Turkish High Court clarifies procedure for choice of law in international transactions

Turkey

A recent High Court of Appeals ruling provided welcome clarification on the determination of the choice of law in a commercial contract with a foreign element.

The Court confirmed that if there is a foreign element in a contract agreement, the applicable law should be determined ex officio by reference to the Turkish conflict of law rules, regardless of the specific state law referenced by the parties in their arguments during litigation.

Background

The Claimant, a German-based bank, entered into loan agreements with two companies. The Defendant, the majority shareholder of those companies, entered into a surety bond agreement with the Claimant in order to secure performance of the companies’ obligations under the loan agreements.

The principal debtors both defaulted on their repayment obligations under the respective loan agreements.  Subsequently, the Claimant brought an action before the Turkish courts against the Defendant for the payment of the monetary obligations under the loan agreements.

Proceedings

Prior to settling the dispute on its merits, the Regional Appellate Court held that while the Agreement did not contain a governing law clause, the parties implicitly chose Turkish law as the governing law because they formulated their arguments with reference to Turkish law.

The Regional Appellate Court’s judgment was overturned by the High Court of Appeals in its decision dated 7 October 2020 numbered E. 2019/83 and K. 2020/3914. The key issue before the Court was whether the reliance of both parties on the provisions of the same legal system amounted to a mutual, implicit choice of law.

Decision

The Court identified the following foreign elements concerning the Agreement:

  • The Agreement was executed in Germany;
  • The Defendant’s habitual residence was in Belgium;
  • The Claimant entity’s registered seat was in Germany.

The Court then referred to the principles set out by the Act on Private International and International Procedural Law numbered 5718 that governs the law on disputes that include a foreign element:

  • Under Article 24, an express or implied choice of governing law prevails. In the absence of evidence of such an intention (either express or implied), the applicable law must be determined objectively in accordance with the forum’s Conflict of Laws rules.
  • Pursuant to Article 2, the Conflict of Laws rules and the law designated by those rules must be applied ex officio. This implies not only that the judge is required to apply the Conflict of Laws rules to determine the applicable law in the absence of a choice of law by the parties, but also that the judge must decide on its own motion whether the parties actually intended the contract to be governed by that specific law.

The Court considered that the parties’ formulation of their arguments in accordance with Turkish law may not have amounted to an express or implied choice of law, and held that the applicable law should have been determined by reference to the Conflict of Laws rules.

Key points to note

Turkish Courts respect the intention of parties on the law governing a contract and the parties can make this choice before or after the execution of the contract. Once a dispute has arisen, however, parties find it more difficult to reach an agreement on the applicable law, resulting in judicial intervention. By inserting a governing law clause in an agreement, the parties would be able to avoid delays in resolving any dispute and unnecessary expenses in the process.

For more information on this high court ruling, contact your CMS client partner or local experts: alican.babalioglu@ybk-av.com and damla.erensoy@ybk-av.com

This article was written by Alican Babalıoğlu, Damla Erensoy and Mina Türkkan.