CORPORATE AUTHORITY TO SIGN ARBITRATION AGREEMENTS
Arbitration became the natural method for resolving disputes involving international aspects. In addition to this, it is the author’s observation that arbitration agreements are increasingly becoming more popular in the domestic context after establishment of Istanbul Arbitration Centre (“ISTAC”). As the frequency of incorporating arbitration clauses into commercial contracts increases, the system participants should be wary of the possible pitfalls of arbitration agreements entered into between corporations. One of those pitfalls is the authority (or lack of it) to sign arbitration agreements of corporate officers. This note will briefly describe the problem and demonstrate how to avoid it.
Under the section 365 of the Turkish Commercial Code (“TCC”), a company is normally managed and represented by its board members. The source of board members’ authority is the TCC itself. Therefore, unless their powers are constrained in another corporate document, board members have unlimited power to represent their companies. Therefore, the issue of lack of authority is not likely to arise in corporate agreements—including arbitration agreements—duly signed by the board members. However, it is common practice that such board members delegate their authority to represent the company to other corporate officers (such as chief executive officers, chief financial officers, managers etc.). This is achieved by adopting internal directives defining signing powers (usually with reference to the monetary values of contracts) into different classes (e.g. first class signatories, second class signatories). It is usually the case that such signatories to whom the authorities are delegated are the ones who sign commercial contracts on behalf of their companies. This is the source of potential arguments to the effect that the signatory who signed a contract on behalf of the company lacked the authority to do so.
Under Turkish agency law, authorisation with respect to certain matters needs to be done specifically. In other words, a general authorisation of a proxy will not include certain matters unless they are specifically mentioned in the instrument by which such authorisation has been done. These are mentioned in the section 504 of the Turkish Commercial Code (“TCC”). Arbitration is one of those matters. Therefore, in order to be able to enter into arbitration agreement on behalf of a person, this authority shall specifically be conferred.
Normally, limitations of authority of corporate officers can only be claimed against counterparties dealing with the corporation if it is proven that the other side of the agreement knew or should have known that the corporate officer who signed the agreement lacked the necessary authority. In this respect, the fact that corporate by-laws have been registered before the trade registry will not, per se, suffice to prove such knowledge. However, this point is rather a theoretical one. In practice, signatories usually attach, to the contracts which they sign, the instrument through which they have been authorised. As a result, the contour of the authority is customarily made known to the counterparty in the first place. Therefore, the possibility of avoidance of arbitration agreements for the want of authority is hardly a remote one. Even though, on the face of the internal directives authorising the signatory, the transaction appears to be falling within the signatory’s authority (e.g. because it is below the monetary limit set out in the internal directive), if the signatory is not specifically authorised to enter into arbitration agreements on behalf of the company, such arbitration agreement/clause may be deemed invalid. It is the author’s observation that this issue is generally overlooked in corporate internal directives. As a result, due care must be given in enquiring whether the signatory is specifically authorised to enter into arbitration agreements.