Recognition and enforcement of foreign arbitration awards in Turkey

TURKEY became a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitration Awards on October 1, 1992, and to the European Convention on International Commercial Arbitration on September 23, 1991.

The domestic law relating to the enforcement of foreign arbitration awards is the Private International and Procedural Law No 2675 of Turkey, which came into force in 1982. Article 90 of the Turkish constitution provides that international conventions duly put into effect carry the force of law without any further enactment. Accordingly, the courts of Turkey are obliged, prima facie, to implement the provisions of the New York Convention.

The provisions of Law 2675, stipulating the terms and conditions of recognition and enforcement of foreign arbitration awards, are almost identical to those set out in the New York Convention.

The practical difficulties most frequently encountered in Turkey when suing for enforcement of a foreign arbitration award may be summarised as follows:

No re-examination of the merits of dispute

In order for such awards to be enforced in Turkey, a recognition and enforcement procedure must be pursued against the defendant. It should be noted that this procedure does not involve a re-examination of the merits of the dispute.

Original and Valid Arbitration Agreement or Clause

A crucial factor is the existence of a valid agreement / clause between both parties agreeing upon arbitration. Under Turkish law, an arbitration agreement or clause should be in writing in order to be valid. The New York Convention (Articles II-2) also permits a series of exchanges of letters or telegrams between the parties to constitute a written arbitration agreement. This matter was considered by the General Board of Civil Panels of the Supreme Court of Appeal (i.e., the highest judicial authority in Turkey) in a decision issued April 15, 1998, under case No 98/19-256 and judgement No 98/279. The issue in this case was that no arbitration clause was signed by the defendant. But in previous correspondence between the parties there were references to FOSFA 54, which contains an arbitration clause. It was held that these references were enough to establish a valid arbitration clause between the parties as envisaged by Article II -2 of the New York Convention.

This decision has particular significance for the shipping industry in light of the great number of standard forms and wide usage of cross-referencing. But, for the avoidance of risk at the enforcement stage, either an arbitration agreement or identical clause should be drawn up and executed even where, for example, there is reference in a charter party to a standard form with an arbitration clause or to a similarly broad term such as "All other terms and conditions as per charter party for ... with arbitration provisions and logical amendments".

What about third parties?

There is no doubt that an arbitration agreement or clause is binding between the parties to it. However, the triangular relationship in shipping circles causes problems. This raises the question of whether a receiver is bound to the terms of an arbitration agreement or clause concluded between, for example, a charterer and a carrier. The relationship between a receiver and a carrier is primarily governed by the terms of the bill of lading, but this document is often silent regarding arbitration.

We can consider three types of bill of lading references to a charter party:

"All other conditions as per charter party"

Does a bill of lading marked "all other conditions as per charter party" create a valid arbitration clause binding on a receiver? Such a term incorporates certain charter party terms into the contract of affreightment, but does this include an arbitration clause? It is submitted by Professor Cemal Sanly in Preparation of International Commercial Contracts and Methods of Dispute Resolution, that this should be answered in the negative, and that this type of clause should only be taken to incorporate the commercial terms of the charter party into the bill of lading and not the arbitration clause itself.

"A specific reference"

It should be noted that Prof Sanly has observed that the arbitration clause of a charter party is incorporated into the bill of lading by a specific reference to the charter party and its arbitration clause. In such a case, the arbitration clause will also be binding on the bearers of the bill of lading.

"To be used with charter parties"

This type of reference is very widely used and its legal implications were considered by the General Board of Civil Panels of the Supreme Court of Appeal in a decision issued in 1995 under Case No 94/11765 and judgement No 95/39. The board held that, where this reference is contained in a bill of lading and this bill is endorsed to a third party receiver, who in turn takes delivery by reliance on this bill, then as such this third party may not allege that the referred arbitration clause of the charter party shall not be binding.

Those who issue bills of lading must therefore consider their position with extreme caution. In order to avoid the risk of disputes arising, bills of lading should contain an arbitration clause, perhaps identical to the arbitration clause found in any relevant charter party. Equally, holders of bills of lading should safeguard their position by examining the referred charter party or the arbitration clause.

Capacity

The validity of an arbitration agreement or clause is dependant upon the capacity of the parties who enter into such agreements or clauses. Allegations sometimes arise that the defendant party to the enforcement proceedings did not have the authority to execute and bind its principal to the arbitration agreement or clause. Under Turkish law, such questions of capacity are resolved for individuals in accordance with the national law of their domicile. On the other hand, for corporate entities, the law of the entity's central place of business determines matters of capacity.

Finalised Award / Binding Award

Turkish law recognises the principle of a defendant's right to exhaust all means of defence before having any process of law enforced against it. Under Law No 2675, an enforceable arbitration award must be a finalised one. On the other hand, the New York Convention requires that an arbitration award is binding. Again, the Turkish courts leave this issue to be decided in accordance with the rules of the arbitration forum or the chosen law of the parties. A recent decision of the General Board of Civil Panels of the Supreme Court of Appeal provides that a foreign arbitration award need only be binding (as opposed to finalised) for enforcement in Turkey.

Public Policy

As in other legal systems, public policy considerations comprise an undefined area of Turkish law. A number of issues may be determined to be against Turkish public policy and, as such, would preclude successful enforcement of a foreign arbitration award. The most notable example for present purposes is that of completion of service of proceedings to the defendant party.

A typical case involves a defendant denying receipt of notice of proceedings. This is a complete defence under Turkish law if successfully invoked. The burden of proof regarding service under Turkish law rests with the plaintiff. Service by fax or other electronic means obviously can constitute valid service where receipt is acknowledged by the defendant. However, denial of receipt cannot easily be overcome.

It is difficult to persuade the Turkish courts by submitting proof of fax or telex transmission. Notwithstanding service of proceedings in accordance with the law of the sender's jurisdiction, for the avoidance of any risk, the most advisable method of service is by return receipt mail and to state the contents of the package thereon.

In summary, then, foreign arbitration awards are enforceable in Turkey, but attention must be given to issues such as validity and capacity during constitution of the arbitration clause and to finalisation and service of notice during and after the arbitration itself.

Turkish International Registry

SHIPOWNERS in Turkey are currently eagerly awaiting the opening of the country's new second register, the Turkish International Ship Registry. The initial legislation for the new registry was put in place in December 1999, and the recent enactment of an accompanying Directive has now brought the establishment of the registry close to completion. At the time of writing the second registry is not open, but is expected to register its first vessel within the next few weeks.

A principle feature of the second registry is the exemption of the earnings of registered vessels from income or corporation tax, as well as various other tax benefits. This has obviously been warmly welcomed by the Turkish shipowning community, which has been advocating such an incentive for a considerable time.

Vessels in the second registry will fly the Turkish flag and enjoy the privileges of those vessels registered in the existing Turkish national register, where criteria for registration is such that, under Article 823 of the Turkish Commercial Code, the shipowning entity must have at least a 51 per cent Turkish nationality interest ,and the majority of the directors must be Turkish nationals. This requirement has been removed for the second registry, where the stipulation is that the shipowning company may be a wholly foreign-owned entity provided it has a registered place of business within Turkey.

Ships and yachts flying the Turkish flag pursuant to the Act may exercise the rights granted by national legislation, with the exception of the benefits of the cabotage law.

This stipulates that only Turkish-flag vessels pursuant to Article 823, i.e., "national" Turkish vessels, shall be entitled to benefit from the advantages of exclusive trading and operations in and around the Turkish coast.

The new registry will also have important implications for banks and financial institutions with Turkish lending portfolios. Many Turkish owners are keen to move their vessels from the first registry to the new registry as soon as it opens. The prime concern of mortgagees of such vessels will be the unimpaired maintenance of their security. The new directive does contain some provisions regarding transfer of vessels between the two registers, but these are presently too vague to be able to determine the exact procedure that will be followed.

The original aim of the new second registry was to promote and strengthen the Turkish shipping market. Turkish owners are presently very optimistic and enthusiastic about the new registry, and the incentives that it provides. The legislation is in place, and the registry will open its books shortly. However, in light of the rather brief legislation, it remains to be seen exactly how the new registry will operate in practice.

It is hoped that, with prudent management, the new registry will be a success and that a smooth transfer of vessels from one registry to the other can take place to the benefit of owners, but also without prejudice to the banks.