The Turkish Court of Appeal reverses its precedent regarding the applicability of arbitration clauses in bankruptcy proceedings

For the last few decades, the Court of Appeal's ("CoA") approach to arbitration clauses vis-à-vis bankruptcy cases has been extremely rigid. The CoA used to hold that Turkish courts had exclusive jurisdiction in bankruptcy claims, and that accordingly, parties were precluded from invoking an arbitration clause to enjoin the commencement or the continuation of litigation in Turkey.

Beginning with 2013, the CoA changed its approach and ruled that if there is an arbitration clause agreed between the parties, Turkish courts would be barred from deciding on the merits of the dispute, but instead, would have to stay their proceedings in the bankruptcy claim pending the resolution of the merits of the dispute by the arbitral tribunal. The CoA's said approach meant acknowledging and giving legal effect to the contractual will of the parties.

However, in its most recent decision, the Grand Chamber of the CoA has seemingly reversed course and adopted its previous and more conservative approach (decision date December 21, 2021; decision number 2019/574 E., 2021/1710 K.). In its decision in question, the CoA allowed the bankruptcy proceedings filed by the claimant to continue and for the Turkish court to enter judgment on the merits of the dispute, despite an arbitration clause contractually agreed upon by the parties. The court's reasoning was that (i) bankruptcy proceedings are subject to an expedited adjudication method as per the civil procedure law, (ii) it was not a bona fide behavior for the defendant to invoke an arbitration defense where the claimant, as part of their right to legal redress, brings a bankruptcy claim to make collection in an expedited manner, (iii) bankruptcy claims have ramifications not only for the parties of the dispute but also for other creditors, and hence they also concern the public order, (iv) each procedure in a bankruptcy claim constitutes a whole and it would not be proper to divide each step and subject them to a different procedure, (v) to do so would be against the principle of judicial efficiency and (vi) the statutory provisions related to bankruptcy proceedings do not provide an exception for arbitrating a claim.

The CoA's decision can be said to be prone to creating a backdoor for those claimants who wish to circumvent a previously stipulated arbitration clause.