The Blue Mosque, (Sultanahmet Camii), Istanbul, Turkey.

On 8 June 2021, the Constitutional Court of the Republic of Turkey (“Constitutional Court“) decided on an individual application concerning, inter alia, violation of ownership right and made a significant point on the effect of arbitration agreements to Turkish courts’ jurisdiction.[1] This decision shows that parties to an arbitration agreement will bear the consequences of resorting to Turkish courts despite the existence of an arbitration agreement.

Factual Background

The underlying dispute arose out of a charter party and related bill of lading concerning transportation of steel from Turkey to the United Kingdom where the charterer was a Turkish company and the consignee was an English company. Additionally, a Turkish insurance company, who then became the applicant to the Constitutional Court (“Applicant“), had insured the cargo subject to maritime transportation.

The cargo was damaged when it arrived in the United Kingdom, and the subsequent inspection revealed that the damage had occurred due to contact with seawater. The consignee requested that the Applicant as the insurance company pay for these damages. Accordingly, the Applicant paid for the damages and initiated execution proceedings in Turkey via foreclosure of moveable pledge (taşınır rehninin paraya çevrilmesi yoluyla takip) against the carrier, who was held responsible for the damage to the cargo.[2]

The execution proceedings were stayed upon the carrier’s objection. The Applicant then initiated an action for cancellation of objection (itirazın iptali davası) before Istanbul 17th Commercial Court (“Court of First Instance“).[3] The defendant in this action, namely the carrier, objected to the Court of First Instance’s jurisdiction on the grounds that the charter party contained an arbitration agreement. However, the Court of First Instance ruled that the relationship between the Applicant and the carrier was subject to the bill of lading and not the charter party itself, and that bill of lading’s reference to the charter party did not cover the arbitration clause. As such, the Court of First Instance rejected the preliminary arbitration objection raised.

The carrier appealed the decision and brought it before the 11th Civil Chamber of the Court of Cassation (“Court of Cassation“).

The Court of Cassation’s Decision

The Court of Cassation held that the relationship between the carrier and the consignee, and therefore the Applicant, who succeeded to the consignee’s rights by paying for the damage to the cargo, is subject to the bill of lading.

The Court of Cassation then stated that the bill of lading itself expressly stipulates that all provisions of the charter party, including the arbitration clause, are valid and applicable between the parties to the bill of lading. As such, the Court of Cassation reversed the Court of First Instance’s decision, finding that Turkish courts had no jurisdiction due to the arbitration clause.

Subsequently, the Court of First Instance complied with the Court of Cassation’s reversal decision and ruled that it lacked jurisdiction.

This time, the Applicant appealed the Court of First Instance’s decision. However, the decision was upheld by the Court of Cassation and the decision regarding Turkish courts’ lack of jurisdiction was finalized. Upon finalization of such decision, the Applicant submitted an individual application to the Constitutional Court.

The Constitutional Court’s Decision

In the individual application, the Applicant argued that it was entitled to statutory pledge since it succeeded to the consignee’s rights and that according to the Court of Cassation jurisprudence concerning similar cases of statutory pledge, the preliminary arbitration objection should have been dismissed. As such, the Applicant argued that the Court of Cassation’s decision in the present case contradicted its established jurisprudence. The Applicant further held that the final decision on lack of jurisdiction was given seven years after the damages occurred. In the meantime, the applicable statute of limitations under English law, as governing law, expired, thereby making it impossible for the Applicant to request indemnification of its losses through arbitration since it did not initiate arbitration proceedings within the time limit. Consequently, the Applicant argued that its right to legal remedies, right to a fair trial and ownership right were violated.

The Constitutional Court first stated that it separated the different legal grounds presented by the Applicant, i.e., violation of ownership right and right to a fair trial, and that it would analyse the application only in terms of ownership right. The Constitutional Court then put forth the legal framework for the protection of ownership right and emphasized that a genuine and effective protection of the right requires the right holder to possess the means to effectively defend itself and oppose arbitrary or unlawful interventions to the right. In this regard, the state has a positive obligation.

Upon this initial analysis, the Constitutional Court emphasized that contrary to the Court of Cassation decisions presented by the Applicant as established jurisprudence, there were many similar cases in which the Court of Cassation upheld the preliminary arbitration objection. As such, the Constitutional Court held that the Court of Cassation’s decision in the present case did not contradict its established jurisprudence nor was it arbitrary.

Furthermore, the Constitutional Court emphasized that it would not interfere with the decisions of Turkish courts unless there was a definite misapplication of law or arbitrariness because its function in terms of interpretation and application of the law was secondary in nature to that of Turkish courts, whose duty was to determine the right interpretation and application of law.

As for the second allegation presented by the Applicant, namely the late decision regarding lack of jurisdiction causing the expiry of the applicable statute of limitations, the Constitutional Court emphasized that the Applicant was well aware of both the existence and content of the charter party and the bill of lading and therefore had the necessary information to be able to foresee that the existence of the arbitration clause could prevent the Turkish courts’ jurisdiction. The Constitutional Court further emphasized that despite having the ability to foresee this since the beginning of the dispute, the Applicant chose not to initiate an arbitration and as such, the Applicant was precluded from claiming that the loss of right was due to the state’s failure to perform its positive obligations.

In fact, after the decision regarding lack of jurisdiction, the Applicant could still have initiated an arbitration to prove that it was impossible to be compensated through arbitration due to the expiry of the statute of limitations, but it did not. For this reason, the Constitutional Court held that the Applicant failed to prove that it was indeed the delayed decision regarding lack of jurisdiction that made it impossible for the Applicant’s to collect its receivables. In light of the foregoing, the Constitutional Court dismissed the application in terms of the violation of ownership right.

Conclusion

In the present dispute, the Applicant initiated an action for the cancellation of objection to the execution proceedings, which is considered arbitrable both by scholars and the Court of Cassation jurisprudence, before Turkish courts with the knowledge of the existence of an arbitration agreement and therefore the Applicant was able to foresee that Turkish courts’ jurisdiction could have been challenged by a preliminary arbitration objection.

Therefore, the Constitutional Court’s decision is accurate. Notably, the emphasis on the foreseeability of Turkish courts’ lack of jurisdiction due to the arbitration agreement is significant, as it correctly points out that parties exclude the jurisdiction of courts when they enter into an arbitration agreement and therefore must bear the consequences of acting against this choice.

 

[1] You may access the Constitutional Court’s decision dated 8 June 2021 on Application No. 2018/5832 here.

[2] Execution proceedings via foreclosure of movable pledge is a special type of execution proceedings that is available to creditors who have secured their receivables with a movable pledge. This type of execution proceedings does not have an attachment procedure and is therefore more advantageous for the creditor. In the present case, the Applicant enjoys statutory movable pledge originating from Turkish maritime law.

[3] For purposes of this article, the explanation on execution proceedings is simplified. Under Turkish law, a party claiming to have a receivable from a counterparty may directly initiate execution proceedings without a binding decision on the merits of its receivables. On the other hand, the counterparty may stay the execution proceedings by objecting to the payment order. In such case, the party claiming to be creditor has to initiate a lawsuit for cancellation of objection in order to dismiss the objection and continue the execution proceedings. This action is considered arbitrable under Turkish law.