“Turkish Court of Appeal: Violation of the right to a fair trial in arbitration proceedings by way of exercising the trade secret defense is contrary to the public policy of the court.”
May 18, 2023 | NEWS
By Gokhan Bozkurt, Mustafa Bozkurt
In a recent case, the 11th Chamber of the Turkish Court of Appeal (Appeal Court), rectifying its previous decision, ruled that taking into account the right of the protection of trade secrets, not allowing the defendant to reach the evidence that submitted by the plaintiff to the file in the arbitration proceedings causes a violation of the fair trial for the respondent. This violation, therefore, means restriction of the right of the defense. Restricting the right of the defense and, by this means, violating the right to a fair trial clearly breaches Turkish public policy. Therefore, the arbitral award is contrary to Article 5(1)(b) and 5(2)(b) of the New York Convention and Article 62(1)(b) of the Turkish Code on International Private and Procedural Law and cannot be enforced in Türkiye.
Background
A plaintiff filed a case before Istanbul 8th Commercial Court [2] (Court) and sought the enforcement of an arbitral award rendered by an ICC arbitral tribunal according to English law. In the case, the plaintiff asserted that the respondent party breached its obligations arising from the shareholder management agreement that was entered into between the parties on 01.16.2007. The plaintiff took the dispute to the ICC under the agreement’s arbitration clause and successfully obtained an arbitral award in favor of itself. By procedural order of the tribunal, the dispute had bifurcated into two parts: liability and quantum, and then, the tribunal rendered its decisions dated 12/13/2012 and 06/19/2013, respectively. In its decision regarding the quantum dated 06/19/2013, the tribunal decided that the respondent should pay US$60.500.00,00 compensation and US$8.155.000,00 arbitration expenses to the plaintiff.
Afterward, the plaintiff applied to the Court to enforce the arbitral award in Türkiye. The Court, however, denied the request to enforce the awards because they were contrary to Turkish public policy.
The plaintiff appealed the decision. After its examination, the Appeal Court stated that the Court’s legal reasoning was not complying with the applicable law and, therefore, reversing the Court’s decision, it decided to send the file back to the Court for reviewing the case. Upon the reversal of the Court’s decision, this time, the respondent exercised its last-rare remedy and submitted a rectification request to the Appeal Court. The Appeal Court, surprisingly, accepted the respondent’s rectification request regarding the arbitral award dated 06.19.2013, while it refused concerning the award dated 12/13/2012.
Decision
In its rectification decision, The Appeal Court set forth an array of crucial principles which should be considered when an arbitral award is to be enforced in Türkiye.
The Appeal Court stated that in line with Article 90 of the Turkish Constitution, the provisions of the New York Convention to which Türkiye is a party should be implemented for the case. The Appeal Court also stated that the right to a fair trial applies to domestic disputes as well as foreign-element disputes. The right to a fair trial is accepted as a fundamental human right in Article 6 of the European Convention on Human Rights, to which Turkiye is a party. Article 36 of the Turkish Constitution also lists the right to a fair trial as a fundamental human right. In this context, the “right to be heard and the “right of access to the court and principle of publicity of the proceedings” are the main components of the right to a fair trial. The right to a fair trial should not be restricted unless there is an exigency.
As a requirement of the right to be heard, both the plaintiff and the respondent should be able to freely raise and prove their claims without let or hindrance before the judicial bodies and also refute the other party’s allegations against him freely and without any restraint within the scope of the right to defense. Within the scope of the right to be heard, the parties should have access to the court easily. The scope of the right of access to the court includes hands-down access to the evidence and documents subject to the dispute. As a result of this principle, the parties should be able to examine the evidence without constraint, and should not be any matter which is not open to the parties’ knowledge.
On the other hand, although “protection of trade secrets” is a legitimate right, it should not be allowed to harm the other party’s right to be heard by sheltering behind or circumventing this right. If the evidence subject to the proceedings is to be concealed from the other party as a trade secret, there should be reasonable grounds for this, and this issue should be explained consistently and lawfully. And, in case it is necessary to protect secrets, the principle of proportionality should not be exceeded, and contradictions should not be made.
The Appeal Court also pointed out that the General Assembly of Civil Chambers of the Court of Appeal [3] has drawn the framework of Turkish public policy in domestic law as a "contradiction to the fundamental values of Turkish law, the Turkish general sense of decency and morality, the basic understanding of justice on which Turkish laws are based, the fundamental rights and freedoms enshrined in the Turkish Constitution, the common principles valid in the international arena, the level of civilization of civilized communities, the political and economic regime of society, and human rights and freedoms.” Alongside these principles, determining whether the arbitral award subject to the enforcement request is contrary to Turkish public policy is left to the judge's discretion. However, while exercising his discretion, the judge must consider the raison d'être of private international law and the general principles of it.
Determining these general rules and principles, the Appeal Court proceeds to examine the objection points that the respondent presented as rectification grounds.
The Appeal Court said that according to the rules governing the arbitration procedure, the parties are entitled to concurrently submit a copy of their expert reports concerning the amount of the damages suffered by the plaintiff and evidence to the arbitral tribunal and the other party in a specific timetable. Each party simultaneously has the right to examine and respond to the other party’s evidence subject to its claim and expert reports received during the proceedings and to cross-examine the experts who submitted reports.
As a matter of fact, both parties submitted the expert reports they received during the proceeding regarding the amount of damage to the file. No part of these reports was concealed from the other party.
However, although the plaintiff relied on the expert reports, which were obtained long before the arbitration case on the financial structure and value of the company subject to the shareholder management agreement, as evidence to strengthen its claim, the plaintiff neither submitted these reports to the tribunal nor the respondent. Upon the requests of the respondent and the arbitral tribunal, the plaintiff refused to submit these reports on the grounds of confidentiality of trade secrets.
Thereon, the arbitral tribunal ordered the plaintiff to submit only the relevant chapters of the reports on the company’s valuation. The tribunal also decided that the plaintiff may submit the report altering the names of the experts and the parts of the reports that are not relevant to the valuation of the company. The tribunal decided in the same order that the reports might be examined only by the respondent’s counsel and the valuation experts, not by the respondent. Removing the information, the plaintiff deemed appropriate, the plaintiff submitted the reports to the file. The counsels and valuation experts of the respondent were only able to examine these reports to the extent that had shown them. However, the respondent’s experts were also prohibited from sharing the draft report with the respondent and making a joint assessment.
At the end of the proceedings, the arbitral tribunal determined the amount of damage suffered by the plaintiff largely based on this debated report that the plaintiff commissioned.
The Appeal Court stated that although the courts do not have the right to supervise the content of the arbitral award and the right of the arbitral tribunal’s discretion in the recognition and enforcement cases, in the scope of Article 5 of the New York Convention, the court has the right to review whether the rights of the defense of the parties restricted or the arbitral award is contrary to the public policy of the court.
The Appeal Court determined that the arbitral tribunal permitted the submission of the report, which was largely taken as the basis for the award incompletely by doing in contravention of the procedural rules agreed upon by the parties. The controversial report also did not include names of the experts who prepared the report, the part of the report which related to the financial model and method used in calculating the company’s value, and the purpose of the report was concealed.
Therefore, (i) concealing the original and copy of the report from the respondent who doubts the existence of such a report and that may have been altered, (ii) not allowing the respondent to see even the draft report prepared by the valuation expert on behalf of the respondent, (iii) preventing the respondent from cross-examining the experts who prepared the reports that were taken on the basis of the award, (iv) not having any reasonable and legal basis for all this secrecy explicitly caused doubt on the impartiality of the arbitral tribunal and, thus, the respondent’s right to access to the evidence and to defend itself was gravely violated during the arbitration proceedings. Therefore, restricting the defense’s right and, by this means, violating the right to a fair trial clearly breaches public policy.
Based on the above reasons, the Appeal Court concluded that the enforcement request of the arbitral award, about the amount of damage suffered by the plaintiff, rendered by the arbitral tribunal dated 06/19/2013 is contrary to Articles 5(1)(b) and 5(2)(b) of the New York Convention and Article 62(1)(b) and (d) of the Turkish Code on International Private and Procedural Law. The Appeal Court, therefore, ruled that the local court’s denial decision about the enforcement request of the arbitral award was in place, and rectifying its previous decision sent the file back to the Court.
Takeaways