Contributed By Cosar Avukatlik Burosu
Parties’ choice of international arbitration as a method of resolving disputes with a 'foreign element' (see 2.1 Governing Law, below) has been increasing, especially over the last decade. Moreover, the use of domestic arbitration has also increased in recent years. In many cases, arbitration is preferred to litigation for specific reasons; some are related to the flexibility of the proceedings (eg, parties’ freedom to agree on the procedure, keeping the proceedings confidential), and some are related to the complexity of the disputes (eg, complex and technical disputes where most of the underlying documents are in a language other than Turkish). It is generally considered that for the resolution of certain disputes requiring particular skills and expertise, arbitration is more convenient than resolving the matter through the national courts. Most international investors prefer international arbitration over litigation.
The Istanbul Arbitration Centre (ISTAC) was established in 2015 by Law No 6570 for the settlement of domestic and international disputes. The use of ISTAC is expected to increase due to certain legislative changes. A Prime Ministry’s circular (No 2016/25), published in the Official Gazette on 19 November 2016, states that public authorities are to consider including dispute resolution clauses providing for ISTAC arbitration in both their domestic and international agreements.
Furthermore, within the scope of Public Procurement Law No 4735, template contracts attached to Tender Application Regulations were amended with effect from 19 January 2018. According to Article 5 of Public Procurement Law No 4735, contracts made by the administration shall be based on the provisions of the template contracts. Before the amendment, the dispute resolution method provided in the template contracts only referred disputes to the Turkish courts. However, the amendment made it possible for the administration to include an arbitration clause. According to this, domestic disputes shall be resolved by ISTAC Arbitration Rules if arbitration is the preferred method. However, in relation to international disputes, either ISTAC Arbitration Rules or the provisions of International Arbitration Law No 4686 (IAL) may be chosen by the administration.
A wide range of sectors use arbitration; however, arbitration is more commonly used in disputes concerning oil and gas, chemicals, mining, construction, telecommunications, energy, IT and banking. Arbitration is mostly preferred in these sectors because disputes in these fields tend to be more complex, and the settlement of such disputes requires certain skills and expertise in the field. Moreover, the issue of confidentiality also makes arbitration an attractive choice for the parties in these sectors.
The most commonly used arbitral institution for the settlement of international disputes is the International Chamber of Commerce International Court of Arbitration. The Swiss Chambers’ Arbitration Institution, Stockholm Chamber of Commerce, and the London Court of International Arbitration are also frequently used. The use of ISTAC is expected to increase, due to the amendments explained above in 1.2 Trends.
International arbitration is regulated by the IAL, which came into effect on 5 July 2001. According to the IAL, if a dispute contains a 'foreign element' as described in Article 2 of the IAL, the arbitration gains an international nature.
The IAL is mostly based on UNCITRAL Model Law (1985), although it also covers certain issues that are not included in the Model Law. Matters concerning the cost of arbitration, such as the fees of the arbitrators, payment of costs, deposit of advance, and preparation of the terms of reference are among the issues that are provided for in the IAL, but not in the Model Law. Moreover, the IAL also includes additional circumstances that call for the termination of proceedings. The changes made in the Model Law in 2006 have not been included in the IAL.
Domestic arbitrations that do not involve any 'foreign element' are regulated by Section 11 of the Code of Civil Procedure, Law No 6100 (CCP). The provisions of Section 11 are generally in line with the provisions included in the IAL.
In 2018, both the IAL and Section 11 of the CCP were amended regarding the competent court to be applied to in order to file an action of annulment. Prior to the recent amendments, annulment actions were heard before the court of first instances. However, the changes made in the legislation require that actions of annulment should be filed before the regional judicial courts. Moreover, a new provision was also included in both the IAL and the CCP with the 2018 amendments, which designates that the competent courts for matters that are required to be conducted by the courts during the course of arbitration, are the civil or commercial courts of first instance, depending on the subject of the dispute.
The IAL provides that arbitration agreements shall be made in writing. The inclusion of the arbitration agreement in “a written document signed by the parties or a letter, a telegram, a telex, a fax exchanged between the parties, or in an electronic medium” is considered sufficient for this requirement to be satisfied. This is also applicable in cases where the respondent does not object to the existence of a written arbitration agreement in its statement of defence (the existence of which is declared in the claimant's statement of claim).
The parties may either include the arbitration agreement in the main agreement or they may make a separate agreement. They may also refer to a document that includes an agreement to arbitrate, provided that such agreement is intended to be part of their main agreement.
According to the Turkish Court of Appeals, the arbitration agreement must be clear and leave no doubt as to the parties’ intention to arbitrate. Moreover, under Turkish law, the representatives must be clearly and specifically authorised to make an arbitration agreement on behalf of their principals.
Disputes arising from the rights in rem over immovables and disputes that are not subject to parties’ will are not arbitrable under Turkish law. Therefore, commercial disputes are eligible for arbitration, while criminal disputes and disputes regarding family law or employees' payments in relation to labour contracts, for example, are not.
As explained above in 3.1 Enforceability, clear and specific authority is sought for the representatives who sign the arbitration agreement on behalf of their principals; otherwise, the agreement to arbitrate would not be deemed as binding on the principal (Court of Appeals, 19th Civil Law Chamber, 21 May 2007, File No 2007/380, Decision No 2007/5114).
In addition to this, arbitration agreements that grant one of the parties a superior position to the other are found to be against public policy, and therefore invalid, by the Court of Appeals (General Assembly of the Court of Appeals Civil Law Chambers, 12 February 1992, File No 1991/13-606, Decision No 1992/56; Court of Appeals Plenary Session of Civil Law Chambers, 9 June 1999, File No 1999/19-467, Decision No 1999/48).
The rule of separability of the arbitration agreement is accepted under Turkish law. The IAL provides that no objections to the arbitration agreement can be made based on the invalidity of the main agreement between the parties. It is further provided that the decision of the tribunal on the invalidity of the main agreement does not consequently make the arbitration agreement contained therein invalid.
Both the IAL and CCP (which regulates domestic arbitration) state that only real persons may be selected as arbitrators. On the other hand, in relation to domestic disputes, the CCP provides an additional criterion. According to this, if the tribunal is to be formed with more than one arbitrator, one of them should be a lawyer with at least five years of experience in their field.
Additionally, a person may be prevented from serving as an arbitrator as per certain special laws that are applicable to them. An example of this would be Turkish judges, who are not allowed to perform any official or private occupation other than one assigned to them by law.
Unless it is otherwise agreed by the parties, the default procedure regarding the selection of arbitrators contained in the IAL shall be applicable, which is as follows:
The IAL provides that the courts may be included in the selection of arbitrators upon the request of one of the parties, under the following circumstances:
When deciding on the arbitrator, the court shall take the parties’ agreement into account. Moreover, the court shall also consider the impartiality and independence of the arbitrators. It is also provided in the IAL that where the parties have different nationalities and a sole arbitrator is to be selected, the arbitrator should be of a different nationality to the parties. If three arbitrators are to be appointed, two of them should not have the same nationality as either of the parties. This procedure shall also apply to cases in which more than three arbitrators are to be appointed.
The provisions regarding the challenge to arbitrators in international arbitrations are included under Articles 7/C and 7/D. Article 7/C of the IAL provides that a challenge to an arbitrator can be made if the arbitrator does not have the agreed qualifications, if there is a ground for challenge that is foreseen in the arbitral procedure agreed by the parties, or if there are circumstances that give rise to justifiable doubts on the impartiality and independence of the arbitrator. The default procedure on the challenges is provided in Article 7/D of the IAL. According to this, a party may challenge the arbitrators within 30 days of their appointment or of becoming aware of the situation giving rise to the challenge. In a case where the arbitral tribunal rejects the challenge, such party may also apply to the court with the same request within 30 days after receiving the decision of the arbitral tribunal.
Challenges to the sole arbitrator, the whole tribunal or to a majority of the arbitrators in the tribunal can only be made through the courts. Where the court accepts such a challenge, the arbitral proceedings come to an end. On the other hand, if the arbitration agreement does not specifically state the names of the arbitrators, the process of selecting arbitrators shall restart.
According to the IAL, when someone is offered the chance to serve as an arbitrator, they shall disclose all the circumstances and conditions that may cause justifiable doubts as to their impartiality and independence, before accepting the appointment. Arbitrators are also under obligation to immediately inform the parties of any circumstances that may subsequently arise and cause justifiable doubts as to their impartiality and independence.
As stated above in 3.2 Arbitrability, disputes arising from the rights in rem over immovables and disputes that are not subject to the parties’ will are not arbitrable under Turkish law.
The principle of competence-competence is recognised under Turkish law. As such, the tribunal has the authority to decide on its own jurisdiction, which also includes challenges regarding the existence or validity of the arbitration agreement. It should be noted that the tribunal’s decision on its own jurisdiction may be reviewed by the courts during an action of annulment of the arbitral award (see 11.1 Grounds for Appeal, below).
Aside from the arbitration objection explained below in 5.7 Third Parties (with regard to the existence of an arbitration agreement), the courts may only review the jurisdiction of the tribunal during an action of annulment. When addressing the jurisdiction of the tribunal, the court reviews the validity of the agreement to arbitrate, the arbitrability of the dispute and the scope of the arbitration agreement.
As explained above, challenges to the jurisdiction of the tribunal can only be made to the tribunal during the course of the arbitration proceedings. According to Article 7/H of the IAL, objections to the tribunal’s jurisdiction must be made with the first answer, at the latest. It also provides that, unless raised immediately, the objection that the arbitrators exceeded the scope of their authority shall not be valid. On the other hand, the tribunal may allow later objections, if it decides that the delay was caused due to justifiable reasons.
Apart from the objections made to the tribunal, jurisdictional objections may only be brought to the courts during the annulment proceedings.
In relation to the jurisdiction of the tribunal, pursuant to Article 15 of the IAL, during an action of annulment, the courts may examine whether the tribunal’s decision on its own jurisdiction is in breach of the applicable law agreed on by the parties or, in the absence of this, Turkish law. The courts may also consider whether the tribunal decided on a matter that exceeded the scope of their authority or the arbitration agreement. In doing so, the court shall review all issues regarding the jurisdiction of the tribunal, although the scope of such review should be limited to that.
The review of the court shall be limited to the grounds for annulment as provided under Article 15 of the IAL, and thus the merits of the case are not reviewed. On the other hand, the Court of Appeals has come to different decisions on the prohibition to review the merits of the case and in some decisions, it has held that the merits may be partially reviewed in order to examine whether the award is in line with public policy (see 11.3 Standard of Judicial Review and 12.3 Approach of the Courts, below).
IAL Article 5 provides that if a party commences court proceedings despite the existence of an agreement to arbitrate, the other party may object to this as a preliminary objection. The objection must be made with the response to the statement of claim, at the latest, or the court shall not take the objection into consideration. If the court accepts the objection, it shall dismiss the case on the basis of procedural grounds.
Only the parties to an arbitration agreement are bound by the arbitration agreement. It is provided in IAL Article 6 that the tribunal cannot render an interim measure or an interim attachment that is binding on third parties. Moreover, the Court of Appeals has decided that a non-party, which is only a beneficiary to an agreement, cannot be bound by the arbitration agreement unless that party has consented to the arbitration (Court of Appeals 11th Civil Law Chamber, 25 June 2015, File No 2014/9538, Decision No 2015/8707).
In international arbitration, unless agreed otherwise, a tribunal is capable of granting an interim injunction or interim attachment at the request of one of the parties. It should be noted, however, that according to Article 6 of the IAL, the tribunal cannot grant interim injunctions or interim attachments that must be executed by the execution authorities or performed by other public authorities. Moreover, tribunal’s interim measures are not binding on third parties.
As stated in 6.1 Types of Relief, above, under the IAL, a tribunal’s interim reliefs cannot be executed by the execution authorities or performed by any other public authorities. Therefore, in a case where one of the parties fails to abide by the tribunal’s interim measure, the other party may seek court assistance in this regard.
Moreover, according to the IAL, parties may apply to the court in order to obtain interim relief (an interim injunction or interim attachment) before or during arbitration. It should be noted that if interim relief is obtained before the initiation of the arbitration, the arbitration must be filed within 30 days of obtaining the relevant decision. Otherwise, the interim relief will automatically cease to have effect. The preliminary relief granted by the courts will also cease to have effect, either when the arbitral award becomes enforceable or the tribunal dismisses the case.
The IAL has no specific provisions regarding the use of emergency arbitrators.
The IAL does not include any provisions regarding security for costs. However, the IAL does provide that the tribunal may ask the claimant to deposit an advance for the arbitration costs and if said advance is not deposited within the prescribed time limit, the tribunal may suspend the arbitral proceedings. The proceedings will continue if the deposit is made within 30 days after the suspension of the proceedings is notified to the parties. If not, the arbitration proceedings will be terminated.
Apart from the above, the IAL does not prevent the parties from applying to the court or the tribunal for security for costs, to be ordered in the form of interim relief (as explained in 6.1 Types of Relief and 6.2 Role of Courts, above).
Provided that the mandatory provisions of the IAL are preserved, the parties are free to agree on the governing procedural rules, or they may refer to a law or certain international or institutional rules of arbitration. In the absence of such agreement, the tribunal shall conduct the proceedings according to the provisions of the IAL. Parties having equal rights and powers during the arbitration and rendering of the award by the tribunal within the term of arbitration are both examples of mandatory provisions of the IAL.
As stated above in 7.1 Governing Rules, the parties can decide autonomously on the procedural rules while also preserving the mandatory provisions of the IAL. If there is no such agreement between the parties, the default procedure set out in the IAL shall be applied to the procedure.
Arbitrators are under an obligation to disclose any circumstances that may give rise to justifiable doubts as to their independence and impartiality before agreeing to serve as an arbitrator. They are also under obligation to inform the parties of a change in their circumstances during the proceedings, if such a change arises. Moreover, while conducting the proceedings, the arbitrators should also ensure that the parties are granted equal rights and powers, and that both have an opportunity to present their claims and defences.
Under the Turkish Attorneyship Law, the right to appear before the Turkish courts and to act as an attorney in Turkey is solely granted to Turkish lawyers. Nevertheless, the IAL provides that in international arbitration, the parties may also be represented by foreign persons. It should be noted that this provision is not applicable to applications made to the Turkish courts in relation to arbitration, such as the applications made to the courts for arbitrator selection or requests for interim relief.
As previously stated in 7.1 Governing Rules, the parties are free to agree on the governing procedural rules for arbitration, including the rules regarding the collection and submission of evidence, an example being the IBA Rules on the Taking of Evidence in International Arbitration. In the absence of party choice, the provisions of the IAL shall be applicable. Accordingly, parties can enclose their written evidence with their petitions or make reference to evidence they plan to submit. It is also provided under Article 12/B of the IAL that the parties are required to submit their evidence within the time limit prescribed by the tribunal. Arbitrators may also seek the assistance of the courts for taking of evidence; in such cases, the provisions of the CCP shall be applicable. Moreover, Article 12/A of the IAL states that the tribunal may decide:
The IAL does not include specific provisions regarding the use of witness statements.
For the rules of evidence in arbitral proceedings, see 8.1 Collection and Submission of Evidence, above. The rules of evidence applied in domestic litigation, which are included in the CCP, are not applicable to arbitration, unless stated otherwise in the IAL.
The IAL does not include specific provisions regarding the production of documents, with the exception of Article 12/A, which states that the tribunal may order the parties to provide explanations, documents and information to the experts. On the other hand, as the IAL provides party autonomy with regards to the determination of the procedural rules, parties may agree on certain rules that enable the tribunal to order document production.
The IAL has no rule regarding the attendance of witnesses; however, as a general rule, arbitral tribunals cannot give orders that are binding on persons who are not party to the arbitration agreement.
The IAL is silent regarding the confidentiality of the arbitral proceedings. However, parties may prefer to keep the proceedings (as well as the relevant evidence and pleadings) confidential by reaching an agreement in this regard, or by making reference to certain procedural rules that provide for confidentiality.
It should be noted that any court proceedings in relation to arbitration or enforcement of arbitral awards are subject to the general rules within the scope of the CCP, which provide that copies of the documents may only be obtained by the parties themselves or representatives who have the legal authority to act on behalf of the parties. On the other hand, there are no specific rules prohibiting the use of documents from the arbitration case records in other court proceedings.
Pursuant to the IAL, an arbitral award must contain the following:
Article 10/B of the IAL provides that the award regarding the merits of the case shall be rendered within a year after the selection of the sole arbitrator or, in cases with more than one arbitrator, from the date of the recording of the first meeting minutes. The parties may reach an agreement to extend the term. In the absence of such an agreement, the term may be extended by the court upon the request of one of the parties. The time limit for rendering of the award is particularly important, as not rendering the award within the term is listed as a ground for annulment under Article 15 of the IAL.
The type of remedies that an arbitral tribunal may award is a matter that is subject to substantive law applicable to arbitration. Nevertheless, such remedy should be within the authority granted to the tribunal by the parties, as awards that go beyond the scope of the tribunal's authority may be annulled. Moreover, neither punitive nor exemplary damages are accepted under Turkish law; thus, awards based on punitive or exemplary damages may be found to be against public policy and may subsequently be annulled.
In the absence of an agreement to the contrary, the costs of arbitration shall be borne by the losing party. In cases where both parties are successful to a certain extent, the costs shall be shared by both parties pursuant to their degree of success.
Whether the parties are entitled to interest is a matter of the substantive law applicable to the dispute. Under Turkish law, tribunals may award interest and legal costs. If there is no party agreement regarding the applicable interest rate, the Law on Legal and Default Interest No 3095 shall be applied.
Under the IAL, the parties are not entitled to appeal arbitral awards. The only method to challenge an award is to file an action of annulment. However, the court decision regarding the annulment action is subject to appeal.
The grounds for annulment of an award are listed under Article 15 of the IAL. According to this, the award may be annulled if the requesting party proves one of the following:
The award may also be annulled if the court ex officio determines that the subject matter of the award is not arbitrable under Turkish law or if the award is against public policy.
The grounds for annulment are limited to the grounds prescribed by Article 15 of the IAL. Nonetheless, it is possible for the parties to partially or entirely waive their right to file an annulment action with the inclusion of an explicit statement within the arbitration agreement. Parties may also agree to subsequently waive their rights in the form of a written agreement. However, such waiver can only be made by parties with domiciles or habitual residences outside of Turkey.
As stated in 11.2 Excluding/Expanding the Scope of Appeal, above, grounds for annulment are limited to the provisions of IAL Article 15, and the merits of the case shall not be reviewed. However, the Court of Appeals does not seem to have a uniform approach regarding the prohibition of reviewing the merits of the case. Although decisions to the contrary have been rendered, certain determinations from the Court of Appeals have found that partial review of the merits of the case may be necessary in order to determine whether the award is in compliance with public policy. Accordingly, awards that lead to a reduction in public income or awards that breach tax or customs laws may be found to be against public policy, and partial review of the merits of the dispute may be required for the determination of such violation (Court of Appeals, 13th Civil Law Chamber, 17 April 2012, File No 2012/8426, Decision No 2012/10349; Court of Appeals, 13th Civil Law Chamber, 16 March 2017, File No 2015/16140, Decision No 2017/3322).
Turkey is a party to the New York Convention, which was ratified on 2 July 1992, with two limited reservations. According to these, the New York Convention shall apply on the basis of reciprocity and only to disputes, whether contractual or not, that are commercial in nature.
Moreover, Turkey is also a signatory to the Geneva Convention on International Commercial Arbitration, ratified in 1992, and to the ICSID Convention, which came into effect in 1989.
Recognition and enforcement of awards are subject to International Private and Procedural Law No 5718 (IPPL) and the New York Convention. Enforcement of awards where the seat of arbitration is party to the New York Convention will be subject to Article V of the New York Convention. Other awards (those not rendered in a signatory country) shall be enforced pursuant to the provisions of the IPPL. Article 62 of the IPPL lists the grounds for refusing enforcement. The award will not be enforced if:
The question of whether an award that has been set aside by the courts in the seat of arbitration will be enforced is dependent on the provisions to which the award is subject (the IPPL or New York Convention). The IPPL provides that arbitral awards are required to be binding and enforceable on the parties in order to be enforced. Therefore, if an award has been set aside in a seat of arbitration that is a non-signatory to the New York Convention, it may not be enforced.
On the other hand, in an enforcement case for an award subject to the New York Convention, the Court of Appeals has held that the enforcement lawsuit should be suspended until the result of an action to set aside is determined, if such action has been filed in the seat of arbitration (Court of Appeals, 15th Civil Law Chamber, 2 February 2017, File No 2017/1094, Decision No 2017/3777). However, in another decision rendered by the Regional Judicial Court of İstanbul, it was held that the text of Article V of the New York Convention grants the enforcement judge the discretion as to whether to refuse the enforcement of an award that has been set aside in its seat (Istanbul Regional Judicial Court, 14th Civil Law Chamber, 11 October 2018, File No 2018/130, Decision No 2018/1042).
A state or state entities may raise a defence of sovereign immunity in relation to their sovereign powers. Therefore, they cannot enjoy sovereign immunity in matters regarding private law relations. There are no specific provisions concerning the enforcement of an award against a state, with the exception of Article 82 of the Code of Execution and Bankruptcy (CEB). Article 82 of the CEB mandates that state properties cannot be attached. On the other hand, the Court of Appeals held in a decision that this article only concerns the property of the Turkish Republic and not foreign states (Court of Appeals 12th Civil Law Chamber, 25 April 2004, File No 2004/6469, Decision No 2004/13007).
Enforcement cases have also been increasing in recent years, with the increase in the number of arbitration cases. Accordingly, the courts are gaining familiarity and experience in such cases, and are rendering more arbitration-friendly decisions. Nonetheless, as explained in 11.3 Standard of Judicial Review, although the standard of review is limited to the grounds for refusing enforcement as listed in the New York Convention or the IPPL (and there are also Court of Appeals decisions that maintain this view), in certain cases involving awards that result in the reduction of the state’s income, the Court of Appeals found that the facts and merits of the case may be partially reviewed to determine whether it is against public policy (Court of Appeals Plenary Session of Civil Law Chambers, 8 February 2012, File No 2011/13-568, Decision No 2012/47).
In relation to the requirement of public policy compliance, in a decision regarding the enforcement of a foreign court decision, the Court of Appeals held that the court should review whether the consequences of enforcing a foreign court decision would result in violation of Turkish public policy (Court of Appeal’s General Assembly for Unification of Judgments, 10 February 2012, File No 2010/1, Decision No 2012/1).
There are no specific regulations in the IAL regarding class action or group arbitration.
It is provided in Article 34 of Turkish Attorneyship Law that attorneys are to conduct their duties with care, accuracy and integrity. Further to this, attorneys shall also act in accordance with the professional rules provided by the Union of Bar Associations of Turkey. Examples of such rules are an attorney’s refusal to represent parties that have a conflicting interest, as well as their discretion regarding information that has been entrusted to them and/or obtained while performing their duties.
Turkish law is silent on the matter of third-party funding (except for legal aid to be provided by the state treasury under certain circumstances). In line with this, there are no rules pertaining to disclosure of the existence of third-party funding or the identity of the funders. Therefore, publicly available information on the use of third-party funding by Turkish parties is limited, with the exception of a few ICSID cases.
Legislation concerning arbitration does not make any provisions for the consolidation of separate arbitral proceedings. On the other hand, parties may agree on arbitral rules that regulate and allow consolidation provided that certain principles in the IAL are protected, such as granting each party equal rights and powers to make their claims and defences. It should also be noted that the Court of Appeals does not currently have a reported decision on this issue, and therefore its approach towards consolidation may diverge in a possible future case.
See 5.7 Third Parties, above.