A Commonly Overlooked Question: Are You Really Free to Enter into a Contract with a Turkish Entity in a Foreign Language?
Especially in the last two decades, Turkey has been trying to create an investment-friendly environment for foreign investors. This has resulted in entry of many foreign investors to the country – in addition to the existing ones. As a result, the number of Turkish companies totally owned by foreign entities has increased rapidly. The number of local Turkish companies involved in international transactions is also not negligible. Even small-sized companies execute significant transactions on the cross-borders. On the flip side, it is not uncommon to see foreign companies contracting with Turkish entities for projects in or out of Turkey. In all these instances, it is obvious that, in the negotiation of contracts shaping the parties’ relationship, there are certain non-Turkish constituents who need to be informed. In cases of complex or multiparty projects, contracts are commonly made in English—even between companies incorporated in Turkey. Although it is totally understandable to negotiate and execute contracts in English (or other foreign languages as the case may be) considering that the constituents need to understand the terms without involvement of an intermediary, this is unfortunately contrary to the Act Regarding Compulsion of Usage of Turkish by Commercial Enterprises numbered 805 (hereinafter “Act 805”) which is a usually overlooked legislation. The consequences of such a possible breach might be substantial, as a foreign party having a claim against the Turkish party might be faced with invalidity defences during the litigation process or enforcement of an arbitral award or court judgement. This paper is going to describe and explain the provisions of the Act numbered 805 with the aid of High Court decisions under Turkish Law.
Contracts Between Turkish Parties
According to the section 1 of the Act 805, Turkish entities are required to use Turkish language in their transactions, contracts, communications, accounts and ledgers within Turkey. In a dispute regarding the interest rate for a sum deposited by a Turkish person to a bank incorporated in Turkey, the bank relied on a contract, which was drafted in English, to prove its allegation that the interest rate should be %22 instead of %24 and that the bank had the authority to convert the money deposited to other currencies without an instruction from its customer (the claimant). The claimant alleged that the contract which he signed was presented to him as “just a formality”, he has not been provided with Turkish translation of it and, hence, he has been misled by the bank. The bank argued that the claimant was in a position to understand what the contract meant since he has been doing high-value transactions for quite some time. The local court agreed with the bank and rejected the claimant’s case. On appeal, however, the Court of Appeals (“Yargıtay” in Turkish) overturned this decision on the basis that the local court should have considered the Act 805 and evaluate whether the contract signed in English language was valid as per the law. After the Court of Appeal’s decision, the local court decided that the bank cannot rely on the contract as it contradicts with the Act 805. Afterwards, this decision was appealed against by the bank. This time, the Court of Appeal approved the local court’s decision which basically implemented what the Court of Appeal previously held.
This rule, however, does not prevent the parties from using foreign terms and expressions when the nature of the situation warrants it. The Court of Appeal, in one decision, acknowledged the fact that sometimes the necessity to use foreign terms may arise. In a case that the Court of Appeal reviewed, the parties executed an insurance policy which incorporated Institute Standart T.L.O. Clause-Hulls clause by reference which was, at that time, not officially translated to Turkish. Nevertheless, the court acknowledged the fact that, from time to time, using foreign terms and expressions might be necessary and incorporating the aforementioned clause into the policy by reference is a common practice in the insurance industry. Hence, the Court of Appeal’s conclusion was that the incorporation of the aforesaid internationally recognised clause does not suffice to say that the parties intended to execute their contract in a foreign language and therefore it cannot be concluded that they violated the Act 805. In contrast with this decision, the Court of Appeal also ruled in another decision that maturity provision which was written in a foreign language in a bank guarantee was contrary to the Act 805. The court noted that, although it is acceptable to use internationally recognised terms, the nature of the situation must require the parties to use them as they are—in foreign language. In absence of such necessity, use of foreign terms is contrary to the Act 805.
Contracts Involving Foreign Parties and Turkish Parties
As mentioned above, when describing the compulsion of using Turkish between Turkish parties, the Act 805 uses the words “transactions, contracts, communications, accounts and ledgers”. The second provision of the Act 805 states that, for foreign entities this requirement is applicable for their “communications”, “transactions”, and “documents which they need to submit to state authorities”. As is seen, the section two does not explicitly say “contracts” albeit it says “transactions”. The literal meaning of “transaction” includes contract. However, when this interpretation is adopted, one cannot answer why the legislator specifically included “contracts” in the first section although it already said “transactions”. Therefore, from a systematical interpretation, it can be construed that the legislator used the word “transactions” in a sense that it does not include “contracts”. This was, actually, Court of Appeal’s approach.
In a decision rendered in 1986, Court of Appeal compared the wordings of section 1 and section 2 and decided that the word “transactions” in section 2 does not include “contracts” and hence, the contracts between foreign entities and Turkish entities may be executed in Turkish language. The present authors of this paper endorse this interpretation of the Act 805.
In a more current decision, however, the same chamber of the Court of Appeal ruled in the opposite direction. The dispute arose between a foreign principal and Turkish distributor that was authorised to apply for the relevant licenses regarding a pharmaceutical product (Polimod 10 Oral Vials) before Ministry of Health and then exclusively distribute the product in Turkey. The contract between the foreign principal and the Turkish distributor had been terminated by the principal. Later on, the principal sued the local distributor, before a Turkish court, for retrieving the documents and information previously handed over for license application of Polimod 10 Oral Vials. The contract between the parties had an arbitration clause and the distributor accordingly objected to the first instance court’s jurisdiction. The court sustained this objection and rejected the case for the want of jurisdiction. Upon appeal, the Court of Appeal, after stating that section 2 of the Act 805 (i.e. the section dealing with foreign companies’ conduct with Turkish companies and state authorities) requires contracts to be executed in Turkish; it overturned the local court’s decision by indicating that the local court should have considered s.2 of the Act 805. The local court complied with the Court of Appeal’s decision and rendered a judgement for the principal. This time, the decision was appealed by the distributor and, upon appeal; the Court of Appeal approved the local court’s decision saying that the distributor was not allowed to rely on the arbitration clause since it was drafted in English language. In a very similar set of circumstances, the Court of Appeal decided that the arbitration clause contained in a distribution agreement regarding import and distribution of a pharmaceutical product was found inapplicable as it was written in English and therefore contrary to the Act 805. Therefore, as is seen, there has been a significant change in the Court of Appeal’s opinion regarding the issue.
As a result, despite the common understanding that it is legally permissible to execute contracts in foreign languages when there is at least a foreign party involved, although makes perfect sense, is legally mistaken. This view actually was adopted by a District High Court (Bölge Adliye Mahkemesi) in a case regarding a dispute arising out of an agency contract written in English language. The local court rejected the case since there was an arbitration clause in the parties’ contract. This decision was appealed by the claimant. The District High Court rejected this appeal on the ground, inter alia, that the Act 805 was not applicable since one of the parties was not Turkish. Upon further appeal, the Court of Appeal however, held that the District High Court erred in its determination that one of the parties was foreign. Therefore, the Court of Appeal held that the contract was invalid as per the first section (section regarding dealings between Turkish companies) of the Act 805. The wording of the Court of Appeal’s decision surprisingly appears to give credit to the District High Court’s view that the Act 805 is not applicable when one of the parties is foreign since, otherwise, the Court of Appeal would not have taken the trouble of examining whether the parties were actually Turkish. However, this issue was not actually decided by the court. This was, indeed, a good opportunity for Court of Appeal to go back to its previous stance on the issue by at least explaining, in obiter, that the District High Court’s determination that Act 805 does not apply to contracts involving foreign parties was correct. This would have changed the situation as it is the most recent decision of the Court of Appeal on this issue. However, currently it is not possible to say that the Court of Appeal’s stance on the issue has changed. Although, as mentioned above, the present authors of this paper sincerely endorse the Court of Appeals previous view on the issue (11th Civil Chamber E. 1986/4231 K. 1986/5032 t.07.10.1986) considering the fact that the same chamber of the Court of Appeals decided, in a more recent case, quite in the opposite direction, the current state of the law requires contracts with Turkish companies to be in Turkish irrespective of whether there is a foreign party involved.
The section 4 of the Act 805 states that documents drawn up in contradiction with the first and second sections of the Act 805 cannot be taken into consideration. The nature and extent of this consequence is somewhat vaguely described. The question as to whether such contracts become legally invalid or if the Act 805 is an Ordnungsvorschrift having no effect on the substantial legal validity of such agreements, but obliging Turkish courts not to accept contracts drawn in foreign languages. Although the difference here might seem merely theoretical as one might think that after all what difference does it make if the contract is legally deemed valid if one cannot rely on it before the courts of law, it hardly is. The importance of this issue becomes clear when there is an arbitration agreement in a contract governed by Turkish law executed in a foreign language. Say, for instance, one of the parties commenced an arbitral proceeding to the other who, then, objects to the jurisdiction of the tribunal on the ground that the arbitration agreement should have been in Turkish. If the Act 805 has no effect on validity of the parties’ agreement, but just directed towards Turkish courts, then the claimant should have no difficulty in enforcing that award in Turkey (provided that there is no other obstacle as per NY Convention) as it is based on a valid agreement. If, on the other hand, contradiction with the Act 805 renders an agreement legally invalid, then the arbitration agreement between the parties would also be regarded as invalid. In this instance, the counterparty might as well apply to set aside the arbitral award on the basis that it has been rendered in absence of a valid arbitration agreement between the parties. Therefore, this issue warrants due attention.
In a relatively recent decision, the Court of Appeal opened the Pandora’s Box—whether non-conformity with the Act 805 renders a contract legally invalid or, although the contract stays valid, it puts a procedural prohibition to rely on such contract. In this decision, the local court rejected the defendant’s objection that the case should be heard by an arbitral tribunal on the basis that their contract (including the arbitration agreement) was not in Turkish. The Court of Appeal stated that the court should have considered the above question—whether the contract was valid. It also added that the local court should also have considered whether the plaintiff’s motion to have the defendant’s arbitration objection dismissed complies with the general principle of good faith. On these grounds, the Court of Appeal overturned the decision for reconsideration. While the question is indeed a crucial one, quite unfortunately, there is no reported decision as to how this case was decided after the Court of Appeal’s decision. It might be the case that, the case might not have been appealed for the second time after the local court’s second judgement. In a different case, however, a local court gave a hint as to its opinion regarding what is the legal consequence of violating the Act 805. In a dispute regarding termination of a legal services contract which was drafted in English, the local court stated that it is against the mandatory provisions of law¾section 1 of the Act 805. The local court, however, did not need to go into detail regarding the discussion as to the effects of violating the Act 805 as it already found the relevant contract invalid on other grounds as well. Upon appeal, the Court of Appeals approved this decision as it is. The Court of Appeal has the authority to approve the decisions which are valid in terms of their conclusion but inaccurate when it comes to their reasoning. It is obvious that had the Court of Appeal not concurred the court’s statement that provisions of the Act 805 are mandatory, the Court of Appeal would have approved the decision with an amendment to take out the relevant section¾the section of the decision stipulating that prohibitions in the Act 805 constitute mandatory law. Likewise, on a further appeal of the Court of Appeal decision approving the local court’s judgment (request for revision of the decision) the Court of Appeal endorsed the local court’s opinion with the following statement: “On the other hand, while the contract on which the case is based was drawn up in English despite the fact that the parties are Turkish, the
court’s decision that this contract is invalid as it contradicts with sections 1 and 4 of the [Act 805]which is mandatory law is, in principle, correct […]”
In the above decision regarding consultancy and legal services contract, Court of Appeal held the fact that the local court’s conclusion regarding the invalidity of the contract does not preclude the claimant from requesting the overpaid amounts. In this regard, the Court of Appeal stated that the local court must determine what proportion of the legal and consultancy services were performed and what is the fair value of such services. The key here is “fair value”. The Court of Appeal did not regard the sums stipulated in the contract. Quite interestingly however, in another case mentioned above (11th Civil Chamber E. 2014/1385 K. 2014/3815 t.28.02.2014) the local court rejected to give effect to an arbitration agreement since it was not in Turkish, the court based its decision on the other provisions of the contract which were, again, not in Turkish. The Court of Appeal approved this decision as it is. Although the content of this agreement is unknown to the present authors, it is safe to assume that the judgment may have been different had the court disregarded the contract in its entirety. It might be the case that the defendant only raised the issue of lack of jurisdiction due to the arbitration clause and the Court of Appeal could not overturn the decision on other grounds since the Court of Appeal is, by Civil Procedure Act numbered 6100, bound by what is requested by the applicant.
The centre of the issue here is whether the prohibitions of sections 1 and 2 of the Act 805 constitute mandatory law in the context of section 27 of the Obligations Act numbered 6098 which says that contracts contradicting with mandatory provisions are invalid. It must be emphasized here that mandatory provisions are not only contained in the Obligations Act 6098. The issue of determining whether a provision constitutes mandatory law can be a slippery slope. Generally speaking; (1) provisions mandatory nature of which can be understood from their wording, (2) provisions designed to protect public order, (3) provisions for preserving moral values, (4) provisions for protecting “personalities” of persons and (5) provisions for protecting weaker sides are regarded as mandatory. In the above items, (1) and (2) are susceptible to be applicable regarding the Act 805. The issue of public order appears to be relevant, albeit outdated. This act was enacted three years after Turkish Republic has been established and, at that time, Ottoman language (which was essentially a combination of Turkish, Arabic and Persian) was generally being spoken on the land. The state was making preparations to revolutionise this by freeing Turkish Republic’s language from Arabic and Persian effects. Considering the circumstances, therefore, the Act 805 may seem related with public order at that time. However, after 96 years, arguably it is not possible to say that this is currently a valid concern.
In terms of literal interpretation, when describing the obligation to use Turkish, the Act 805 uses the word “compelled”. The root of the relevant word means “force”. Therefore, the wording of the Act is definitely strong. The question as to whether this strength suffices to render contracts legally invalid is a matter of interpretation. As mentioned above, the Court of Appeal held, in some cases, that prohibitions of the Act 805 are of mandatory provisions of law. Since there are no other reasonable grounds (as discussed above) to deem these provisions as mandatory provisions of law, it appears that the Court of Appeal is of the idea that it does. What is quite unusual, however is the fact that these provisions deal with a very formal detail¾language of the contract. Contrary to this, other mandatory provisions regulate substantial issues (e.g. whether personal rights, public order or moral rights are violated, whether the weaker party is oppressed by the stronger party) and, generally speaking, prohibitions which are not directed to the substance of an agreement do not trigger s.27 of the Obligations Act. Therefore, the present authors’ opinion is that they should not be regarded as mandatory provisions of law. However, the question is an open one and care must be exercised not to fall foul of Act 805 considering the fact that, according to the latest decisions of Court of Appeal, contracts involving foreign parties are also included in the prohibition.
Finally, the section 3 of the Act states that if the contracts are made in dual languages (eg. Turkish-English), Turkish version will prevail. Therefore, foreign constituents are required to rely on other persons’ translations regarding their contracts¾especially where the disputes arising out of such contracts are to be adjudicated in Turkey. Therefore, executing contracts in dual language is not a conclusive solution since, again, foreign constituents would need to rely on the correctness of the translation.
As is seen, the Act 805 creates two ambiguities: (1) whether the contracts involving foreign parties should also be in Turkish and (2) whether contracts violating the Act 805 are legally invalid. These are open issues creating ambiguities in international trade and foreign investment. The Act increases transaction costs as, to be compliant with it, contracts must be accompanied by Turkish translations and, in any event, Turkish versions are to prevail. Considering the fact that the utility of this Act is now outdated, the present authors believe that the legislator should consider repealing it¾or at least amend it in a way that it would allow foreign language contracts. Until then, the Court of Appeal should render a unification of judgments decision to clarify the scope and effects of the Act 805.