Turkish Court of Cassation in Spotlight: The Court Renders the Arbitration Agreement Invalid Due to the Uncertainty in the Language

19th Chamber of Turkish Court of Cassation (“the Court”), in its decision dated 29.05.2012 and numbered 2012/9080, held that a clear and conclusive language in the arbitration agreement is a sine qua non for the validity thereof. The invalidated arbitration clause stated that “[Parties] may refer the dispute to the institution in writing for the resolution.” (emphasis added)

Facts

Basing its claim on the penal clause set forth in a Use-of-System Agreement (“Agreement”) between the disputing parties, the claimant constituted local court proceedings for unpaid invoices. Article 14 of the Agreement contained the following arbitration clause:

In the event that Turkish Electricity Transmission Company (TEİAŞ) and the user cannot reach an agreement on the provisions of this contract, they may refer the differences to the institution in writing for the resolution. Disputes are resolved by the institution. The decisions of the institution are binding.

Decision

The local court, entertaining the objections of the respondent, dismissed the case without a review on merits by addressing the Turkey’s Energy Market Regulatory Authority as the competent authority for resolution. The claimant appealed the decision, and the dispute had been forwarded to the Court of Cassation. The Court, without much discussion on the wording of the Article 14, ruled as follows:

In principle, the [local] courts are competent to hear the disputes between parties. However, parties may agree on submitting the dispute for arbitration in the contract, or they may conclude a separate arbitration agreement [for the same purpose].

Consent to arbitration must be so clear-cut and conclusive as not to allow any doubt; parties’ will to arbitrate must be absolute. Since it is not possible to talk about the existence of a conclusive consent to arbitration in the Article 14 of Use-of-System Agreement, which states “[Parties] may refer the dispute to the institution in writing for the resolution,” the local court’s decision to dismiss the case but not to proceed with the merits, cannot be deemed appropriate…

Comment

The judgment of the Court represents one of the major problems of arbitration in Turkey. The Court, as explicitly underscored by itself, looks for an arbitration clause which does not allow any doubt on the parties’ absolute consent to arbitration. That being the case, parties to an arbitration agreement can easily eliminate the barring effect of the arbitration clause on court proceedings by raising objections based on the unclarity, uncertainty or any other deficiency in the language used for drafting the clause; even if they have explicitly stated, as is in the case at hand, the binding effect of the arbitral tribunal.

While it is true that it is not uncommon to come across jurisdictions where the so-called hybrid or split dispute resolutions clauses enabling parties to choose among different fora such as litigation and arbitration, are not allowed; in the instant case, parties do not in fact refer to multiple fora in the Agreement—a non-exclusive reference is only made to arbitration. Under such circumstances, the single inference which might be drawn from the true intentions of the parties is that they regard submitting the dispute to arbitration possible; put differently, they undoubtedly presume the possibility of arbitration.

As known, a valid arbitration agreement is a bar to court proceedings, but not vice versa as the parties may even decide to refer the on-going dispute to arbitration before the local courts. From this perspective, parties—by presuming the possibility of arbitration in their dispute resolution clause—in fact acknowledge that if this presumption realizes and one of the parties decides to submit the dispute to arbitral tribunal, this will remove the jurisdiction of the local courts. In the present case, parties clearly and only refer to arbitration for the settlement of disputes, although they do not use an exclusive expression. But still, removing the authority of local courts is inherent in the said clause. Thinking otherwise will mean that the auxiliary verb of “may” may sometimes mean “may not.” This will represent a manifest disregard of the literal interpretation of the parties’ intent to arbitrate. One could also argue that if the parties had not intended to submit the dispute to arbitration, they would not have mentioned it at all.

Disregarding treaty arbitration and speaking of commercial arbitration, there should be no difference between interpreting arbitration clause or any other provision of the contract. Accordingly, parties’ true intention in regards to the arbitration clause should be decisive. Here, the core issue relates to the method Turkish Court of Cassation endorses when interpreting the arbitration agreement. As the Court clearly states in its reasoning the local courts are principally competent to hear the disputes between the parties. Attributing such superiority to the authority of the local courts in face of the arbitral tribunals, will inevitably affect the means of interpretation regarding arbitration clauses. However, unlike court proceedings, arbitral proceedings are consensual in nature, so that the Court should give priority to arbitration proceedings to ensure the deference to the parties’ true intentions.

 

Read the full decision (Turkish)