Arbitration Agreement and Applicable Law
The fundamental regulations regarding arbitration agreements in Turkish legislation are found in the Turkish Civil Procedure Code (“HMK”) Articles 407-444 and the International Arbitration Law (“MTK”).
According to Article 412/1 of the HMK, an arbitration agreement is defined as “an agreement between the parties to submit all or part of the disputes arising from or may arise from a contractual or non-contractual legal relationship to an arbitrator or arbitral tribunal for resolution.” In Article 4/1 of the MTK, an arbitration agreement is defined as “an agreement between the parties to resolve all or some of the disputes arising from or may arise from an existing legal relationship, whether based on contract or not, through arbitration.”
The determining factor as to which of the two different arbitration processes defined by these laws should be applied is the “foreign element” in the dispute. If the dispute involves a foreign element, then the arbitration becomes international in nature and the applicable law is the International Arbitration Law. In disputes without a foreign element, the provisions of the Turkish Civil Procedure Code will be applicable, and in such cases, the application of the provisions of the International Arbitration Law becomes optional.
The definition of the foreign element is regulated in Article 2 of the International Arbitration Law. According to this definition, a dispute is considered to have a foreign element if the parties’ places of residence or habitual abodes or places of business are in different countries, or if the place of arbitration is in a different country based on the circumstances specified in the arbitration agreement, or if a significant part of the performance of the obligations arising from the main contract will be carried out in a place other than the place of arbitration, or if the subject matter of the dispute is most closely related to a place in another country, or if at least one of the partners of the company that is a party to the main contract underlying the arbitration agreement has brought foreign capital in accordance with the foreign investment legislation or if it is necessary to conclude credit and/or guarantee agreements from abroad for the implementation of this contract, or if the main contract or legal relationship underlying the arbitration agreement involves the transfer of capital or goods from one country to another.
The Mandatory Elements of an Arbitration Agreement
The mandatory elements of an arbitration agreement are as follows: the existence of a specific legal relationship, arbitrability of the dispute, presence of the intention to arbitrate, compliance with the requirement of written form, existence of representation authority, and determination of the language of the arbitration agreement. The arbitration agreement may be included as a clause in the underlying contract between the parties or be concluded as a separate agreement.
“Specific legal relationship”: A specific legal relationship refers to existing or potential disputes arising from a current legal relationship. An arbitration agreement concluded for a potential legal dispute that has not yet arisen is invalid (arbitration agreements related to all potential future disputes are also considered invalid).
“Arbitrability”: Disputes related to real rights on immovable properties in Turkey and disputes that are not subject to the will of the parties (such as divorce cases, criminal cases, etc.) are not arbitrable.
“Intention to arbitrate”: The intention to resolve the dispute through arbitration and make the arbitration decision binding must be clearly and explicitly stated in the agreement. Arbitration agreements that do not clearly indicate the intention to authorize both arbitration and state jurisdiction or that do not clearly indicate the binding nature of the arbitration decision are considered invalid by the Court of Cassation.
“Written requirement”: According to Article 412/3 of the Code of Civil Procedure, an arbitration agreement must be made in writing. In order for the written form requirement to be fulfilled, it is sufficient that the arbitration agreement is contained in a written document signed by the parties, or in a communication tool such as a letter, telegram, telex, fax or electronic medium exchanged between the parties, or alleged in the statement of claim and not objected to in the response statement of the defendant. In case a reference is made to a document containing an arbitration clause for the purpose of becoming part of the main contract, the arbitration agreement shall also be deemed to have been concluded.
“Authority to represent”: According to Article 74 of the Code of Civil Procedure and Article 504/3 of the Turkish Civil Code, the representative must be specifically authorized to make an arbitration and arbitration agreement. A general power of attorney is insufficient for lawyers to make an arbitration agreement.
For a legal entity, no special authorization is required for making an arbitration agreement to be done by the competent organs. However, if only one of the members of the organ is authorized to sign, special authorization will be required.
“Language of the arbitration agreement”: In this regard, the Law on Compulsory Use of Turkish Language in Economic Enterprises No. 805 will come into play. The Law dated 22/4/1926 is still in force today and according to Law No. 805, as the name suggests, the language of the contract must be Turkish.
The Court of Cassation examines whether one of the parties has foreign nationality in its decisions where the scope of application of this Law is examined, and gives different decisions in different directions.
“Considering the trial, claim, defense, collected evidence, adopted expert report, and the entire file in accordance with Article 4 of Law No. 805 due to the fact that the arbitration clause was drafted in English, the defendant cannot rely on the arbitration clause written in English…” Y.11.HD., E. 2016/5836 K. 2017/4720 T. 26.9.2017
In this decision, it is stated that, even if one of the parties has foreign nationality, according to Law No. 805, the contract must be concluded in Turkish, and a contract concluded in a foreign language is invalid.
“In terms of the conditions for bringing a lawsuit and the application of the law, and particularly due to the existence of the foreign element in the dispute subject to arbitration examination in accordance with Article 2 of Law No. 4686, it is understood that there is no violation of Law No. 805…” Y.15.HD., E. 2020/1714 K. 2020/2652.
In contrast to the above decision, in this more recent decision, it is stated that if one of the parties has foreign nationality, the arbitration agreement can be concluded in a foreign language, and the invalidity of the arbitration agreement cannot be claimed due to the alleged violation of Law No. 805.
Considering the different decisions of the Court of Cassation on this issue, although the current decision suggests that it is possible to have an arbitration agreement in a foreign language in the presence of a foreign element, since there is no precedent decision of unification of jurisprudence yet, if it is not possible to have the contract in two languages, one in Turkish, in order to make the arbitration clause valid, we believe that it would be the most appropriate solution to have the clause related to the arbitration clause in Turkish as well, especially in long-form contracts, in order not to prolong the signing process and to ensure the validity of the arbitration clause.