or not the contract violates Law No. 805.

Moreover, even if a party raises an objection based on the Turkish language requirement, the Turkish courts do not automatically conclude that the contract itself is void. Rather, the Turkish courts examine whether raising the Turkish language requirement in such circumstances constitute an abuse of rights. In many instances, the Turkish courts have concluded that a party who had previously relied on any part of the contract cannot later argue that the contract is void because did not satisfy the language requirement under Law No. 805.

The price to be paid for the separability presumption under Turkish law

When it comes to arbitration agreements, it appears that the Turkish courts are unable to eliminate the negative impacts of Law No. 805. In some instances, the Turkish courts will enforce those contracts that violate Law No. 805 except for the arbitration clauses therein. While the Turkish courts have not provided any reasons for treating the arbitration agreement and the contract differently, it appears that the difference in approach is based on the principle of separability. The separability principle means that arbitration clauses do not necessarily live or die with the contracts in which they are found. Arbitration agreements are separate agreements; their validity is analysed independently from the rest of the contract. The Turkish courts therefore enforce contracts prepared in violation of Law No. 805 by relying on the abuse of rights argument, but do not extend the same argument to save the arbitration clauses contained in those contracts.

The principle of separability can be used to uphold an arbitration clause even where the rest of the contract is invalid, but in relation to Law 805, this principle does not protect an arbitration clause that violates the Turkish language requirement. Even though the Turkish courts are able to circumvent Law No. 805 based on the principle of abuse of rights, this argument generally does not assist in upholding the arbitration clauses contained in those contracts.

Since arbitration agreements are considered to be standalone agreements, independent from the main contract, the parties’ previous reliance on the main contract does not mean that a subsequent challenge of the arbitration agreement amounts to an abuse of rights. The abuse of rights argument can only be raised in relation to arbitration agreements when the party raising the challenge previously relied on the arbitration agreement itself or remained silent on its application, only to challenge it later. One may argue that where the parties acted on the contract that violates Law No. 805, one party should not be allowed to subsequently challenge the validity of the arbitration clause contained in that contract. However, this appears to be the hard price to pay to preserve the principle of separability principle.

Ultimately, the efficacy of an international arbitration agreement depends on the parties’ ability to enforce that agreement. It is therefore essential to consider Law No. 805 not only when the arbitration agreement is subject to Turkish law but also when the place of enforcement is Turkey. Indeed, in both cases, the Turkish courts might refuse recognition and enforcement based on the public policy exception under Article V(2)(b) of the New York Convention.

The way forward

It is always advisable to have a Turkish translation of a contract that is in another language but will be executed by Turkish parties. In cases where the parties do not wish to translate the contract due to costs or other related concerns, it is highly recommended that, at the very least, there should be a Turkish translation of the arbitration clause annexed to the contract to ensure that the arbitration clause is upheld by the Turkish courts.

 

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