• Validity of Arbitration Clauses under Turkish Law: An Insurance Case Study
  • February 24, 2010
  • Law Firm: Mehmet Gun & Partners - Istanbul Office
  • Validity of Arbitration Clauses under Turkish Law: An Insurance Case Study

    A number of disputes arise between insureds and their local insurers (and in turn their reinsurers) in relation to validity and/or meaning of foreign insurance and related clauses reflected in a local fronting policy. The below case study discusses arguments arisen in relation to the conditions for validity and meaning of an arbitration clause in an all risks construction fronting policy under the Turkish Arbitration Act and points to certain areas for caution.

    An all risks construction fronting policy was provided by a local insurer covering the construction of a major tunnel construction project in Turkey undertaken by a foreign construction company, the insured. A dispute arose between the insurer (their foreign reinsurers) and the insured in relation to extent of cover of the policy resulting in the rejection of payment by the insurer.

    The Policy conditions contained an Arbitration Clause which provided,

     “If any dispute arises as to the Insurer’s liability under this Policy of insurance either the insured or the insurer may give notice to the other that it wishes the dispute to be referred to conciliation in accordance with and subject to the International Chamber of Commerce (ICC) Rules of Conciliation or any modification thereof that is in force at the time.”

    If the matter cannot be resolved by conciliation, either the insured or the insurer may, within 28 days of either party deciding that the conciliation has failed, require that the matter finally be settled under ICC rules of Arbitration by a panel of 3 (three) arbitrators in accordance with these rules.”

    The Turkish Act on Arbitration, under article 4 defines an Arbitration Agreement as “an agreement, be it based on a contract or not, whereby the parties conclude the submission of part or entire of a dispute, arisen or to arise between them from a legal relationship to arbitration “.

    The insurers had invited the insured to Conciliation. No response was received. Meanwhile the insured brought court proceedings in the Turkish Courts against the insurer and argued invalidity of the arbitration clause upon jurisdictional objection of the insurer based on the arbitration clause.

    The invalidity claims of the plaintiff were on the basis that the clause does not entail one of the criteria for validity of arbitration, namely, the “reflection of a definite, conclusive, explicit will of the parties in relation to referring the dispute to arbitration”.

    According to article 4 of the Turkish Arbitration Act, the validity of an arbitration agreement is determined in line with the chosen law by the parties to apply to the arbitration agreement or where there is no such choice Turkish law.

    The plaintiff argued that there should accordingly be no hesitation in relation to referral of the dispute to arbitration.

    1.                  The policy contained another clause namely;

    “Choice of Law and Jurisdiction: Turkey”. The presence of this clause according to the plaintiff led to inconsistency in relation to the will of the parties in terms of their choice of arbitration or the courts.

    2.                  The plaintiff further argued that the wording of the relevant Arbitration clause contains the word “may” which means that the parties may or may not chose to go to arbitration and this does not reflect a conclusive will in relation to referring matters to arbitration. 

    The plaintiff further argued “lack of the authority of its representative concluding the arbitration agreement” which would also render the arbitration clause invalid.

    The reference to “Jurisdiction: Turkey” is to indicate the venue where a dispute is to be settled whether by the courts or arbitration and this is Turkey, i.e., the clause does not state that Turkish courts have jurisdiction on the matter. This should mean that Arbitration shall take place in Turkey.

    The defendant further argued that the clause should also be understood as to make reference to disputes which have not been subjected by the Parties to ICC Conciliation and Arbitration. The arbitration clause refers only certain types of disagreements to conciliation and arbitration.

    The defendant in relation to the first argument stated that the court of appeal precedents cited by the plaintiff where the arbitration clauses were held invalid due to being indefinite and inconclusive in relation to the will of the parties in referral to arbitration, were completely different than the case at hand.

    In one of the precedents it was stated by the court that “...Although the relevant section of the contract provides that the parties shall go to arbitration, the same section under art. 17 provides that the courts of Istanbul shall have jurisdiction in case of any dispute”

    In the other precedent cited by the defendant the court of appeal held that, “...the agreement after stating that any dispute in relation to contract provisions shall be referred to an arbitral tribunal, ...art. 15 of the agreement provides that where the parties do not comply with the arbitral judgment within 30 days of submission, any of the parties who has an executable right shall have the right to refer the dispute to the Istanbul Courts. The same arbitration clause under section 17 provides that in case of any dispute the Istanbul courts shall have jurisdiction.”

    In the above cited instances, the reason of the invalidity was the apparent inconsistency and ambiguity on whether the parties should go arbitration or the court since both were instructed. The second instance also includes a provision, inconsistent with the concept of arbitration, which takes away any enforceability of an arbitral judgment. According to court of appeal precedents and the doctrine in that regard, under “Invalidity due to indefinite and inconclusive expression of will in relation to referral arbitration” one should understand cases of conflicts as in the above precedents or uncertainties in relation to which dispute the parties should refer to arbitration.

    In the current case on the other hand, there was a clear reference to arbitration in case of dispute arising from liability of the insurers and there is no conflicting provision under the policy which enables the parties to go to the court as was the case in the above referred court of appeal cases.

    In relation to the argument of the plaintiff in terms of the wording of the arbitration clause containing the wording “may request”, the defendant argued that the word “may” in English  as well as referring to an “option and possibility” also refers to cases where the party is “allowed” to do something and is used in that sense[1]. As a matter of the English language the key word is “require” and not “may”. In other words if either party chooses (“may”) the other party must (is required to) submit to arbitration. The clause should be understood as to allow either party to “require” (i.e. compel) Arbitration. It is therefore a binding and effective Arbitration clause. Although the standard ICC wording uses the word “shall”, for the reasons set out above the word require should have the same affect.

    This was the more so considering the identity of the parties both being companies active on international business of big scale and the evaluation of the court of appeal decisions mentioned above regarding the certainty and conclusiveness of the arbitration clause. An interpretation otherwise would encourage bad faith objections.

    The plaintiff further argued that “the lack of the authority of its representative concluding an arbitration agreement in relation to an arbitration agreement” would render the arbitration clause invalid. The Turkish Code of Obligation provides under article 388/3 that unless the Proxy was authorized specifically, he/she cannot file a law suit, make a settlement, resolve a dispute by arbitration, donate and transfer an immovable. The plaintiff in that regard submitted the power of attorney of the person who was at the time of the agreement the authorized person of the Turkish liaison office of the insured who had no authority to consent to arbitration.

    The defendant objected to the argument on the basis of the facts that the plaintiff failed to show that the relevant person was involved in the conclusion of the policy. Thus the provisions of the policy were negotiated by the insured company’s headquarters and the foreign reinsurers and were then reflected in a local policy. It would also inconsistent with the natural flow of commercial business application that the liaison office representative would be authorized to negotiate and consent to the policy terms of such a huge project. The power of attorney of the representative explicitly provided the representative the authority to act solely upon instructions of the insured company. This would indicate that the submission to arbitration was concluded by the headquarters of the insured company. Additionally according to Article 30 of the Code on International Private and Civil Procedure any issue of authority of representation between a person and a company shall be concluded under the laws of the state where the company headquarters are established.

    The Turkish Courts must deal first with jurisdictional objections and therefore the court with an interim decision rejected the arbitration defense. Turkish courts do not provide sufficient reasoning in their interim decisions and the reasoning for rejection was limited to “due to the fact that the company representative did not have authority to submit to arbitration, arbitration defense to be rejected...”.

    The court did not yet conclude the case and it is therefore to be seen to what extent the rejection of the arbitration defense is going to be discussed in further detail. The court in its interim decision totally ignored the objections of the defendant and failed to investigate them especially in relation to the authorized person and assumed that the liaison office representative was authorized to conclude the local policy.

    The court also ignored the request of the defendant for the appointment of an expert panel to discuss the meaning and interpretation of the arbitration clause in the policy, especially linguistically. The defendant had asked the court to appoint an expert panel consisting of an academician experienced in the field of international arbitration and an English language expert where the court did not find the explanations of the parties sufficient to conclude.

    According to article 11/5 of the Turkish Insurance Act, policies issued by local insurers must be in Turkish. Therefore standard wording of reinsurers must be translated to Turkish when a local policy is issued. It should be easy to imagine in that context the difficulty to translate into the Turkish language and explain to the Turkish court the linguistic discussion above in relation to the English language in terms of the meaning of the arbitration clause.

    One of the main reasons parties submit to arbitration is to provide an impartial venue to resolve disputes and prevent delays in local courts. The rendering of an interim judgment on the validity of the arbitration clause took the Turkish court eight months to conclude upon filing of the proceedings. (Subject to appeal with the final decision on the merits - and therefore may take around 3 - 4 years to be finally concluded - unless the parties settle). This stresses the importance of providing local wording with caution. Standard global insurance and related wording may lead to serious delay and unexpected results locally.

    Contributed by Nese Tasdemir, Partner of Mehmet Gun & Partners


     [1] Collins Cobuild English Language Dictionary - “May : ...5. you use may, 5.1. to say that someone is allowed to do something. e.g. the roman law according to which a girl may marry at twelve, was adopted by the church.