• It is the spirit and not the form of law that keeps justice alive.
    Earl Warren

THE INEFFICACY OF JURISDICTION AGREEMENTS IN TURKEY – A COMPARISON WITH ERICH GASSER

Incorporation of a jurisdiction clause in a commercial contract has become sine qua non in contemporary business practice but the efficacy of doing so is under dispute in many jurisdictions. In the last decade, the Member States of the European Union have experienced the cataclysmic fall-out of the ECJ’s landmark decision in Erich Gasser and the effect of the decision in question has been the subject of controversy ever since. In parallel, the functionality of jurisdiction clauses in Turkey is being curtailed by the rigid bankruptcy rules whereby undermining party autonomy and procedural certainty. This article will compare the ramifications of Erich Gasser and the Turkish bankruptcy rules and argue that the present Turkish legislative order creates a more unwarranted situation in Turkey than the one which was created by Erich Gasser in the Brussels Regulation regime.

The question in Erich Gasser was whether the courts of the Member State whose jurisdiction was contractually agreed by the parties were nonetheless obliged to stay their proceedings if the courts of another Member State had been seized first. Specifically, there was an exclusive jurisdiction agreement between the parties in favor of Austrian courts. Despite the clause, Misrat brought proceedings in Italy for a declaration of non-liability. When Gasser brought proceedings in Austria for the substantive claim, the question arose whether the Austrian court could entertain the jurisdiction clause and exercise jurisdiction accordingly.

Before the ECJ’s decision in Erich Gasser, the English courts had taken the view that Article 23 of the Brussels Regultaion (exclusive jurisdiction agreements) would take precedence over Article 27 (lis pendens) of the Regulation by holding that an exclusive jurisdiction clause would deprive the courts of the other Members State of jurisdiction. This would mean that the courts of the Member State which have been contractually conferred exclusive jurisdiction by the parties could exercise jurisdiction even if the courts of another Member State had been seized first. However, the ECJ in Erich Gasser held an opposite view and ruled that “a court second seised whose jurisdiction has been claimed under an agreement conferring jurisdiction must nevertheless stay proceedings until the court first seised has declared that it has no jurisdiction.”

ECJ’s decision has drawn immense criticism. As Fawcett explains, an exclusive jurisdiction clause comprises two aspects: a positive aspect whereby the parties agree to bring proceedings in the contractually agreed forum and not to object to the jurisdiction of that forum and yet a negative aspect whereby the parties undertake not to litigate the other in a forum other the one contractually agreed upon. However, ECJ’s decision in Erich Gasser eradicates the effect of both of these aspects by allowing the parties to go forum-shopping in order to stall the proceedings to be brought before the contractually agreed forum and to do so in breach of contract.

In its decision, ECJ has stated that it was conducive to legal certainty that in cases of lis pendens, it should be determined the courts of which Member State were to establish whether it had jurisdiction and has decided that it was the court first seized. ECJ further ruled that the Regulation sought to ensure “legal certainty” by allowing individuals to foresee with sufficient certainty which court will exercise jurisdiction. Contrary to its good intentions, the ruling of the ECJ means that an ill-intentioned party can launch a tactical pre-emptive strike in a Regulation State by applying for a declaration of non-liability whereby stalling the proceedings to be brought in the contractually agreed forum. There is no question that this in return does create legal uncertainty and eradicates party autonomy by neglecting the contractual expectations of the parties to have their disputes be resolved swiftly and by the courts of the contractually agreed forum.

The inadvertent injurious effect of the Turkish bankruptcy rules on the jurisdiction agreements creates problems akin to the ones created by Erich Gasser. Under Turkish law, a party wishing to collect its receivable from a debtor can apply for the debtor’s bankruptcy instead of filing a collection action. The major difference between the two courses of action is that after a collection action, the creditor becomes entitled to attach the debtor’s assets and that after a bankruptcy claim, the debtor will be declared bankrupt and its total assets will be liquidated and distributed to its creditors pro rata to the amount of their receivables. In essence, to the extent that the debtor has attachable assets, a creditor’s rights will be fully protected as a result of the successful resolution of an ordinary collection action and as such, a plaintiff creditor has no justifiable reason to seek the bankruptcy of the debtor where it could well file a collection action against it.

Despite the lack of difference in its outcome, the important aspect of a creditor’s resorting to bankruptcy proceedings is that Article 154 of the Enforcement and Bankruptcy Law (“EBL”) provides that Turkish courts have exclusive jurisdiction to hear bankruptcy claims. This means that where the parties have agreed on a foreign forum for the settlement of their disputes, the Turkish court would not entertain the jurisdiction clause agreed upon by the parties if the plaintiff in the Turkish proceedings applies for the bankruptcy of the debtor, whereas the court would have had to dismiss the same proceedings on want of jurisdiction had the plaintiff filed an ordinary collection action .

This duality, in return, creates great unfairness and culminates in an outcome which is worse than the one created by Erich Gasser. Firstly, in an Erich Gasser situation, the court of the Member State which is preemptively seized first as a tactical strike is likely to decline jurisdiction eventually given that such proceedings have been brought in breach of contract. It is therefore likely that in an Erich Gasser situation, the contractually agreed court will ultimately resolve the dispute, albeit after an unwarranted delay. However, the application of Article 154 of EBL will mean that the substantive proceedings will continue in a forum other than the one contractually agreed since the Turkish courts are under the statutory obligation not to decline jurisdiction. Furthermore, in an Erich Gasser situation, the prospective plaintiff may avert the undesirable outcome of Erich Gasser by acting promptly and filing for substantive proceedings in the agreed forum, without giving the chance to the ill-intentioned defendant to apply for a declaration of non-liability in some other forum. However, in a Turkish bankruptcy situation, it will not matter whether the contractually agreed forum has been seized first , given that Turkish courts will exercise jurisdiction regardless of lis pendens on account of the exclusivity of their jurisdiction. More importantly, however, Article 154 of the EBL creates a one-sided advantage in favor of a foreign plaintiff and to the detriment of a Turkish defendant. This is because a foreign plaintiff can bring substantive claims in Turkey against a Turkish defendant by applying for the bankruptcy of the latter and to do so in breach of contract; however, a Turkish plaintiff cannot enjoy the same advantage against a foreign defendant given that no bankruptcy application can be made against a foreign entity.

Although the problem which is created by the EBL is great, the solution for its remedy is not so complex. Some have suggested that actions for damages would prevent the parties from litigating each other in forums other than the one contractually agreed; however, that solution is inclined to create what was referred to by Sir John Donaldon MR in Tracomin SA v Sudan Oil Seeds as an “unseemly spectacle” whereby the contractually agreed forum would be required to re-litigate the dispute. If that is the case, there is no question that the contractually agreed forum’s reaching a different solution will in return generate problems of comity. Therefore, the simplest solution seems to lie in a statutory amendment which would require Turkish courts to stay their proceedings until the finalization of the decision of the contractually agreed forum and to continue the bankruptcy procedures (i.e. liquidation of assets) subsequent to the rendition of the decision on the substantive claim. This solution would be both fair for respecting the parties’ choice of forum and practical for having the liquidation procedures to be conducted at the domicile of the debtor. After all, in international commercial litigation, the foremost objective of both the courts and the legislatures should be to observe party autonomy and try to preclude any act which could jeopardize it.

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