A practical guide to determining the applicable law and the competent forum in international commercial contracts, covering party autonomy under Article 24 of the Turkish PILA, the limits of choice of law, jurisdiction agreements under Article 47 and the certainty requirement, arbitration, Incoterms 2020 and the CISG.
<p>In international commercial contracts, the two matters most often neglected by the parties, yet which become the most decisive once a dispute arises, are the law applicable to the contract and the determination of the forum that will resolve the dispute. Where these two matters are not clearly regulated in a contract between parties established in different countries, the question of which country's law applies and where the action is to be heard becomes a dispute in itself at the moment of conflict, constituting a preliminary issue that must be resolved before the substance of the dispute. This leads to a serious loss of time and cost. This article examines choice of law and jurisdiction agreements in international commercial contracts comprehensively, in the light of the Act on Private International Law and Procedural Law No. 5718 and settled case law, from the perspective of the practitioner drafting the contract.</p>
<p><b>1. The Concept of the International Commercial Contract and the Foreign Element</b></p>
<p>Whether a contract may be subject to the rules of private international law depends on its containing a foreign element. The foreign element may arise in various forms, such as the parties being nationals of different states or established in different countries, the place where the contract was concluded or is to be performed being a foreign country, or the subject matter of the contract being located abroad. According to an understanding increasingly established in doctrine and practice, even where a contract does not carry a foreign element in the classical sense, contracts that concern international commerce and whose economic character transcends borders are regarded as carrying a foreign element, in other words as being international in nature. This approach brings the economic reality of the contract to the fore. Since the existence of a foreign element opens the door to the parties freely determining the applicable law and the competent court, the correct identification of whether a contract is international in nature forms the basis of all subsequent assessments.</p>
<p><b>2. The Principle of Party Autonomy and Article 24 of the PILA</b></p>
<p>The cornerstone of international contract law is the principle of party autonomy, which means that the parties may freely determine the applicable law. In Turkish law this principle is set out in Article 24 of Law No. 5718. Under that provision, contractual obligations are governed by the law expressly chosen by the parties. This provision adopts an understanding parallel to the 1980 Rome Convention and grants the parties a broad freedom to choose the law of any state they wish. The parties may make this choice at the time of the conclusion of the contract, or subsequently, and even during the proceedings, provided that the rights of third parties are not prejudiced, and they may also modify it. The chosen law is the domestic substantive law of that state; the conflict of laws rules of the chosen law are not taken into account. The parties may, moreover, choose a single law for the whole of the contract, or may agree that different laws apply to different parts of the contract.</p>
<p><b>3. Express and Implied Choice of Law</b></p>
<p>The PILA does not prescribe any particular form for the choice of law and recognises both express and implied declarations of intention. An express choice of law is made where the parties directly indicate the applicable law through a provision inserted into the contract, and this is the safest method. An implied choice of law, by contrast, is a choice that can be understood from the provisions of the contract or the circumstances of the case in a manner that leaves no room for doubt. Among the factors that may in practice constitute an indication of an implied choice are references made in the contract to the institutions of a particular country's law, the contract having been drafted in terminology peculiar to a particular country's law, or the selection of a particular country's court or of a seat of arbitration. However, an implied choice must be of a clarity that leaves no room for doubt; dubious or strained interpretations are not accepted as an implied choice of law. In order to avoid this uncertainty, expressly and by name stating the applicable law in the contract is always the most appropriate course.</p>
<p><b>4. The Limits of Choice of Law</b></p>
<p>Party autonomy is not absolute and is subject to certain limits. Foremost among these limits are overriding mandatory rules. The mandatory rules of a state which it insists must be applied irrespective of the will of the parties may find application whatever the chosen law may be. Competition law, export and import restrictions, foreign exchange legislation and sanctions regimes may be given as examples of such rules. The second important limit is public policy. Where the application of the chosen foreign law in the concrete case produces a result manifestly contrary to Turkish public policy, the judge does not apply that law. The third limit consists of special provisions concerning the protection of the weaker party; in certain types of contract, such as consumer and employment contracts, the choice of law cannot deprive the weaker party of the minimum protection afforded by the mandatory provisions protecting that party. In international commercial sale and distribution contracts, on the other hand, since the parties are as a rule merchants of equal bargaining power, party autonomy is recognised in its broadest form in this field.</p>
<p><b>5. The Applicable Law Where No Choice of Law Is Made</b></p>
<p>Where the parties have made no choice of the applicable law at all, the law applicable to the contract is determined according to objective connecting rules. Under the fourth paragraph of Article 24 of the PILA, where there is no choice of law, the contractual relationship is governed by the law most closely connected with that contract. The law has introduced a presumption for the identification of the most closely connected law. Accordingly, the most closely connected law is taken to be the law of the habitual residence of the debtor of the characteristic performance at the time of the conclusion of the contract, in contracts concluded in the course of commercial or professional activity the law of that debtor's place of business, and where there is more than one place of business the law of the place of business most closely connected with the contract in question. The characteristic performance is the performance that gives the contract its character; for example, in a sale contract the seller's performance of delivering the goods, and in a service contract the performance of the party rendering the service, is the characteristic performance. However, where, according to all the circumstances of the case, there is another law more closely connected with the contract, the presumption is set aside and that law applies. This system seeks to strike a balance between flexibility and legal certainty; however, since the absence of a choice of law creates unforeseeability for the parties, making an express choice of law in the contract should always be preferred.</p>
<p><b>6. The Rome I Regulation and the International Framework</b></p>
<p>The choice of law regime in Turkish law bears a close parallel to developments in the European Union. The relevant provisions of the PILA were prepared on the basis of the 1980 Rome Convention. In the European Union this Convention has been replaced by the 2008 Rome I Regulation. The Rome I Regulation regulates in detail the law applicable to contractual obligations and introduces special connecting rules for particular types of contract such as sale, service, distribution and franchise. Awareness of this framework is important for the Turkish practitioner in two respects. First, where the counterparty is established in a European Union member state, the Rome I Regulation will apply in a dispute before that country's court. Secondly, the Rome framework and the case law relating to it may serve as guidance in the interpretation of the provisions of the PILA. In international commercial relations, foreseeing which conflict of laws system will come into play in the possible dispute scenarios of the contract enables the choice of law to be made strategically.</p>
<p><b>7. Incoterms 2020 and the Regulation of Delivery and Risk</b></p>
<p>The Incoterms rules, which determine in a standard manner the obligations of the parties and the allocation of costs and risk in the international sale of goods, are an area of regulation distinct from, but closely connected with, the choice of law. Published by the International Chamber of Commerce, with Incoterms 2020 being the most recent version, these rules contain delivery terms determining the manner of delivery, up to which point and to which party the costs belong, and the moment at which the risk passes to the buyer. Terms such as EXW, FCA, FOB, CIF, DAP and DDP clarify the points of intersection of the responsibilities of the seller and the buyer. However, the Incoterms rules are not a legal system; they merely standardise the commercial terms relating to delivery and risk. Matters such as the passing of ownership, the validity of the contract, liability for defects and default fall outside the scope of the Incoterms and are subject to the law applicable to the contract. For this reason, regulating the Incoterms term together with the applicable law in the contract, in a coherent manner, is essential in order to avoid uncertainties as to delivery and risk.</p>
<p><b>8. The Choice of the Dispute Resolution Method</b></p>
<p>One of the most strategic decisions the parties must make in international commercial contracts is whether disputes that may arise will be resolved before the state courts or through arbitration. This choice determines the dispute resolution architecture of the contract. In the state court route, the parties determine by means of a jurisdiction agreement which country's court is to be competent. In the arbitration route, the parties agree by means of an arbitration clause that the dispute is to be resolved in a binding manner before an arbitrator or arbitral tribunal. The advantages and disadvantages of the two routes differ. The principal strengths of arbitration are that awards may be enforced in a great many countries by virtue of the New York Convention, that the parties may choose the arbitrators, the confidentiality of the proceedings and procedural flexibility. The strengths of the state court route are generally lower cost, the availability of legal remedies and its being more suitable for certain types of dispute. For Turkish parties, arbitration under the auspices of the Istanbul Arbitration Centre is a powerful option offering advantages of speed and enforcement in international commercial disputes. Making a conscious choice of the dispute resolution method at the contract stage prevents jurisdictional conflicts that may arise in the future from the outset.</p>
<p><b>9. The Jurisdiction Agreement and Article 47 of the PILA</b></p>
<p>Where the parties prefer that the dispute be resolved before the state courts, it is possible for them to determine by means of a jurisdiction agreement which country's court is to be competent. The conferral of jurisdiction on a foreign state court is regulated in Turkish law in Article 47 of the PILA. Under that provision, where jurisdiction over the place is not determined on the basis of exclusive jurisdiction, the parties may agree that a dispute arising between them that carries a foreign element and arises from contractual obligations is to be heard before a foreign state court. The most important consequence of a valid jurisdiction agreement is that the international jurisdiction of the Turkish courts is removed. Indeed, the wording of the provision is clear; where a foreign court has been conferred jurisdiction by a jurisdiction agreement, the action is heard before the competent Turkish court only where the foreign court declares itself to have no jurisdiction, or where no objection to jurisdiction is raised before the Turkish courts. This provision strongly protects the principle of adherence to the jurisdiction agreement and provides legal certainty as to the parties' choice of forum. The jurisdiction agreement is required to be in writing; however, this requirement of writing is regarded as a condition of proof.</p>
<p><b>10. The Requirement of Certainty in the Jurisdiction Agreement and the Limits of Exclusive Jurisdiction</b></p>
<p>As regards the validity of the jurisdiction agreement, the matter most often overlooked in practice and giving rise to the greatest problems is the requirement of certainty. According to the settled case law of the Court of Cassation, the foreign state court conferred jurisdiction by the jurisdiction agreement must be certain, that is, must be named. Jurisdiction clauses that do not clearly indicate the court of a particular country or city and that contain vague or optional expressions are held to be invalid. For example, a vague expression to the effect that recourse is to be had to the competent court in the event that the parties cannot agree is invalid, as it does not satisfy the criterion of certainty. For this reason the country and, where possible, the city of the competent court must be clearly stated in the jurisdiction agreement. The second important limit consists of areas of exclusive jurisdiction. In matters falling within the exclusive jurisdiction of the Turkish courts, no jurisdiction agreement may be made in favour of a foreign court. The principal example of this is disputes concerning rights in rem in immovable property located in Türkiye; such actions must be heard before the Turkish court of the place where the immovable is located. Moreover, the relevant provision of the PILA concerns only the jurisdiction of the courts and does not remove the jurisdiction of the enforcement offices.</p>
<p><b>11. A Comparison of the Jurisdiction Agreement and the Arbitration Clause</b></p>
<p>The jurisdiction agreement and the arbitration clause are two different instruments determining the forum for the resolution of a dispute, and their legal natures and consequences differ significantly. Whereas the jurisdiction agreement takes the dispute to the court of a particular state, the arbitration clause removes the dispute entirely from state jurisdiction and brings it before an arbitrator. The greatest strength of the arbitration clause is that arbitral awards may be enforced in a great many countries by virtue of the 1958 New York Convention; this is often a more foreseeable process than the recognition and enforcement of foreign court judgments. By contrast, in order for the judgment of a foreign court conferred jurisdiction by a jurisdiction agreement to be enforced in Türkiye, an enforcement action is required, and this process is subject to additional conditions such as reciprocity. In drafting the contract, a conscious choice between the two routes must be made, assessing together the nature of the parties' commercial relationship, the country in which the judgment will be enforced in the event of a dispute, and the approach of the parties' countries to the enforcement of arbitral awards and court judgments. The contradictory inclusion in a single contract of both a jurisdiction agreement and an arbitration clause is a serious source of pathology and must be avoided at all costs.</p>
<p><b>12. The Role of the CISG in the International Sale of Goods</b></p>
<p>In international sale of goods contracts, an important instrument that the parties must take into account alongside their choice of law is the United Nations Convention on Contracts for the International Sale of Goods, known by its abbreviation CISG. Türkiye is a party to this Convention. As a rule, the CISG applies directly to sale of goods contracts between parties whose places of business are in different contracting states. The CISG also finds application where the rules of private international law lead to the law of a contracting state. A critical point here is that the parties' choosing merely the law of a particular country is often not sufficient to exclude the CISG; for where that country is a contracting state, the CISG is already part of that law. Parties who do not wish the CISG to apply must expressly state in the contract that the CISG will not apply and must separately indicate the domestic law that is to apply. Conversely, parties wishing to benefit from the balanced and internationally accepted regime of sale afforded by the CISG may structure their contracts accordingly. Making this choice consciously ensures that the rules applicable to the substance of the sale contract are clarified in advance.</p>
<p><b>13. Retention of Title and the Regulation of Securities</b></p>
<p>In international sale and supply contracts, one of the most important instruments of protection for the seller is the retention of title clause, which enables the seller to retain ownership of the goods until the price has been paid in full. However, the legal validity of this clause and its enforceability against third parties differ significantly from country to country. Some legal systems require registration in a register or particular formalities, while others adopt a more flexible approach. Since the law of the country in which the goods are located is often decisive as regards the proprietary effect of retention of title, the seller must investigate in advance whether this clause is valid and effective in the country to which the goods are to be shipped. Similarly, payment and security instruments such as bank letters of guarantee, letters of credit and guarantees must also be carefully regulated together with the applicable rules. Structuring the choice of law in the contract and the law to which the securities are subject in a coherent manner is decisive in terms of the seller securing its receivable.</p>
<p><b>14. Avoiding Pathological Clauses</b></p>
<p>In practice, the defective drafting of choice of law and jurisdiction or arbitration clauses produces results referred to as pathological clauses, which give rise to serious problems in the event of a dispute. Among the most frequently encountered pathologies are the following. The first is vague or optional jurisdiction clauses; expressions that do not name a particular court carry the risk of invalidity. The second is contradictory dispute resolution provisions; the inclusion in the same contract of both a provision conferring jurisdiction on a foreign court and an arbitration clause creates a conflict as to which route is valid. The third is the incompatibility of the applicable law with the chosen dispute resolution method. The fourth is erroneous references pointing to a non-existent institution or to an arbitral centre by the wrong name. The fifth is the making of no choice of law at all, or the creation of uncertainty by referring simultaneously to more than one law. The safest way to avoid these pathologies is to adopt the model clauses recommended by the institutions and to have these parts of the contract reviewed by an expert.</p>
<p><b>15. Conclusion and Contract Drafting Recommendations</b></p>
<p>Choice of law and jurisdiction agreements in international commercial contracts are often the provisions left to the very end of the contract, yet which become the most critical once a dispute arises. The practical considerations to be observed in this field are as follows. The applicable law must be stated expressly and by name in the contract, and uncertainty arising from an implied choice must be avoided. Whether courts or arbitration is to be preferred as the dispute resolution method must be decided consciously, and the two routes must never be regulated together in a contradictory manner. Where a foreign court is conferred jurisdiction, the competent court must be indicated by name and with certainty. Where arbitration is preferred, the model arbitration clause recommended by the institution must be adopted and the seat, language and number of arbitrators determined. Areas of exclusive jurisdiction, such as disputes concerning rights in rem in immovable property located in Türkiye, must be observed. Whether the CISG is to apply in the international sale of goods must be decided consciously, and the Incoterms term must be regulated coherently with the applicable law. The attention devoted to these parts of the contract will provide a decisive advantage, in terms of both time and cost, in any disputes that may arise in the future.</p>
<p>For advisory services on choice of law and jurisdiction agreements in international commercial contracts, the drafting of arbitration and jurisdiction clauses, the international sale of goods and the application of the CISG, and the resolution of disputes arising from contracts, you may contact us at <b>info@guzeloglu.legal</b>.</p>