Arbitrability of the Action for Annulment of Objection and Compensation for Unjustified Denial of Debt: 11th Civil Chamber of the Court of Cassation Decision dated 3 April 2024

Factual Background

The dispute in question arose from a license agreement concluded between the parties. The agreement contained an arbitration clause stipulating that any disputes arising therefrom would be resolved by arbitration. Relying on claims derived from the agreement, one of the parties initiated ex parte execution proceedings. Upon the debtor’s objection to the payment order, the creditor subsequently filed an action for annulment of objection before the Istanbul Arbitration Centre.

The arbitral proceedings, conducted in accordance with the provisions of the International Arbitration Law No. 4686 (“IAL”), resulted in a decision whereby the tribunal not only upheld the creditor’s claim based on the underlying contract but also awarded compensation for unjustified denial of debt.

The respondent, against whom the arbitral award had been rendered, filed an action for annulment of the arbitral award before the Turkish courts. In support of its application, the claimant argued that the arbitral tribunal lacked jurisdiction to adjudicate an action for annulment of objection, asserting that such actions fall outside the scope of arbitrable disputes. The claimant further contended that initiating execution proceedings despite the existence of an arbitration agreement was inconsistent with the parties’ expressed intent to arbitrate and that arbitral tribunals are not competent to render decisions binding upon execution authorities. It was also submitted that an action for annulment of objection should not be equated with a standard action for recovery of debt.

The claimant further asserted that the arbitral tribunal lacked jurisdiction to award compensation for unjustified denial of debt and that such a decision was contrary to public policy. It was argued that the action for annulment of objection is a remedy specific to execution law and that compensation for unjustified denial of debt is neither contractual in nature nor based on substantive law. Accordingly, the claimant contended that such compensation falls outside the scope of the arbitration agreement. The claimant emphasized that compensation for unjustified denial of debt is a sanction envisaged within the compulsory execution system and serves a public interest function, whereas arbitral tribunals are competent only to resolve disputes arising under private law.

Moreover, the claimant maintained that the arbitral tribunal addressed the jurisdictional objection as a preliminary issue and ruled, by way of an interim decision, that it had jurisdiction. However, one of the arbitrators issued a dissenting opinion specifically with respect to jurisdiction over the claim for compensation. The claimant argued that, pursuant to Article 14 of the IAL, dissenting opinions must be included in the final award and that the failure to incorporate the dissent—despite its appearance in the interim decision—constituted a violation of the rights to be heard and to a fair trial. On this basis, the claimant sought the annulment of the arbitral award.

Assessment by the Regional Court of Appeal and the Court of Cassation

The Regional Court of Appeal, which examined the annulment action brought against the arbitral award, established that the parties had agreed upon Turkish law as the applicable law under the terms of their contract. In this context, the court found that Turkish law does not contain any provision prohibiting a creditor from initiating ex parte execution proceedings in respect of a claim subject to an arbitration agreement. The court emphasized that, both in legal practice and in doctrine, the prevailing view holds that a creditor may initiate execution proceedings even where a valid arbitration agreement exists between the parties.

The court further observed that execution proceedings do not constitute a lawsuit in the procedural sense and that prior to the debtor’s objection to the payment order, no arbitrable dispute has yet arisen. However, once such an objection is raised and a legal dispute materializes, the creditor is required to pursue the matter through arbitration in accordance with the arbitration agreement concluded between the parties. On the basis of this reasoning, the court concluded that the arbitral tribunal had jurisdiction to adjudicate the action for annulment of objection.

With respect to the compensation for unjustified denial of debt, the court emphasized that this form of compensation is specific to execution law. It is designed to discourage the unnecessary occupation of courts and execution offices, and constitutes a special type of compensation that may be awarded contingent upon the outcome of the action for annulment of objection. In the case at hand, the court found that, since the dispute did not pertain to matters of public policy and the compensation in question was ancillary in nature, the arbitral tribunal was also competent to adjudicate this aspect of the claim.

The court further stated that the underlying dispute was, in essence, a claim grounded in substantive law and therefore, pursuant to the parties’ agreement to arbitrate, should have been resolved within the framework of arbitral proceedings. Consequently, the tribunal that was competent to decide on the principal claim in the action for annulment of objection was likewise authorized to rule on the associated claim for compensation for unjustified denial of debt. On these grounds, the court concluded that the arbitral tribunal’s decision to award such compensation was in conformity with the law.

With regard to the dissenting opinion, the court emphasized that, pursuant to Article 14/A, paragraph 4 of the IAL, arbitral awards must include any dissenting opinions. However, it noted that the absence of a dissenting opinion’s reasoning is not expressly listed as a ground for annulment under Article 15 of the IAL. The court further observed that the arbitral award had been rendered by majority vote, that the subject matter of the dissent had been acknowledged in the reasoning of the award, and that additional explanations were provided in a supplementary decision. In light of these considerations, the court held that the omission of the dissenting opinion’s reasoning from the final award did not constitute a violation of public policy and, therefore, did not amount to a ground for annulment. Accordingly, the court rejected the application for annulment.

Upon appeal, the Court of Cassation reviewed the case and concluded that the decision of the Regional Court of Appeal was procedurally and legally sound. The Court dismissed the appeal and upheld the lower court’s ruling.

Conclusion

The decision under review is of particular significance as it affirms the arbitrability of the action for annulment of objection, a special remedy arising from execution law. It is also noteworthy in that it accepts that compensation for unjustified denial of debt, which originates from compulsory execution law and is ancillary to the action for annulment of objection, may be awarded in arbitral proceedings.