Turkish Court of Cassation Overturns Local Court’s Decision Not to Set Aside ICC Award

The Board of the Turkish Court of Cassation for Civil Actions in a decision dated September 30, 2015, overruled local court’s judgment rejecting an application to set aside against an ICC award. The dispute arose from a concession agreement, and brought a GSM company against Turkish public institutions.

Facts

Parties to the dispute entered into an agreement with regard to “Granting License for Establishment and Operation of GSM-Pan European Mobile Telephone System,” a concession contract signed among the mobile network providers and the Turkey’s Ministry of Transport. As one of these GSM carriers party to the concession, Claimant commenced arbitration proceedings with ICC International Court of Arbitration (“ICC”) against the Ministry of Transport as well as Undersecretary of Treasury in order to get a certain amount of money paid to Respondents by mistake back and also sought for a declaratory judgment in order to resolve the differences between the parties that led to the inadvertent payments in question.

Parties had diverging opinions with respect to the extent of a term used in the concession agreement, but construing the meaning of the disputed term, namely gross sales, required knowledge of accounting rather than legal knowledge. ICC Tribunal, confirming its jurisdiction, held that the components of retailer premiums and retailer stock protection are covered by the term gross sales so that they will be taken into account when calculating the value of share base, which is the figure used to determine the amount to be paid to state entities (Respondents), whereas other reductions made during sales cannot be considered within the scope of gross sales. Despite this finding favoring the Claimant’s position, Tribunal rejected Claimant’s claim for compensation since the time specified in statute of limitations passed.

Respondents separately challenged the ICC award before the local courts on grounds that the award is in violation of Turkish public policy and the arbitral tribunal exceeded its powers. According to them, it is not possible to divide the extent of gross sales into sub-components, and excluding the sale discounts from the extent of gross sales will mean to redefine the term as net sales. Consequently, the award is in contradiction with the concession agreement, finance law and public policy (Under Turkish law, only the last one is a ground to challenge foreign arbitral awards).

Claimant argued that the arbitrators are experts in their fields; moreover, parties have given consent to arbitration instead of resolving disputes before local courts, so that a second review on merits is not possible.

The local court consolidated the separate proceedings against the Claimant, and dismissed the whole case. In its judgment, the court stated that Respondents failed to substantiate their claims, and public policy objections remained unfounded. Also, the local court–inaccurately–held that it is for the party raising the public policy objections to produce evidence for the existence of such violation while pursuant to Turkey’s International Arbitration Act, the courts shall ex officio consider the public policy violations.

The decision had been appealed by Respondents. Under Turkish Civil Procedure Code (“Procedural Code”), the Court of Cassation (“Court”) may uphold the judgments of the local courts with or without amendments, or may partially or fully overrule them. In doing so, the Court of Cassation may or may not (in principle, may not) re-assess the facts and evidence and give ruling on behalf of the local court. On the other hand, the Procedural Code authorizes local courts to insist on their judgments despite the Court of Cassation’s decision to overrule. In such cases, the Board of the Court of Cassation for Civil Actions (“Board”) revisits the case and renders a final judgment.

Decision

The 11th Chamber of the Court of Cassation did not set aside ICC award but overruled the local court’s judgment finding its examination insufficient, and ordered the local court to reconsider the judgment in the light of its instructions. The local court insisted on its judgment and the case had been submitted to the Board. The Board overruled local court’s decision to insist, and upheld the decision of the subdivision (11th Chamber) without amending it or providing new reasons. Accordingly, the decision below illustrates the reasoning of the subdivision, which was later affirmed by the Board:

As it is clear from the Article 15 of International Arbitration Act, since it is not possible to appeal the arbitral awards (while the decisions given by the local courts in regards to applications for setting aside an award, might be appealed), and legal recourse might only be made for setting aside the award, a substantive review on arbitral awards is not possible (Ziya Akinci, Milletlerarası Tahkim, Ankara 2003, p. 185). Indeed, an application for setting aside is the only legal recourse against arbitral awards which fall under the International Arbitration Act, and grounds to set aside are set out in the Article 15 thereof. …

(When it comes to the public policy objections …) The concept of public policy has different meanings in the contexts of domestic law and of private international law. In the meaning of domestic law, public policy means the set of rules protecting the fundamental structure of Turkish society and its essential interests. … On the other hand, the notion of international public policy is narrower and more limited concept compared to its meaning in domestic law. Accordingly, a circumstance which could be regarded as a violation of national public policy, may not be deemed a violation in terms of international law. …

If parties choose the law to be applied to the arbitration proceedings, the arbitrators shall at the same time assume that parties hereby choose the rules of public policy of this law (Kemal Dayınlarlı, Milli-Milletlerarası Kamu Düzeni ve Tahkime Etkileri, Ankara 1994, p. 77). Put differently, the concept of public policy must be interpreted as part of the law chosen (by parties). In the instant case, since the arbitration agreement between the parties refers to “Rules of Turkish law,” the concept of public policy as is in the Turkish law, must be taken into account when determining the potential violations.

We must also indicate that a review on merits might be needed when ruling on the challenges based on public policy violations. Otherwise, it would not be possible to hear such objections. In such cases, the necessary review on merits does not technically mean a substantive review on merits.(Prof Dr. Cemal Şanlı, “Uluslararası Ticari Akitlerin Hazırlanması ve Uyuşmazlıkların Çözüm Yolları”, 3. Ed., İstanbul, Haziran 2005, p. 209) …

In the present case, the local court dismissed the case on grounds that the claimants failed to produce evidence regarding the public policy violations and [according to the court] the burden of proof lies with the party raising the objection…

As stated above, on contrary to the holding of the local court, violation of public policy, as a ground set out in Article 15 which governs the application for setting aside, is not a plea which must be evidenced by the parties, but it is a matter which must be ex officio resolved by the court. However, it is observed that neither the expert report nor the judgment of the court made any assessment as to whether the award violates the public policy …

In conclusion, the local court must appoint an expert committee among whom there is an accountant, in order to have a report regarding the following issues: understanding of the parties in the concession agreement about the payment of treasury shares, the accounting practice of the respondent company before and after the concession agreement, the concept of “gross sales” which underlies the amount to be paid to the state, the values that were included in or excluded from this amount during the performance of the concession, … Only after that the court may decide as to whether the award violates Turkish public policy. In doing so, the court must consider the nature and purpose of concession agreements. …

Comment

The judgment of the Court of Cassation is noteworthy as it illustrates the stance of the Court on the public policy objections and heavily relies on the scholarly opinions. The following observations might be made for the decision:

1. The Court distinguishes between private international law and domestic law and defines the concept of public policy as a distinct term for local disputes. Accordingly, it acknowledges that the concept has more restricted scope of application in the realm of international law compared to its content in domestic law. However, the Court disregards international dimension of the dispute at hand, and abides by the vague meaning of public policy in Turkish law by stating that the parties chose Turkish law as the governing law for their contract.

2. The Court agrees that reviewing public policy objections carries the risk of interfering with the merits; however, it notes that this is not a review on merits in its technical sense, but this is a review confined to the assessment of public policy objections.

3. The Court defers to party autonomy by confirming that when parties choose the law to be applied to the merits of the case, this law also forms the meaning of public policy.

While the Court endorsed an arbitration-friendly approach when defining and interpreting the concept of public policy, its instruction for the local court to appoint an expert committee to find out whether any breach of Turkish public policy occurred, is subject to controversy.

First of all, it is pretty much difficult to foresee a scenario where the way used by an arbitral tribunal to define the extent of a financial term may cause to public policy violations. While accounting practice may change depending on the relevant country or even on the practice of a company, it is for arbitral tribunal to construe the meaning of the concepts located in a disputed agreement by considering the circumstances surrounding the particular case, and broadly speaking, it is not easy to argue that such a minor decision will have serious influences on public policy considerations of a country going beyond the commercial relations between parties. Even one assumes that the decision of the arbitral tribunal on the extent of the term gross sales was explicitly wrong, this too would not be a valid ground to set aside, as–needless to say–erroneous application of the chosen law is not a ground to set aside unless arbitral tribunals delibaretely disregard it. As a result, while it is true that the local court was wrong in its finding that it is for the party raising public policy objections to prove it, the Court of Cassation was expected to uphold the decision since the legal error that the local court fell into has no effect on the outcome of the case.

Read the full decision (Turkish)