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TURKEY

Ismail G. Esin, Ali Selim Demirel, Yigitcan Bozoglu and Ceyda Sıla Cetinkaya

A. LEGISLATION AND RULES

A.1 Legislation

The International Arbitration Law of 2001 (IAL)[1] governs international arbitration[2] in Turkey, while the Code of Civil Procedure of 2011 (CCP)[3] deals with domestic arbitrations seated in Turkey. Both acts were inspired by UNCITRAL Model Law and contain fairly standard and arbitration-friendly provisions. Further, the Law on International Private Law and Procedural Law of 2007 (IPPL)[4] includes the principles and procedures concerning the recognition and enforcement of foreign arbitral awards, and it has never been amended since its enactment. The New York Convention, which also regulates the same matter as the IPPL, has been in force in Turkey since 30 September 1992.

No legislative amendments were made to the IAL and the IPPL in 2019, but an important amendment to the CCP had been made. The Constitutional Court of Turkey abolished the first sentence of article 398/1 of the CCP, which foresaw the disciplinary imprisonment sanction for a term ranging from one month to six months for persons who fail to comply with or breach Turkish courts’ interim relief decisions, including interim reliefs ordered by Turkish courts during or before arbitration. [5] The Constitutional Court declared the provision unconstitutional on the ground that the CCP is unclear as to whether a person subject to an interim decision may appeal the decision or not, and this ambiguity constitutes a breach of the freedom to claim rights and the principle of clarity and definiteness. Upon the Constitutional Court’s decision, as of 21 November 2019, any person breaching or failing to comply with an interim relief decision will not be subject to disciplinary imprisonment.

In addition to the above, Turkey has made progress with regard to mediation. According to article 5/A, which was recently incorporated to the Turkish Commercial Code of 2011 (TCC)[6] through the Law on Execution Proceedings for the Collection of Monetary Receivables Arising out of Subscription Agreements No. 7155 (“Law No. 7155”)[7], parties to a commercial dispute must undergo mandatory mediation prior to filing cases involving monetary claims as of 1 January 2019. However, the Law No. 7155 also added a provision to the Law on Mediation in Civil Disputes of 2012 (“Mediation Law”)[8] wherein pursuant to article 18/A of the Mediation Law, parties who choose to settle their disputes through arbitration do not have to undergo mandatory mediation. Consequently, if the parties are willing to avoid mandatory mediation, they may agree to arbitration as a dispute resolution method in their agreements either before or after the dispute arises and initiate an arbitration proceeding without undergoing mandatory mediation.

On 7 August 2019, Turkey signed the United Nations Convention on International Settlement Agreements Resulting from Mediation (“Singapore Convention”), which facilitates the enforcement of settlement agreements concerning international commercial disputes within contracting states. Under Turkish law, all disputes arising out of private law transactions concerning matters that can be freely disposed of are subject to mediation. However, as explained above, parties must undergo mandatory mediation for commercial disputes for monetary claims pursuant to the TCC. The Singapore Convention is applicable to cross-border settlement agreements settling commercial disputes as a result of a mediation. Taking this into consideration, settlement agreements signed following mandatory mediations prior to filing commercial cases are in the scope of the Singapore Convention, provided that they also meet the other conditions specified under the Singapore Convention. Therefore, the ease of enforcing settlement agreements concerning international commercial disputes and signed as a result of mandatory mediation in the contracting states of the Singapore Convention makes mandatory mediation a functional and effective way to settle these types of disputes.

A.2 Institutions, Rules and Infrastructure

Turkey hosts various arbitral institutions, most frequently used of which are the Istanbul Arbitration Centre (ISTAC), the Union of Chambers and Commodity Exchanges of Turkey (TOBB) Court of Arbitration and the Istanbul Chamber of Commerce Arbitration Center (ITOTAM).

ISTAC is a significant arbitral institution in Turkey for both domestic and international arbitrations. ISTAC’s Arbitration and Mediation Rules entered in force on 26 October 2015, and ISTAC has managed to attract a number of disputes since then. ISTAC provides modern and flexible rules with a fast-track option to parties both of national and international natures. ISTAC is often preferred due to its competitive fees and confidentiality when compared to many international arbitral institutions.

On 15 November 2019, ISTAC established its rules regarding the mediation-arbitration model, known as Med-Arb, by introducing its Med-Arb Rules. Med-Arb introduces a two-tier alternative dispute resolution method where parties attempt to resolve a dispute through mediation, and if mediation fails, the parties resort to arbitration. In this model, the person acting as a mediator can also act as an arbitrator in the same dispute if the parties give their explicit and written consent.

ISTAC and the Dispute Resolution Board Foundation (DRBF) signed a cooperation agreement on September 2019 with the intent to settle construction disputes in a fast and efficient manner and direct the DRBF’s members to arbitration instead of courts. ISTAC announced that it is planning to establish the ISTAC-DAB (Dispute Avoidance Board) Rules, which will be the basis of ISTAC and the DRBF’s relationship.

Another noticeable arbitral institution in Turkey is the TOBB Court of Arbitration. All parties, whether Turkish or foreign, may choose TOBB Court of Arbitration as the acting arbitral institution and its rules (unchanged since 2016) for dispute resolution. TOBB, the main establishment of the TOBB Court of Arbitration, plays a significant role in making Turkey a pioneer in international arbitration by cooperating with the Organization of Islamic Cooperation (OIC). Turkey is a member of the OIC, which aims to reinforce economic and trade cooperation among its members. Turkey hosts the Standing Committee for Economic and Commercial Cooperation of the Organization of Islamic Cooperation (COMCEC), which tracks the implementation of the OIC’s economic and trade resolutions. In 2017, Turkey and the COMCEC decided to establish an arbitration center in Istanbul with the cooperation of TOBB and the Islamic Chamber of Commerce and Industry and Agriculture (ICCIA), which is an affiliated institution of the OIC providing a common platform for the private sector to interact. After conducting several task force meetings with internationally renowned arbitration experts, the OIC Arbitration Center was established in Istanbul with the signing of the Host Country Agreement of the Center on 27 November 2019 between Turkey and the ICCIA at the 35th COMCEC Session in Istanbul, Turkey. Turkey ratified the Host Country Agreement on 25 January 2020.

ITOTAM is another preferred arbitral institution in Turkey. ITOTAM has been providing its members with arbitration services since 1979. To benefit from ITOTAM services, at least one of the parties must be a member of the Istanbul Chamber of Commerce. The current ITOTAM Rules came into force on 14 December 2017; parties may resort to the small claim arbitration procedure under the ITOTAM Rules to resolve their disputes. According to the ITOTAM Rules, unless parties agreed otherwise, claims that do not exceed approximately USD 33,000[9] are subject to the small claim arbitration procedure, and a sole arbitrator renders their final and binding award within three months following their appointment. In addition, ITOTAM also serves as a mediation center to settle disputes in an effective and in a friendly manner before disputes reach state courts or arbitration.

B. CASES

B.1 Turkish courts rendering interim measures as arbitration proceeds in a foreign country

The 16th Civil Chamber of the Istanbul Regional Court determined that pursuant to the IAL[10], Turkish courts can render an interim measure as an arbitration proceeds in a foreign country.[11]

A dispute arose from a corn sales agreement. The parties chose arbitration as the dispute resolution method. Under the agreement, the seller had to deliver goods of a certain quality, whereas the buyer had to pay the price in three installments, each installment due at different stages of the seller’s performance of the agreement. The buyer initiated arbitration in London, contending that the products did not conform to the agreed quality, and requested the arbitral tribunal to order the seller to refund the payments. As the arbitration proceeded, the plaintiff, i.e., the buyer, requested an interim attachment from the competent Turkish court, which in this case was the commercial court of first instance. The court issued an interim attachment against the defendant and the defendant appealed the decision. The 16th Civil Chamber of the Istanbul Regional Court reviewed the decision of the court of first instance and upheld its decision by stating that an arbitral proceeding in a foreign country does not pose an obstacle to the Turkish courts rendering an interim measure, given that the case’s conditions require an interim measure.

This decision illustrates that an ongoing arbitration in a foreign country does not prevent Turkish courts from rendering interim attachments.

B.2 Declaration of bankruptcy

According to the Court of Cassation, under Turkish law, if there is a valid arbitration agreement between the parties, the party who wishes to obtain a decision declaring the bankruptcy of the other party must first initiate arbitration to determine the existence of its receivables. Then, the party must resort to the competent court to obtain the debtor’s declaration of bankruptcy.[12]

In a case where the parties signed an arbitration agreement, the plaintiff initiated a lawsuit to lift the defendant’s objection to bankruptcy proceedings and requested the court of first instance to issue a declaration of the defendant’s bankruptcy. Both parties appealed to the court of first instance’s decision. According to the Court of Cassation, there are two steps to resolve lifting objections and bankruptcy cases. The first step is to determine whether the plaintiff is the creditor and the defendant is the debtor. The second step, if conditions are met, is to declare the defendant’s bankruptcy. If the parties agreed on referring their disputes to arbitration, they must first initiate arbitration to determine the existence of the receivables. However, deciding on bankruptcy is under the sole jurisdiction of the state courts because bankruptcy is associated with the principle of state sovereignty.

Consequently, the plaintiff must resort to arbitration to prove the existence of the receivables and then initiate bankruptcy proceedings and resort to the court to obtain a decision declaring the defendant’s bankruptcy.

B.3 Enforcement of foreign court judgment while arbitration is pending

The Court of Cassation rendered that if the conditions for enforcement are met, a foreign court judgment is enforceable even if it is related to an ongoing arbitration.[13]

A dispute arose from a share purchase agreement. The defendants initiated an ICC arbitration with Zurich, Switzerland as the place of arbitration. The arbitral tribunal rendered a partial award and dismissed the defendants’ requests. The defendants applied to the Swiss Federal Supreme Court to set aside the partial award but the court dismissed the lawsuit and ordered the defendants to pay the court fees and the plaintiff’s attorney fees.

The plaintiff initiated an enforcement lawsuit in Turkey for the enforcement of the Swiss Federal Supreme Court’s judgment. The defendants objected to the enforcement, arguing that, inter alia, the arbitration is not concluded and therefore the arbitral award is not final.

The commercial court of first instance decided to enforce the Swiss Federal Supreme Court’s judgment, given that the Swiss Federal Supreme Court’s judgment is final and the conditions for the enforcement of a foreign court judgment are met under Turkish law.

The defendants appealed. The regional court did not find anything in the court of first instance’s decision that is contrary to the law and upheld the court of first instance’s decision. The defendants appealed the regional court’s judgment and the Court of Cassation upheld the regional court’s decision.

As a result, pursuant to the Court of Cassation’s judgment, as long as the enforcement conditions under Turkish law are met, a party may request the enforcement of a foreign court judgment that a foreign court rendered with regards to a pending arbitration.

B.4 Setting aside of arbitral award

The Court of Cassation rendered that under Turkish law, a party cannot base its application to set aside an award on any ground other than those listed in the IAL. The Court of Cassation also stated that a party will be unsuccessful in its application to set aside an arbitral award due to an arbitrator’s lack of impartiality if it does not raise this objection during the arbitration.[14]

A dispute arose from a share purchase agreement. The sole arbitrator rendered its award and the plaintiff applied to the regional court to set aside the arbitral award on a number of grounds. The regional court rejected the plaintiff’s request. Upon the plaintiff’s subsequent application to the Court of Cassation, the Court of Cassation upheld the regional court’s judgment.

The plaintiff contended that although the chosen law was Turkish law, the sole arbitrator applied another jurisdiction’s substantive law to the merits of the dispute, which includes provisions in favor of the defendants. According to the plaintiff, this was against the principle of equality and the sole arbitrator exceeded his authority. The Court of Cassation stated that the grounds for setting aside an award are conclusively listed under article 15 of the IAL. Therefore, the application of a law on the merits of the dispute different than the chosen law cannot be a reason to set aside an award.

Another ground the plaintiff argued was that the sole arbitrator lacked impartiality. The Court of Cassation stated that although the arbitrator asked whether the parties had any objections to the procedure, the plaintiff did not raise any objections. Therefore, raising this objection in the set-aside proceedings is against the principle of good faith.

Consequently, the Court of Cassation confirmed that the only grounds a party can base its request to set aside an arbitral award are the ones enumerated by the IAL, and raising an objection regarding the arbitrator’s lack of impartiality in the set-aside proceedings is against good faith if this objection was not raised during the arbitration.

B.5 Recognition of a partial award

The Court of Cassation rendered that a partial award can be recognized if (i) it includes a final judgment on certain disputed matters and (ii) such disputed matters are different from those the arbitral tribunal will resolve in the final award.[15]

The plaintiff initiated an ICC arbitration based on a share purchase agreement. The arbitral tribunal rendered a partial award where it decided that it is exclusively competent to render an award with respect to the claims raised pursuant to the share purchase agreement.

The plaintiff resorted to the Turkish courts to recognize the partial award. Both the first court of instance and the regional court, which reviewed the case as the appeal court, dismissed the case as unfounded because (i) the arbitral award is not final since there is no document proving the finality of the award and (ii) the award cannot be recognized since it includes declarations as to the further course of the arbitral proceedings. The plaintiff appealed to the Court of Cassation.

The Court of Cassation reviewed the case in the context of the bindingness of the partial arbitral award. Even though the IPPL is applicable to recognition and enforcement of arbitral awards; as Turkey is a contracting state of the New York Convention; a final and enforceable award, which is the criteria to recognize an arbitral award pursuant to the IPPL, should be understood as a binding award in accordance with the New York Convention. According to the New York Convention, an arbitral award should be binding on the parties to be recognized and enforced. Accordingly, the Court of Cassation examined the ICC rules, which states that arbitral awards are binding on the parties. In addition, the parties’ arbitration clause states that all of the awards rendered by the arbitral tribunal shall be final and binding. As a result, the partial arbitral award rendered by the arbitral tribunal is binding.

The Court of Cassation also noted that it does not matter if the award is referred to as a “partial award”; if the award includes a final judgment on certain disputes before the arbitral tribunal renders its final award, and these disputes are independent and separable from those to be resolved in the final award, it is enough for a partial award to have a final nature and be recognized. The Court of Cassation reversed the regional court’s decision and remanded the case back to the commercial court of first instance.

[1] International Arbitration Law No. 4686 of 21 June 2001.

[2] The IAL is applicable to disputes with a foreign element and where the place (seat) of arbitration is Turkey. It is also applicable if the parties agreed to its application or if the arbitral tribunal determines that the arbitral proceedings should be conducted pursuant to the IAL.

[3] Code of Civil Procedure No. 6100 of 12 January 2011.

[4] Law on International Private Law and Procedural Law No. 5718 of 27 November 2007, Articles 60-63.

[5] Constitutional Court, File No. 2018/1, Decision No. 2018/83 of 11 July 2018.

[6] Turkish Commercial Code No. 6102 of 13 January 2011.

[7] Law on Execution Proceedings for the Collection of Monetary Receivables Arising out of Subscription Agreements No. 7155 of 6 December 2018.

[8] Law on Mediation in Civil Disputes No. 6325 of 7 June 2012.

[9] TRY 200,000.

[10] Article 6 of the IAL.

[11] Istanbul Regional Court, 16th Civil Chamber, File No. 2018/706, Decision No. 2018/650 of 14 March 2018.

[12] Court of Cassation, 23rd Civil Division, File No. 2018/1512, Decision No. 2019/796 of 4 March 2019.

[13] Court of Cassation, 11th Civil Division, File No. 2017/3903, Decision No. 2019/1083 of 12 February 2019.

[14] Court of Cassation, 11th Civil Division, File No. 2018/3263, Decision No. 2018/7408 of 27 November 2018.

[15] Court of Cassation, 11th Civil Division, File No. 2017/3469, Decision No. 2019/4259 of 11 June 2019.

Author

Ismail G. Esin is a partner in Baker McKenzie's Istanbul office. He is a member of the Istanbul Bar Association, the International Chamber of Commerce (ICC) Turkish National Committee, the German Arbitration Institute (DIS), the London Court of International Arbitration (LCIA) and the Istanbul Arbitration Centre (ISTAC) Advisory Committee.

Author

Ali Selim Demirel is a senior associate at Esin Attorney Partnership, a member firm of Baker McKenzie, where he leads the arbitration practice group. He focuses his practice on arbitration, domestic and international mergers and acquisitions and energy and concessions. He is a member of the Istanbul Bar Association.

Author

Yiğitcan Bozoğlu is an associate at Esin Attorney Partnership, a member firm of Baker McKenzie, where he specializes on arbitration, M&A, corporate and commercial law. He is a member of the Istanbul Bar Association.

Author

Ceyda Sıla Çetinkaya is an associate at Esin Attorney Partnership, a member firm of Baker McKenzie where she focuses on dispute resolution. She is a member of the Istanbul Bar Association.