The Constitutional Court of the Republic of Turkey's decisive reasoning regarding foreseeable lack of jurisdiction due to arbitration clause

Demet Kaşarcıoğlu
Esin Attorney Partnership, Istanbul
​​​​​​​demet.kasarcioglu@esin.av.tr​

Ceyda Sıla Çetinkaya
Esin Attorney Partnership, Istanbul
​​​​​​​ceyda.cetinkaya@esin.av.tr

Introduction

With its decision dated 8 June 2021, the Constitutional Court of the Republic of Turkey ('Constitutional Court') made a significant and conclusive point concerning the effect of arbitration agreements on the jurisdiction of Turkish courts.^[1] In Turkish law, if one party believes it has receivables from the counterparty, it can directly initiate an execution proceeding before having a binding decision on the merits of the receivables, and this procedure is regulated under Turkish Enforcement and Bankruptcy Law ('Law No. 2004').

However, if the counterparty (debtor) objects the execution proceedings, the claimant (creditor) will need to initiate a lawsuit to cancel such objection (itirazın iptali davası). If the court decides to cancel the objection to the execution proceedings, the claimant can proceed with the execution proceedings. On the other hand, if there is an arbitration agreement between the parties, then the claimant has to initiate an arbitration to cancel the objection.

In the dispute subjected to the Constitutional Court's decision, there was an arbitration agreement between the parties. First, the claimant initiated execution proceedings before Turkish execution offices. The counterparty objected to the execution proceedings and the claimant filed a lawsuit before Turkish courts for the cancellation of objection and the defendant raised a preliminary arbitration objection.

However, the First Instance Court dismissed the objection and ruled that Turkish courts had jurisdiction. Subsequent to multiple appeals, the Court of Cassation stated that the Turkish courts had no jurisdiction and the lawsuit for cancellation of objection had to be initiated before the arbitral tribunal. This final decision by the Turkish courts was given after seven years, by which time, the applicable statute of limitations for the collection of the claimant's receivables had expired, and therefore the claimant's ownership right was allegedly violated. Following the claimant's application, the Constitutional Court concluded that the lack of jurisdiction of the Turkish Courts in light of the existence of an arbitration agreement was foreseeable for the applicant (claimant in the execution proceedings and in cancellation of the objection to execution proceedings), and it could initiate arbitration proceedings before the lapse of the statute of limitations, therefore no such violation of ownership right occurred, and the court rejected the claimant's application.

Background of the dispute

The underlying dispute stems from a contract of affreightment dated 25 October 2010 ('Charter Party') and related bill of lading issued by the captain of the ship ('Bill of Lading') concerning the transportation of steel from Turkey to England. The charterer is a Turkish company exporting steel from Turkey, and the consignee is an English company in the business of steel trading. The steel to be transported was insured on 30 October 2010 with a freight insurance policy by a Turkish insurance company, which is also the applicant of the individual application analyzed herein. The steel cargo was loaded onto a ship of the carrier, which is a German maritime transportation company, and the cargo was carried and discharged in England on 19 November 2010. Upon discharge of the steel, it was detected that nearly one-third of the entire steel cargo was damaged due to rusting. Subsequent expert inspection revealed it was due to contact with sea water. The consignee notified the carrier of the damage on the same day, claiming that the captain of the ship was responsible.

Another expert inspection, this time conducted in the warehouse of the consignee, determined the quantity of the damaged steel to be just above half of the entire cargo; the total damage suffered was specified in the report as GBP 55,000. The consignee demanded the payment of damages from the applicant. Accordingly, the applicant paid for the damages suffered by the consignee and initiated execution proceedings via foreclosure of moveable pledge (taşınır rehninin paraya çevrilmesi yoluyla takip) in Turkey against the carrier.^[2]

This is a special type of execution proceedings, without an attachment procedure, foreseen by Law No. 2004 when the creditor's receivables are secured with a movable pledge. In principle, it is mandatory to first initiate this type of execution proceedings and collect the debt by liquidating the pledge before initiating other types of execution proceedings. The payment orders were issued on 12 July 2011, and the execution proceedings were stayed on 14 July 2011, following an objection to the payment orders.^[3]  In order to dismiss the objection to the payment orders and therefore be able to continue the execution proceedings, the claimant initiated an action for cancellation of objection^[4] (itirazın iptali davası) on 12 April 2012 before the Istanbul 17th Commercial Court ('First Instance Court').^[5]  

The carrier, who is the defendant in this action, objected to the jurisdiction of the court, claiming that it is resident in Germany and there is an arbitration clause in the Charter Party. This preliminary arbitration objection was dismissed by the First Instance Court on 29 January 2013, in the first hearing whereby the First Instance Court stated that the reference made to the Charter Party in the Bill of Lading only concerned freight cost but not the arbitration agreement. Subsequently, on 25 June 2015, the First Instance Court decided on the cancellation of objections and the continuation of the execution proceedings. The First Instance Court justified the rejection of the preliminary arbitration objection, stating that the relationship involving the consignee could not possibly be subject to the Charter Party, and therefore the relationship to which the applicant became party by succession was not subject to the Charter Party but rather to the Bill of Lading. This meant that the arbitration clause contained in the Charter Party was not applicable to the applicant.^[6]

The First Instance Court's decision was appealed by the carrier and brought before the 11th Civil Chamber of the Court of Cassation ('Court of Cassation').

Court of Cassation's decision

The Court of Cassation held that pursuant to Article 1110 of the former Turkish Commercial Code No. 6762 ('Former Commercial Code'), the relationship between the carrier and the consignee is subject to a bill of lading, whereas the relationship between the carrier and the charterer is subject to a charter party. Accordingly, the Court of Cassation emphasised that the Bill of Lading expressly stipulated that it was to be used with the Charter Party and the freight was to be paid pursuant to the Charter Party. The Court of Cassation further stated that the back side of the Bill of Lading provided that all provisions, including the arbitration clause of the Charter Party, the date of which is specified on the front side of the Bill of Lading, were made valid and applicable between the parties to the Bill of Lading. As such, the Court of Cassation held that the arbitration clause was valid and therefore, the case must be dismissed due to lack of jurisdiction because of the arbitration clause. In light of this reasoning, the Court of Cassation reversed the decision of the First Instance Court on 12 January 2017.^[7]

Subsequently, the First Instance Court complied with the decision of the Court of Cassation and dismissed the applicant's case on 15 May 2017 due to lack of jurisdiction. This decision of the First Instance Court was appealed by the applicant this time, but the Court of Cassation upheld the First Instance Court's decision on 4 December 2017, and the decision became final and notified to the applicant on 23 January 2018. Following this, the applicant made an individual application to the Constitutional Court on 22 February 2018.

Constitutional Court's decision

The applicant claimed that it succeeded to the rights of the consignee and, as such, it was entitled to statutory pledges, which was not contested during the execution proceedings.^[8] The applicant then emphasised that the Court of Cassation, in similar cases concerning statutory pledges due to the ship's creditor right (gemi alacaklısı hakkı), dismissed the preliminary arbitration objection and argued that the Court of Cassation's decision was contradictory to established jurisprudence.^[9]  Furthermore, the applicant claimed that the decision on lack of jurisdiction was given seven years after the occurrence of the damages, within which time the applicable statute of limitations in English law expired and the applicant consequently lost all means of claiming indemnity due to not being able to initiate arbitration proceedings in due time. As such, the applicant claimed that its right to resort to legal remedies, right to fair trial, and ownership right were violated.

Concerning the allegations of the applicant, the Constitutional Court first stated that it was not bound by the judicial qualifications made by the applicant, and decided to separate the other legal grounds and analyze only the application in the context of ownership right. Accordingly, the Constitutional Court stated that in principle, the positive obligations of the state consist of establishing an effective legal framework that provides sufficient protection of the right, including procedural protections before judicial and administrative authorities. In this regard, the Constitutional Court emphasized that, although such is not explicitly specified in the text of Article 35 of the Constitution of the Republic of Turkey on ownership right, a real and effective protection of the right requires that the right holder possesses the means to effectively defend itself and object to interventions that are against the law or are arbitrary in nature.

The Constitutional Court then emphasized that there are many Court of Cassation decisions where a preliminary arbitration objection was upheld in similar cases, and therefore stated that the Court of Cassation's decision was neither contradictory to established jurisdiction nor arbitrary.^[10] The Constitutional Court further emphasised that its duty concerning interpretation and application of the law is secondary, and therefore limited compared to Turkish courts of various instances whose duty consists of determining the right interpretation and proper application of the law.^[11] Accordingly, the Constitutional Court stated that it will not interfere with the national courts' discretion unless there is a clear misapplication or arbitrariness in the courts' decisions.

Regarding the second allegation concerning the expiration of the statute of limitations due to the delayed decision on lack of jurisdiction, the Constitutional Court stated that the applicant was well aware of the existence and content of the Charter Party and Bill of Lading and, as such, had the necessary knowledge to be able to foresee that the existence of the arbitration clause could cause the lack of jurisdiction of the Turkish courts. The Constitutional Court emphasised that the applicant, despite having all that knowledge and the ability to foresee that the Turkish courts could rule for the lack of jurisdiction since the beginning of the case, opted not to initiate arbitral proceedings, and therefore could not argue that the loss of right was due to a failure in the performance of the state's positive obligations.

Furthermore, the Constitutional Court stated that the applicant could have initiated arbitral proceedings after the decision on the lack of jurisdiction to prove that it was indeed impossible to make a claim regarding damages due to the statute of limitations under English law, which the Constitutional Court cannot evaluate itself, but the applicant did not do so. Consequently, the applicant failed to prove that the delayed decision on the lack of jurisdiction of the Turkish courts made it impossible to make a claim for the collection of its receivables. Accordingly, the Constitutional Court found the applicant's second allegation meritless as well and dismissed the application.

Evaluation

The Constitutional Court's decision, especially its reasoning regarding the foreseeability of the lack of jurisdiction, is very much on point. First of all, the applicant initiated an action for cancellation of objection in a dispute where there is a valid arbitration agreement. Under Turkish law, it is nearly undisputed among scholars that such an action is arbitrable, and the Court of Cassation's jurisprudence also states that an action for cancellation of objection must be initiated before the arbitral tribunal instead of the Turkish courts if there is an arbitration agreement. This is an action where objections concerning the merits of the dispute, such as whether the obligor is actually under such an obligation and whether such a claim actually exists, are evaluated.^[12]

This means that the disputed points that would be discussed and analysed by a court if such action is brought before a Turkish court are points that fall under the scope of the dispute subject to the arbitration agreement. Therefore, any party that is bound by the arbitration agreement risks a decision on the lack of jurisdiction if it initiates the action for cancellation of objection before Turkish courts when there is an arbitration agreement concerning the dispute. As the Constitutional Court correctly pointed out, the applicant was aware of the contracts and their content, and therefore knew the risk of initiating the action for cancellation of objection before the Turkish courts instead of the arbitral tribunal.

Conclusion

The Constitutional Court's decision dated 8 June 2021 is significant for multiple reasons, including the Constitutional Court's remarks clarifying that it does not act as a hierarchical appeal mechanism for the Court of Cassation's decisions and highlights the limits of the state's positive obligations to protect ownership right. In addition to these, the Constitutional Court clarified the effect of the arbitration agreement on Turkish courts' jurisdiction by emphasizing that the parties, when they enter into an arbitration agreement, exclude the jurisdiction of the courts, and therefore they must bear the consequences of acting against their initial choice.