THE AUTHOR:
Fatih Işık, Founding Partner at Işık & Partners Law Firm
This article relates to a decision of the 11th Civil Chamber of the Turkish Court of Cassation (“Court of Cassation”) in which several issues such as parallel proceedings, consolidation, arbitrator’s discretion and lis pendens in arbitration are discussed. The decision concerns the annulment of an arbitration award under Istanbul Chamber of Commerce Arbitration and Mediation Center (“ITOTAM”) Arbitration Rules.
Background of the Dispute
The award subject to annulment proceedings was rendered in the ITOTAM case numbered 2019/9. This case related to a dispute arising from a portfolio transfer contract in which the claimant claimed for allegedly overpaid fees due to the three respondents’ non-fulfilment of their portfolio transfer obligations, as well as contractual penalty and compensation for loss of profit. However, one of the respondents of the case numbered 2019/9 had previously claimed for the payment of the overdue remaining portion of the contract price in exchange for the portfolio transfer as the claimant in the case numbered 2019/7. Despite the parties’ requests, the ITOTAM Board decided not to consolidate the two arbitrations as there were differences between the two arbitrations in terms of the parties and the subject matter. The Board appointed a different sole arbitrator for the case numbered 2019/9. Thus, the disputes arising from the same contract and based on the same set of facts were to be resolved by two different sole arbitrators in two different arbitrations.
The claims put forward in the case numbered 2019/9 were partially accepted, shortly after the award in the case numbered 2019/7 was rendered. The award in the latter case was submitted as evidence by the parties to the file numbered 2019/9. The sole arbitrator of the case numbered 2019/9 stated in his award that he reviewed the award of the case numbered 2019/7, but he was not bound by the findings and evaluation reflected on that award and has freely assessed the evidence and facts while rendering his own award.
Annulment Proceedings – Divergence between the Approaches of Turkish High Courts
The grounds for the annulment claim rested on the fact that the sole arbitrator of the case numbered 2019/9 chose not to halt proceedings until the award was issued under the case numbered 2019/7, even though there were two separate arbitration cases filed before the same institution, based on the same contract and same set of facts. According to the parties, this posed a risk of contradictory decisions, which was against public order.
The 14th Civil Chamber of the Regional Court of Istanbul (“Regional Court”) dismissed the annulment claim (dated 21.12.2021 and numbered 2021/5 E., 2021/7 K.). According to the Regional Court, it was correctly held in the award that, even though the two arbitrations were based on the same contract and the same set of facts, the parties and the claims did not exactly align, and the two arbitrations concerned different subject-matters. Underlining the arbitrator’s power to freely evaluate the evidence, the Regional Court stated that the award included a reasonable assessment of the evidence and facts presented. The Regional Court also noted that failing to wait for an ongoing case to be resolved was not listed as a ground for annulment under the relevant legislation, and that the arbitrator’s discretion in analysing the evidence was an issue related to the merits of the dispute and therefore could not be reviewed through an annulment claim.
The Regional Court’s decision was reversed by the Court of Cassation and the award was annulled on the grounds of public order, as the final award in the case numbered 2019/9 was rendered without waiting for the finalisation of the relevant claims in the case numbered 2019/7. The Court of Cassation stated that even though the claims or the parties did not exactly align, the two arbitrations were related to the same issue: one party’s fulfilment of its contractual obligations. According to the Court of Cassation, this could lead to different conclusions, albeit partially, around the same set of facts. Different and potentially conflicting outcomes regarding a particular set of facts, the Court of Cassation said, can jeopardise the principles of “legal security, transparency and consistency”, which in turn can create issues in terms of public order. The Court of Cassation noted that although national courts lack the authority to review the merits of an arbitral award, public order maintains an exception to that rule.
Given the above, the Court of Cassation found that the arbitrator of the case numbered 2019/9 failed to; (i) question whether the award and related material facts in the case numbered 2019/7 became definitive (which means all the annulment procedures are finalized) and (ii) evaluate the effects of these (definitive) findings on the dispute at hand, before rendering the final award.
Upon the Court of Cassation’s decision, the Regional Court stood firm in its decision (dated 07.10.2022 and numbered 2022/3 E., 2022/2 K.). The Regional Court once again emphasized that the subject matters, claims, and the points of dispute in the two arbitrations were different, on top of the partial difference in parties. The Regional Court, thus, reiterated its initial founding that there was no lis pendens between these two arbitrations. The Regional Court also underscored that no legal provision requires the previous file to be considered as a preliminary issue to be resolved in the arbitration proceedings, nor is there any such provision in the ITOTAM Arbitration Rules.
This time, the Regional Court delved more into details and explained why the award should not be annulled: (i) the fact that the arbitrators have exercised their discretion differently in evaluating certain facts is strictly related to the independence of each arbitrator and their right to freely evaluate the evidence and exercise their discretion, (ii) as a matter of fact, the sole arbitrator of the case numbered 2019/9 examined the case numbered 2019/7 after the proceedings and reflected in his award what his independent assessment was, (iii) since there is no conflict between the outcomes of the awards, and what is ruled in one award is not eliminated in the other, it cannot be argued that the Turkish public order has been disrupted. Accordingly, the Regional Court dismissed the claim for annulment once again. This reasoning, apparently, has been accepted by the Court of Cassation, as the latter finally upheld the Regional Court’s decision and the award was saved from the parties’ challenges on the ground of public order. Unfortunately, it is not possible to provide a detailed assessment of the judgment as the Court of Cassation did not explain the reasoning behind its decision.
Final Remarks – Decision’s Effect on the Discretion of Arbitrators
While the Regional Court had acknowledged the arbitrator’s discretion and authority to freely evaluate the evidence, the Court of Cassation’s initial position held that the risk that such an approach seemingly posed against public order outweighed the importance of the discretion of the arbitrator. The fact that the Court of Cassation failed to acknowledge how the final award of the case numbered 2019/9 came out after that of the case numbered 2019/7 proves that the Court of Cassation was not satisfied with the arbitrator merely waiting for the end of the previous proceedings but expected him to take the previous award’s findings as definitive facts while ultimately rendering the award.
Thus, according to the initial position of the Court of Cassation, an award rendered in an arbitration that was initiated before another, in a way, prevails over the latter. This interpretation takes away from the second arbitrator’s ability to come to his or her own determination on factual claims, hinders the arbitrator’s freedom to assess evidence and expects the arbitrator to be bound by the factual findings of the first arbitration. Considering the findings of the previous arbitration could be reasonably expected from the arbitrator, but taking these findings as facts would only limit the arbitrator’s discretion in a way that does not suit the nature of the arbitration.
The Court of Cassation’s concern was that contradictory findings might lead to discrepancies that could jeopardise the consistency and harmony within the legal system. As reasonable as this concern may be, the consequently adopted measures should still be effectively balanced to preserve the discretion allowed to arbitrators.
ABOUT THE AUTHOR:
Fatih Işık is the Founding Partner of Işık & Partners Law Firm. With nearly fifteen years of experience, Fatih provides consultancy services to his clients, represents them before the courts and acts as counsel, expert witness and arbitrator in domestic and international arbitration proceedings. Besides his professional activities, Fatih has built a strong academic background. On top of several articles, his monography entitled as “Authority to Enter into Arbitration Agreements and Applicable Law to this Authority in International Commercial Arbitration” was published as a book in 2015. Fatih Işık regularly speaks at symposiums and conferences, visits law faculties as a guest lecturer in the field of international arbitration and gives arbitration trainings.
*The author of this article has disclosed being involved in the case mentioned. The views and opinions expressed by the author are his and do not necessarily reflect the views and opinions of Daily Jus, Jus Mundi, & Jus Connect.
