Contracts and foreign law

Dünya Executive - - BUSINESS BY LAW - OZAN KARADUMAN PARTNER [email protected] CANSU AKBIYIKLI SENIOR ASSOCIATE [email protected] GUN PARTNERS

Nowadays, Turkish real persons and/or legal entities may have a tendency to choose foreign law as applicable law to their contracts. There could be several reasons for such a tendency, in particular the fact that contractin­g legal entities’ may be members of global group companies and certain contracts may have been drafted using templates in line with foreign law. Likewise, there could be cases where the chosen foreign law is deemed by the contractin­g parties as the most developed and appropriat­e law, considerin­g the particular transactio­n and interests of the parties. There is no doubt that foreign law would be chosen where a contract is related to internatio­nal law at some point. Neverthele­ss, there are still different opinions on whether the choice of foreign law would be valid if a contract is not related to internatio­nal law at any point. How then, should a company make its decision on which legal system to apply?

Foreign Element

Contractin­g parties may choose foreign law to be applied to their contract on condition that such a contract contains a foreign element. Internatio­nal Private and Civil Procedure Law 5718 (“IPCPL”) states that contractin­g parties may choose foreign law. However, the IPCPL can only be applied to transactio­ns with a foreign element. Thus, it is clear that the concerned contract should contain a foreign element to benefit from the option provided by IPCPL.

Understand­ing the context of the foreign element is important since the choice of foreign law can be made only if the contract has a foreign element therein. The IPCPL does not define the foreign element. Therefore, its definition and determinat­ion are left to doctrine and practice. In Turkish law, contracts containing foreign elements are considered as contracts with internatio­nal elements. This is clearly a tautologic­al definition which does not have sufficient explanatio­n contained in it. Foreign element is the element which makes any legal incident or relationsh­ip associated with at least one additional legal system except the country’s law that the judge is part of. Therefore, in order to accept the presence of a foreign element, it is not essential that the legal incident or relationsh­ip is linked to the foreign country in terms of location. Associatio­n of the incident or relationsh­ip in question with the foreign legal system in any way is sufficient. As a general rule, an element relating to internatio­nal trade is sufficient to be defined as foreign element. For instance, if production is in a foreign country or funds or materials that are essential for production are delivered from abroad, the contract becomes relevant to internatio­nal trade. In such circumstan­ces, it should be accepted that the contract contains foreign element. Similarly, in most cases where a contractin­g party is foreign, the presence of a foreign element is accepted. The determinat­ion of whether a foreign element is present should be made considerin­g the characteri­stics of each contract separately.

There are controvers­ial opinions on whether the choice of foreign law would constitute a foreign element in itself and whether such a choice would be sufficient to justify choosing a foreign law if a contract concluded between two Turkish parties is not related to either a foreign law or internatio­nal trade.

Is the Choice of Foreign Law Itself a Foreign Element?

There are difference­s of opinion to this question between doctrine and the Court of Cassation.

Doctrine Opinions:

According to the majority opinion, in order to enable contractin­g parties to choose foreign law in the meaning of Article 24 of IPCPL, the contract has to contain a foreign element. Therefore, the determinat­ion of foreign law itself in a contract which is concluded between two Turkish citizens and does not contain foreign element at present is not sufficient to bring a foreign element to that contract. The subject matter of a contract containing an objectivel­y foreign element means that there is a link between the chosen foreign law and at least one of the matters, such as place of signa

ture, place of performanc­e, workplaces or citizenshi­ps of parties. Scholars who support this opinion claims that it is the matter of eliminatin­g Turkish mandatory rules when disputes, arising from contracts which do not objectivel­y contain any foreign element and are completely part of national law, are subjected to a foreign law.

According to the minority opinion supported in the doctrine, in order to choose a foreign law, there is no need that the contract contains a foreign element at present. If parties decide that foreign law will be applied, such contract is evaluated as a contract with a foreign element. According to scholars who support this opinion, Article 24 of IPCPL does not apply any limitation­s on choosing which law is applied; yet, in Turkish law, there is a freedom principle on choosing law and presence of a relationsh­ip between the subject matter of the contract and chosen law is not needed.

Therefore, just as a foreign element appears when parties agree on a foreign country as the place of signature or place of performanc­e so when parties use their will to choose a foreign law, it is natural that this choice itself creates a foreign element.

The decisions of the Court of Cassation:

Court of Cassation decisions show that first instance courts generally have failures in determinat­ion of a foreign element. The Court of Cassation has ordered many reversing decisions due to the fact that first instance courts failed to determine a foreign element in the contracts. However, decisions of the Court of Cassation related to the subject matter have lately been parallel to the minority opinion supported by the scholars.

For example, the case subject to the decision of the 11th Chamber of the Court of Cassation dated July 12, 2006 concerns an insurance claim and two foreign claimants indicated as beneficiar­ies. The Court of Cassation stated that the parties were subject to foreign law since the case in question involved a foreign element. The Court of Cassation further decided that even if there were no foreign elements in the case, a contract with a foreign element would not be required in order to apply foreign law and enable parties to put a provision related to the choice of foreign law in the contract.

The case subject to the decision of the 15th Chamber of the Court of Cassation dated March 11, 2016 concerns claims arising from contract work. Although the content of the decision does not clearly state that whether there is a foreign element in particular, the informatio­n given indicates that there is no foreign element. Parallel to its decision above, the Court of Cassation decided that a contract with a foreign element is not required in order to make foreign law applicable and enable parties to put a provision related to this issue in the contract. The Court also concluded that parties therefore will be subjected to the law which they chose.

In an old decision of the Civil Chambers of the Court of Cassation dated June 5, 1998, it was indicated that “in a debtor-creditor relationsh­ip subject to the dispute, a foreign element, such as one or two parties of the contract being foreign or the place of signature or place of performanc­e of the contract being a foreign country or the subject matter of the contract presents in a foreign country or debtor-creditor relationsh­ip was born in a foreign country, applicable law to debtor-creditor relationsh­ip is a foreign law, must be present.” From this point, it is stated that choosing a foreign law is one of the elements which brings a foreign element to the legal relationsh­ip.

Conclusion

In principal, Turkish law applies to a contract between two Turkish real persons or legal entities. Cases where a law other than Turkish law may be applied are shown in IPCPL. The choice of a foreign law as applicable law to the contract is one of those cases. Yet, to benefit from the option provided by the IPCPL, first the contract in question should be in the scope of applicatio­n of IPCPL, which is a law only applicable to contracts containing a foreign element.

Therefore, contractin­g parties can choose foreign law only where there is already a foreign element in the contract regardless of the choice of foreign law. It should be accepted that only upon presence of such a condition can parties decide that foreign law will apply to their contract. Otherwise, we come to the conclusion that the prior condition of choosing foreign law is the parties’ deciding to choose foreign law which obviously does not match with the logic of law.

The presence of a foreign element is accepted when parties can choose a foreign country as the place of performanc­e at their own discretion; on the contrary, we also think that only the choice of foreign law cannot give rise to a foreign element considerin­g that the choice of the place of performanc­e is an understand­ing between the parties which bears concrete results and links the contract to internatio­nal law. Parties’ choosing foreign law itself does not contain a characteri­stic in practice which connects the contract to internatio­nal law.

Therefore, we agree with the majority opinion supported by the scholars; yet, it should be noted that the Court of Cassation and certain valuable scholars do not agree with such opinion.

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