A. LEGISLATION AND RULES
A.1 Legislation
In Turkey, international arbitration[1] is subject to the provisions of the International Arbitration Law of 2001 (IAL),[2] whereas domestic arbitrations seated in Turkey are governed by the Code of Civil Procedure of 2011 (CCP),[3] both of which are inspired by the UNCITRAL Model Law and are therefore reasonably standard and arbitration-friendly in terms of their provisions. Additionally, the Law on International Private Law and Procedural Law of 2007 (IPPL),[4] which has yet to be amended since its entry into force, contains the principles and procedures regarding the recognition and enforcement of foreign arbitral awards in Turkey. Turkey is a party to the New York Convention, which also regulates the recognition and enforcement of foreign arbitral awards and has been in force in Turkey since 30 September 1992. No legislative amendment was made to the IAL, the CCP and the IPPL, nor was any significant change made in 2021 to any other legislation related to arbitration.
A.2 Institutions, rules and infrastructure
Turkey is host to a multitude of arbitral institutions; those most frequently preferred are the Istanbul Arbitration Centre (ISTAC), the Istanbul Chamber of Commerce Arbitration and Mediation Center (ITOTAM) and the Union of Chambers and Commodity Exchanges of Turkey (TOBB) Arbitration Council.
A.2.1 ISTAC
Since its establishment in 2014, ISTAC has been the most prominent arbitral institution in Turkey, providing efficient dispute resolution services for both domestic and international arbitrations. In 2021, ISTAC entered into a cooperation protocol with the HKIAC to host events and seminars together and for HKIAC to promote ISTAC’s operations in the Asian market. ISTAC’s president and the HKIAC’s secretary-general both noted that they look forward to working together and expanding their reach. This cooperation protocol is particularly important and beneficial for ISTAC’s goal to become a recognized and reputable international arbitration center.
A.2.2 ITOTAM
ITOTAM is another well-established and frequently preferred arbitral institution in Turkey. It has been providing arbitration services since its establishment in 1979, in addition to starting to provide mediation services more recently. ITOTAM’s new rules entered into force in March 2021, with certain amendments to ITOTAM Rules 2017 and ITOTAM Mediation Rules.
Some amendments under ITOTAM Rules 2021 are significant for modernizing such rules. Article 1 contains one of the major changes, which is the expansion of ITOTAM’s arbitration scope by removing the requirement that at least one of the parties to the arbitration be a member of the Istanbul Chamber of Commerce (ITO).
Also, several provisions regarding joinder and consolidation that already existed under the rules of the modern international arbitration centers, such as the ICC Rules 2021 and the LCIA Rules 2020, were added to articles 14 to 17 of ITOTAM Rules 2021. First, the procedure of joinder of additional parties to the arbitral proceedings is regulated under article 14, which provides that unless otherwise agreed by all parties, including the additional party, no additional party can join after the confirmation or appointment of the arbitral tribunal. Furthermore, articles 15 to 17 respectively regulate claims between multiple parties, claims arising out of multiple contracts and consolidation of arbitrations. These amendments have made ITOTAM Rules 2021 more suitable for multi-party and multi-contract arbitrations.
Another addition is related to the participation of third-party funders, which is a growing trend in arbitration. Pursuant to article 19, each party must promptly inform the secretariat, the arbitral tribunal and the other party of the existence and identity of any non-party that has entered into an agreement for funding of claims and defenses and has an economic interest in the outcome of the arbitration. This rule is parallel with the ICC Rules 2021 and has been emphasized because of its relevance to the impartiality and independence of arbitrators.
Furthermore, according to the new article 35, the arbitral tribunal may appoint an expert(s) (bilirkişi). Moreover, the tribunal can request that the parties submit an expert opinion (uzman görüşü) instead of appointing experts itself. Additionally, all tribunal-appointed or party-appointed experts can be freely examined during the hearing by the arbitral tribunal and the parties. Also, the possibility of holding virtual hearings is now expressly provided under article 40 of ITOTAM Rules 2021.
Another entirely new provision is article 38 on expedited arbitration, which stipulates that if the total amount or value of the claims and the counterclaims, if any, does not exceed TRY 500,000 (approximately USD 34,000), or if the parties choose so, the Expedited Arbitration Rules in annex 4 of ITOTAM Rules 2021 will be applied. The Expedited Arbitration Rules provide that the dispute will be resolved by a sole arbitrator within three months and with minimal cost. The Expedited Arbitration Rules do not automatically apply to the dispute if the arbitration agreement predates them, the parties have agreed that they will not or ITOTAM Arbitration Court decides that they will not.
Finally, ITOTAM Rules 2021 will apply to applications that were made post entry into force, unless the parties have agreed that the rules in force when the arbitration agreement was signed will apply.
In addition, article 8 of the Internal Regulation on the Structure and Working Principles of the Arbitration Court and Secretariat of ITOTAM also underwent a significant amendment. Accordingly, ITOTAM Arbitration Court will determine the necessary qualifications of arbitrators on a case-by-case basis. This is very different from the previous version of the article, which provided for two groups of arbitrators, namely arbitrators with a commercial and/or business background and those without such background, and set predetermined and concrete requirements such as age, degree and work experience to qualify as an arbitrator.
Simultaneously with the new rules’ entry into force, ITOTAM established its Med-Arb Rules[5] regarding the mediation-arbitration model, which is a two-tier alternative dispute resolution method where parties first undergo mediation to resolve their disputes through an impartial and independent third party. If the parties fail to reach an agreement, they resort to arbitration.
On 24 November 2021, ITO and ITOTAM shared a model arbitration clause that can be inserted into companies’ articles of association. This clause provides that in all disputes arising from the Turkish Commercial Code, articles of association and company decisions between any of the categories of parties listed below can be resolved in arbitration under ITOTAM Rules unless the rules contradict mandatory provisions of Turkish law:
- Shareholders
- The company and shareholders
- Board members and the company and/or the shareholders.
This clause is expected to promote arbitration as a dispute resolution mechanism in disputes arising from corporate law. However, note that the arbitrability of corporate law disputes, especially those concerning the validity of an arbitration clause inserted into a company’s articles of association, is still controversial among scholars in Turkish law. There is no established jurisprudence for the application of this novelty.
A.2.3 TOBB
Finally, TOBB Arbitration Council, whose rules remain unchanged since 2016, is also an option.
B. CASES
B.1 Turkish courts’ lack of jurisdiction is foreseeable in the presence of an arbitration agreement
In an individual application, the Constitutional Court ruled that Turkish courts’ lack of jurisdiction is foreseeable in the presence of the arbitration agreements. Therefore, parties should act accordingly and should not make any claim that their ownership right was violated due to the length of the proceedings before Turkish courts.[6] The underlying dispute originated from a charter agreement containing an arbitration clause that foresaw London as the seat of arbitration and a bill of lading and involved cargo insured by the applicant being damaged during transport. The applicant paid for the damages and initiated execution proceedings against the carrier in Turkey, which were halted upon the carrier’s objection.
The applicant initiated a lawsuit to have the objection dismissed and to continue the execution proceedings. In this lawsuit, the carrier raised a preliminary arbitration objection. However, the court of first instance dismissed the objection on the grounds that the lawsuit had been initiated based on the bill of lading, but the reference to the charter contract within the bill of lading did not encompass the arbitration agreement. The Court of Cassation reversed the decision upon appeal, stating that the charter agreement between the parties contained an arbitration clause. The court of first instance ruled that it had no jurisdiction with regards to the Court of Cassation’s decision. This was again appealed by the applicant but the Court of Cassation upheld the court of first instance’s decision, which was then finalized.
The applicant applied to the Constitutional Court, arguing that the decision on lack of jurisdiction is contrary to the Court of Cassation’s jurisprudence. Furthermore, the applicant argued that its right to a fair trial and its right to ownership were violated because the decision on lack of jurisdiction was given after seven years. This made it impossible to initiate arbitration proceedings as the statute of limitations had expired under English law, which is the applicable law for the claimant’s arguments since the seat of arbitration is London. The Constitutional Court separated the claimant’s claims and stated that it would evaluate this individual application in terms of violation of ownership rights. The Constitutional Court found no express abuse of discretion or arbitrariness in the Court of Cassation’s decision. It also concluded that the applicant was aware of the agreement and was therefore in a position to foresee a possible arbitration objection raised before Turkish courts. For this reason, the applicant’s first claim was found inadmissible. Furthermore, the Constitutional Court emphasized that the applicant did not try to initiate arbitration before the individual application and stated that it is not possible to determine whether the applicable statute of limitations and thus, the possibility to get compensation through arbitration, had expired.
B.2 Violation of the right to a fair trial and public policy
The 11th Civil Chamber of the Court of Cassation emphasized that pursuant to article 5 of the New York Convention, the right to a fair trial and public policy must be respected to prevent an award rendered from being unenforceable.[7]
The underlying dispute arose from a shareholders’ agreement (“Agreement”) concerning the management rights of shares amounting to 95% of a Turkish company’s entire share capital. The plaintiff argued that the Agreement was breached due to fraudulent execution proceedings (icra takibi), which damaged the plaintiff.[8] Subsequently, the plaintiff initiated arbitral proceedings before the ICC. Following the completion of the arbitration, the plaintiff requested enforcement of the award pursuant to the New York Convention. The court of first instance rejected the plaintiff’s request and this decision was appealed by the plaintiff. The Court of Cassation reversed the decision. However, upon this reversal decision, the defendant filed for correction of the Court of Cassation’s judgment. The Court of Cassation rejected this correction request on all grounds but one, thus, evaluating the correction request in terms of violation of public policy and infringement of the right to a fair trial. In the award whose enforcement is sought, the arbitral tribunal had allowed one of the parties to submit an appraiser’s report by redacting the appraiser’s name and calculation method, and prevented the other party from receiving even the draft of the appraiser’s report submitted by the other party and cross-examining the appraiser who prepared it.
The Court of Cassation further emphasized that violating public policy and the right to a fair trial is reason to dismiss the recognition and enforcement of a foreign award under the New York Convention. As per the decision, the right to be heard constitutes an aspect of the right to a fair trial and requires that parties to a dispute can access evidence and documents that are significant for the decision. Therefore, decisions should not be based on evidence that one party was unable to inspect properly or was completely unaware of. In this regard, the right to be heard cannot be violated in favor of the other party’s trade secret. The Court of Cassation held that the arbitral tribunal’s manner in dealing with a crucial piece of evidence — namely restricting one party’s ability to properly inspect the appraiser’s report, on which the award was substantially based — contradicted the agreed procedural rules. The level of secrecy was not reasonably justified. The Court of Cassation emphasized that this was a grave violation of the right to a fair trial and, therefore, violated public policy. In this regard, the Court of Cassation accepted the correction request for the award.
B.3 ICSID awards cannot be directly executed in Turkey
The Court of Cassation ruled that an ICSID award cannot be directly executed in Turkey, since Turkey has not yet appointed an authority[9] or court to approve and conduct the execution of ICSID awards, pursuant to article 54 of the ICSID Convention.[10]
In the underlying dispute, the government of Turkmenistan initiated execution proceedings in Turkey against a Turkish company to collect the arbitration costs and expenses awarded under an ICSID arbitration. Then, the company applied to an execution court in Turkey to dismiss the execution proceedings, arguing that, among others, the ICSID award on which the execution proceedings are based cannot be directly subject to execution proceedings without the approval of the relevant authority in Turkey. The court of first instance rejected the company’s request and the company appealed the decision. The regional court dismissed the appeal lawsuit and this decision was also appealed by the company.
The Court of Cassation stated that pursuant to article 61 of the ICSID Convention, the arbitral tribunal’s decision on costs and expenses constitute part of the award. The Court of Cassation then emphasized that article 54 of the ICSID Convention provides that the state party shall appoint an authority or a court that will approve the execution of the awards, which is a prerequisite for the execution of an ICSID award in a state party. In this regard, the Court of Cassation then held that no authority has been appointed by Turkey yet and as such, the prerequisite has not been met. Therefore, the Court of Cassation reversed the decision.
Consequently, under the current situation, a party seeking recognition or enforcement in Turkey shall furnish to the competent court a copy of the award certified by the secretary-general of ICSID.
B.4 A two-fold approach to the arbitrability of bankruptcy disputes
The Regional Court emphasized that bankruptcy disputes have two phases:
- The assessment of whether the receivables actually exist.
- The decision on the bankruptcy of the company.
The court ruled that only the bankruptcy decision is not arbitrable.[11]
In the underlying dispute, the plaintiff argued that the arbitration objection raised by the defendant against the execution proceedings initiated by the plaintiff was meritless as, among others, pursuant to article 154 of the Execution and Bankruptcy Law (“Law No. 2004”), Turkish courts have peremptory jurisdiction (kesin yetki) concerning bankruptcy cases. On the other hand, the defendant argued that there is an arbitration agreement between the parties and as such, the dispute must be resolved through arbitration.
The court of first instance stated that there is indeed an arbitration agreement between the parties and, pursuant to the relevant provisions of Law No. 2004, the court must first assess whether the plaintiff is actually the creditor and the defendant is the debtor under the general provisions of governing law in the lawsuit initiated by the plaintiff in which the plaintiff requested the dismissal of the defendant’s objection to the bankruptcy. As such, this initial evaluation regarding the existence of an actual debt should firstly be heard by an arbitral tribunal. Then, a state court can grant the bankruptcy decision, upon the arbitral tribunal’s decision. Therefore, the court of first instance accepted the arbitration objection and the plaintiff appealed the decision.
The Regional Court stated that the defendant duly raised an arbitration objection. The Regional Court emphasized that there is no reason for the direct declaration of bankruptcy of the defendant and that the arbitration agreement is valid for the execution proceedings through the request for bankruptcy initiated under article 155 of Law No. 2004. The Regional Court then held that the rule regarding bankruptcy disputes not being arbitrable concerns the phase where the bankruptcy decision is given, and not the evaluation of whether the receivables actually exist. As such, the Regional Court emphasized that, pursuant to the relevant Court of Cassation jurisprudence, the plaintiff must first prove its claim before the arbitral tribunal and then initiate a bankruptcy lawsuit.
[1] 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.
[2] International Arbitration Law No. 4686 of 21 June 2001.
[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] ISTAC also established its Med-Arb Rules and entered into a cooperation protocol with 130 mediation centers on 24 June 2020. For detailed explanations, please refer to the Turkey section of the Baker McKenzie International Arbitration Yearbook 2020-2021.
[6] The Constitutional Court of the Republic of Turkey, Application No. 2018/5832 dated 8 June 2021. You may find a more detailed summary of the Constitutional Court’s decision by clicking here.
[7] 11th Civil Chamber of the Court of Cassation, File No. 2019/2417, Decision No. 2021/1051, dated 10 February 2021.
[8] The plaintiff claimed that the defendant initiated execution proceedings (icra takibi) that were against the Agreement, causing the target company’s shares in another company, which was its only asset, to be sold at extremely low prices, thus damaging the plaintiff.
[9] Turkey has appointed an authority pursuant to article 54 of ICSID Convention on 1 February 2017. Accordingly, the commercial court of first instance, or the civil court of first instance in the absence of a commercial court, at the place designated in the written agreement between the parties or, in the case of absence of such an agreement, the commercial court of first instance at the losing party’s domicile, or residence if domicile does not exist, or the place where the assets subject to the claim are situated in the absence of both domicile and residence, is appointed as the authority as per ICSID Convention by Turkey. It should also be highlighted that this authority’s power to review an ICSID award is limited to whether the award is granted in the custody of ICSID under ICSID Convention.
[10] 12th Civil Chamber of the Court of Cassation, File No. 2021/875, Decision No. 2021/4586 dated 28 April 2021.
[11] 17th Civil Chamber of Istanbul Regional Court, File No. 2021/1396, Decision No. 2021/1231 dated 4 November 2021.
