A. LEGISLATION AND RULES
A.1 Legislation
International arbitration[1] seated in Türkiye is governed by the International Arbitration Law of 2001 (IAL),[2] while domestic arbitration not involving a foreign element is governed by the Code of Civil Procedure of 2011 (CCP).[3] The provisions in these two codes were both inspired by the UNCITRAL Model Law; therefore, they can be characterized as reasonably standard and arbitration-friendly. The recognition and enforcement of foreign arbitral awards in Türkiye is regulated under the Law on International Private Law and Procedural Law of 2007 (IPPL).[4] In addition, Türkiye 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 Türkiye since 30 September 1992. In 2022, no amendments were made to the IAL, CCP, IPPL or other arbitration-related legislation.
A.2 Institutions, rules and infrastructure
There are a number of local arbitration institutions in Türkiye. The most preferred institutions 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 Türkiye (TOBB) Arbitration Council. The Union of Turkish Bar Associations (UTBA) Arbitration Center has also come to light in 2022 after releasing its new arbitration rules (“UTBA Rules“).
ISTAC: Probably the most well-known arbitral organization in Türkiye since its founding in 2014, ISTAC offers effective dispute resolution services for both domestic and international arbitrations. On 21 March 2022, ISTAC amended its rules on costs and fee scales. Until the date of the amendments, the costs of proceedings with three arbitrators before ISTAC were in some cases higher than Turkish court proceedings, depending on the amount in dispute. The updated rules on costs and fees have made ISTAC arbitration cheaper by reducing the costs of proceedings for disputes with a value of less than TRY 1,000,000.[5] The revised rules on costs and fee scales have made the already cost-friendly ISTAC arbitration even more affordable.
Additionally, in 2022, ISTAC signed a cooperation protocol with the Swiss Arbitration Association, aiming to hold joint seminars, workshops and events.[6] Considering that a sizeable number of international arbitrations involving Turkish parties are conducted by Swiss arbitrators, and that Switzerland is one of the globally most commonly preferred arbitration seats, the signing of a cooperation protocol with the Swiss Arbitration Centre is a very important step to further cement the international recognition of ISTAC.
ITOTAM: Another reputable and frequently chosen arbitration institution in Türkiye is ITOTAM. Since its founding in 1979, ITOTAM has offered arbitration services and recently also started offering mediation services. The latest amendment to the ITOTAM rules was made in March 2021 and it was a very significant amendment modernizing the ITOTAM rules.[7] Following such an in-depth amendment in 2021, ITOTAM did not make any amendments to its rules in 2022.
UTBA Arbitration Center: The UTBA Arbitration Center is an independent and impartial arbitration center established in 2015 within the UTBA. Initially, the UTBA Arbitration Center’s scope of services was limited to disputes arising from attorney-client relationship or disputes between attorneys. As such, the UTBA Arbitration Center was not very active until it introduced the amended arbitration rules in 2022. Now, the UTBA Rules, which have been brought to the standard of internationally recognized arbitration centers in Türkiye and the arbitration practice around the world, entered into force in 2022 and became an active arbitration institution in Türkiye. With the entry into force of the UTBA Rules, UTBA offers institutional arbitration services for the resolution of all disputes, including those of an international nature. Since it is quite new in practice, it will need some time to show its effectiveness in arbitration scene.
That being said, the UTBA Arbitration Center provides a wide range of tools; its services are no longer limited to resolving conflicts arising out of attorney-client relationship, which is the most important change in the UTBA Rules. As a result, its services will now be available for all forms of domestic and international disputes.
In accordance with article 2 of the UTBA Rules, the parties may request that the UTBA Arbitration Center record the executed settlement documents, conciliation minutes, and mediation documents prepared in accordance with article 35/A of Attorneyship Law as an arbitral award in accordance with article 2 of the Rules. This is an innovative provision that facilitates the execution capability of these documents.
Also, according to article 12 of the Rules, unless the parties have agreed otherwise, disputes will be decided by a sole arbitrator. On the other hand, the parties are permitted to choose multiple arbitrators provided that the number of arbitrators is an odd number. Prior to the entry into force of the UTBA Rules, the parties had to choose the arbitrators from a list provided by the UTBA Arbitration Center. However, the Rules have eliminated both this requirement and the criterion for choosing the arbitrators. In addition, the procedures for challenging and replacing arbitrators have been implemented, in line with those of contemporary arbitration centers.
In addition, the UTBA Rules have also been improved with the addition of provisions on handling disputes arising out of multiple contracts consolidation of arbitrations.
The UTBA Rules continue to provide that the arbitral proceedings should, in principle, be conducted in a confidential manner in accordance with article 17 of the Rules. In addition, the previous system allowing publication of arbitral awards with certain modifications to anonymize the parties involved and protect trade secrets has been removed.
One of the most remarkable aspects of the UTBA Rules is article 25, which allows for virtual hearings, reflecting the changes in arbitration practice, particularly in the wake of the COVID-19 pandemic. Unlike the previous rules where decisions were generally rendered based solely on document, the UTBA Rules provide that it is mandatory to hold a hearing if the amount in dispute exceeds TRY 100,000.[8] Therefore, the option to hold virtual hearings will provide speed and flexibility to the proceedings.
TOBB: Finally, there is also the TOBB Arbitration Council which is one of the prominent arbitration centers in Türkiye. The arbitration rules introduced by TOBB remain unchanged since 2016.
B. CASES
B.1 Initiating the arbitration proceedings without completing the prior steps in the dispute resolution clause does not undermine the existence of the parties’ intention to arbitrate, and the arbitral tribunal’s refusal to hear the witness by teleconference does not prejudice the right of defense
The Court of Cassation upheld a decision of the regional court, ruling that (i) initiating the arbitral proceedings before completing the first step of the dispute settlement procedure provided under the share purchase agreement (SPA) between the parties does not disable or impair the parties’ intention to arbitrate, and (ii) the arbitral tribunal’s rejection of the request for the witness to be heard via teleconference does not prevent the right of defense, as the witness was allowed to be heard at the hearing and their written statements were submitted and accepted by the arbitral tribunal as evidence.[9]
The dispute between the parties was related to the sale of 25% of the shares in an energy company, owned by the plaintiff, to the defendant. For this purpose, the parties signed a SPA, and the defendant paid the plaintiff the initial portion of the purchase price but the plaintiff failed to transfer the shares to the defendant. The defendant commenced arbitration proceedings under the ICC arbitration rules to request the payment it made to the plaintiff, and the arbitral tribunal issued its decision in favor of the plaintiff on 25 June 2019. Based on the claim that the defendant failed to engage in good faith negotiations, as agreed upon in the SPA, prior to commencing arbitration proceedings, the plaintiff filed a set aside lawsuit and asked the regional court to set aside the arbitral award. The plaintiff also argued that the arbitral tribunal’s rejection of the plaintiff’s request for a witness to be heard via teleconference violates its right of defense and is against the mandatory rules of the law and public order as it violated the right to a fair trial. In response, the defendant argued that good faith negotiations were conducted, but the parties failed to come to an agreement. The defendant further argued that it is the plaintiff’s responsibility to ensure the plaintiff’s witness be present at the hearing venue and refusal to hear a witness via teleconference due to the witness’ absence does not constitute a violation of public order. The regional court held that (i) the initiation and continuation of the arbitration proceedings without the completion of the first stage of the dispute resolution procedure provided under the SPA did not remove the parties’ intention to arbitrate, and (ii) the arbitral tribunal’s refusal of the request to hear the witness by teleconference did not prejudice the right of defense, as the witness was allowed to be heard at the physical hearing but the counsel failed to bring the witness to the hearing and the written statements of the witness were submitted and accepted as evidence by the arbitral tribunal. Therefore, the claimant’s request for setting aside the award was rejected on both grounds. Despite the plaintiff’s appeal to the Court of Cassation, the regional court’s decision was affirmed and the plaintiff’s case was rejected.
B.2 Even if there is an arbitration agreement between the parties, the creditor does not need to first resort to arbitration to obtain a decision on the existence of its receivable before filing a bankruptcy lawsuit
The General Assembly of Civil Chambers of the Court of Cassation (“General Assembly“) ruled that even if the parties have an arbitration agreement, the creditor can file a bankruptcy lawsuit without first going through arbitration to determine whether its receivables exist.[10] The dispute stemmed from a construction agreement in return for land share (arsa payı karşılığı inşaat sözleşmesi). The plaintiffs (creditors) asserted that the defendant (debtor) failed to complete and deliver the turnkey construction in due time. As a result, they initiated execution proceedings with the bankruptcy request (genel iflas yoluyla icra takibi) against the defendant for a total of TRY 2,000,000 for the loss of rent revenue.[11]
The defendant objected to the execution proceedings with the bankruptcy request. Thereupon, the plaintiffs filed a bankruptcy lawsuit for the dismissal of the defendant’s objection and requested the issuance of a depot order (depo emri) and the bankruptcy of the defendant if it fails to pay the amount subject to the proceedings. The defendant first argued that there was an arbitration clause in the agreement and, therefore, the court was not competent to hear the dispute. The defendant further argued that the defendants were not in default, and that it was the plaintiffs that were in default due to their failure to fulfill their obligations under the agreement. Therefore, the defendant requested that the plaintiffs’ lawsuit be dismissed on procedural grounds due to the existence of the arbitration agreement, or, in the alternative, on the merits due to the default of the plaintiffs.
According to the court of first instance, bankruptcy cases with dismissal of the objection request are a unique type of proceedings with multiple stages. Whether the plaintiff is, in reality, the creditor and the defendant is the debtor in accordance with the applicable law must be decided in the first phase. The decision on bankruptcy must be the secondary phase following the initial determinations on the existence of the receivables. The court of first instance emphasized that the first phase will, in general, be heard by the court hearing the bankruptcy lawsuit. However, within the limits of freedom of contract, the parties may opt for a different venue for resolving their disputes, as they have done in the present instance by incorporating an arbitration clause in their agreement. That said, although bankruptcy lawsuits are deemed not arbitrable since they have an impact on public order, this rule only applies to the second phase (i.e., the bankruptcy decision itself) and not the first, during which the existence of the receivables is evaluated. As such, the court of first instance held that the plaintiffs should have initiated arbitration to obtain a decision confirming the existence and amount of its receivables and then initiated a bankruptcy lawsuit before local courts. Therefore, the court of first instance dismissed the plaintiffs’ lawsuit on procedural grounds due to the existence of the arbitration clause in the agreement. The plaintiffs appealed the decision of the court of first instance.
On appeal, the regional court, upheld the decision of the court of first instance, stating that the contract between the parties contained an arbitration clause and, therefore, the plaintiffs should have first initiated arbitration to obtain a decision on the existence of their claims. The plaintiffs also appealed the decision of the regional court.
Subsequently, the Court of Cassation emphasized that arbitration agreements can only be concluded for disputes that are subject to the will of the parties, and that these are the disputes where the parties can freely dispose of the subject matter of the dispute, for example through settlement.
The Court of Cassation held that even if arbitration is an exception to the principle of the exercise of the state’s jurisdiction by the courts, raising an arbitration objection in a situation where the other party has filed bankruptcy proceedings before courts to quickly obtain its receivable would be incompatible with the rule of good faith and would restrict the party’s right to access legal remedy. The Court of Cassation stated that one of the fundamental principles of the CCP is that the proceedings be conducted as efficiently as possible and in accordance with procedural economy. The Court of Cassation also pointed out that, according to a part of the Turkish doctrine, waiting for the arbitral tribunal’s decision in bankruptcy proceedings is incompatible with the characteristics and legal nature thereof and, therefore, the parties are not free to opt out of the jurisdiction of Turkish courts regarding bankruptcy lawsuits, which concerns public order. The Court of Cassation further stated that there was no justification for separating the proceedings into two phases, as the bankruptcy proceedings were integrated with the dismissal of the objection. Thereupon, the Court of Cassation reversed the judgment of the court of first instance on these grounds.[12]
Upon the Court of Cassation’s decision, the court of first instance insisted on its original ruling and stated that there are other Court of Cassation decisions emphasizing that if there is an arbitration agreement between the parties, the arbitral tribunal must first decide on the existence of the receivables and then a bankruptcy decision can be obtained from the Turkish courts.[13] As such, the court of first instance insisted on its initial decision. The plaintiffs appealed the court of first instance’s decision of insistence and the case was brought before the General Assembly.
The General Assembly emphasized that bankruptcy proceedings have consequences that affect not only the plaintiff seeking the bankruptcy of the defendant, but also all other creditors of the defendant and the public order. The General Assembly emphasized that in terms of the execution proceedings with a bankruptcy request, the dismissal of the defendant’s objection and the declaration of bankruptcy are inseparable parts of a process and should not be divided into separate stages for the proper conduct of the execution proceedings. Therefore, it held that initiating arbitration to obtain a decision on the dismissal of the objection to the execution proceedings and then proceeding with the bankruptcy lawsuit before the Turkish courts would be contrary to procedural economy. The General Assembly also stated that articles 154 and 155 of the Execution and Bankruptcy Code, which regulate execution proceedings with a bankruptcy claim, do not provide for applying for arbitration to determine the existence of a claim or enable an arbitration objection against such proceedings. Furthermore, the arbitration clause itself did not provide that the parties cannot initiate execution proceedings with a bankruptcy claim in the case of a dispute. For these reasons, the General Assembly reiterated the same reasoning as the Court of Cassation and reversed the insistence decision of the court of first instance.
That said, there is a dissenting opinion in the General Assembly’s decision. The dissenting opinion stated that arbitration is not possible for disputes that are not subject to the will of the parties; however, in the present dispute, the arbitration clause is valid and the nature of the receivables subject to the dispute is arbitrable. The dissenting opinion held that the existence and amount of the receivable should first be determined by arbitration, and that this stage is not specific to bankruptcy proceedings. It further held that if there is an arbitration agreement between the parties, this issue should be resolved before the arbitral tribunal, and then the dispute should be referred to the Turkish courts for a depot order and bankruptcy decision. It was also emphasized that, despite the existence of an arbitration agreement and the arbitrability of the dispute, the fact that the plaintiffs initiated execution proceedings with a bankruptcy claim instead of applying for arbitration rendered the arbitration clause unenforceable for the defendant. According to the dissenting opinion, this constituted an abuse of right, as it aimed to invalidate the arbitration clause in the agreement. We also note that this decision of the General Assembly is heavily criticized within Türkiye as it has the potential to invalidate many arbitration clauses.
B.3 Having two conflicting decisions on the same subject matter is contrary to public order, and contradiction to public order constitutes an exception to the prohibition of révision au fond
The Court of Cassation held that the existence of conflicting awards undermines the principles of legal certainty, transparency and stability and creates serious problems in the enforcement of the award. Therefore, having conflicting decisions should be considered contrary to public order. As such, arbitrators should, if necessary, examine the facts and outcome of another relevant pending case and its impact on the case at hand to avoid rendering conflicting awards. The Court of Cassation also emphasized that although courts are not authorized to review the merits of an arbitral award, public policy is an exception to this.[14]
The dispute between the parties arose from the portfolio agreement where two Turkish real persons were parties to the portfolio agreement as guarantors. To hold the transferor and the guarantors accountable for the transferor’s breach of the noncompete agreement and breach of the portfolio transfer obligation set forth in the portfolio agreement, the transferee of the portfolio filed arbitration proceedings before ITOTAM. During the arbitration process, the respondent informed the arbitrator that another arbitration proceeding exists before ITOTAM concerning the same portfolio agreement according to which the transferor had claimed its remainder portfolio transfer receivable from the plaintiff and thus, requested that the files be merged. Although both of the arbitrations before ITOTAM were based on the portfolio agreement, the arbitrator in the first hearing concluded that the arbitrations could not be merged since the parties to the arbitrations are not exactly the same and the requested reliefs differed from each other.
In the set aside lawsuit filed after the arbitration, the set aside of the arbitral award was requested due to, among others, the failure to consolidate the two arbitrations. The regional court ruled that the arbitrator’s decision in the first file without waiting for the decision to be rendered in the second file would not require the set aside of the arbitral award. In addition, the regional court ruled that the claims that the arbitrator misinterpreted certain evidence or made an erroneous decision should be rejected as grounds for set aside, as Turkish courts are not competent to review the merits of the arbitral award. Furthermore, the regional court held that the arbitral award had considered the evidence and facts submitted in a reasonably logical manner and that the fact that the arbitrator had not collected or examined additional evidence was not in itself a ground for set aside and did not violate the equality of the parties or the right of one party to defend itself in the present case.
The Court of Cassation stated that although the claims and parties were not identical in the first case, the main issue in both proceedings was whether the transferor had fulfilled its obligations under the portfolio agreement. The Court of Cassation also stated that courts are not authorized to review the merits of an award under the prohibition of révision au fond, but that public order constitutes one of the exceptions to this rule. The Court of Cassation then emphasized that conflicting awards violate legal certainty, transparency and stability and create problems in the enforcement of such awards and, therefore, will be considered contrary to public order. Therefore, the Court of Cassation ruled that the arbitrator must examine the prior award, its facts and consequences, and its impact on the case under review. Therefore, the Court of Cassation considered the arbitral award to be contrary to public policy, as the consequences of the other award were not considered. The Court of Cassation therefore reversed the decision of the regional court.
[1] The IAL is applicable to disputes when there is a foreign element and where the place (seat) of arbitration is Türkiye. 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] International Private and Procedural Law No. 5718 of 27 November 2007, articles 60-63.
[5] As of 24 January 2023, TRY 1,000,000 corresponds to approximately USD 53,304 based on the conversion rate published by the Central Bank of the Republic of Türkiye.
[6] For detailed information, see ISTAC’s press release.
[7] For detailed information, you may refer to the Türkiye chapter of the previous issue of Arbitration Yearbook.
[8] As of 24 January 2023, TRY 100,000 corresponds to approximately USD 5,330 based on the conversion rate published by the Central Bank of the Republic of Türkiye.
[9] The 11th Civil Chamber of the Court of Cassation, File No. 2020/5852, Decision No. 2022/2988, dated 13 April 2022.
[10] The General Assembly of Civil Chambers of the Court of Cassation, File No. 2019/574, Decision No. 2021/1710, dated 21 December 2021.
[11] As of 24 January 2023, TRY 2,000,000 corresponds to approximately USD 106,607 based on the conversion rate published by the Central Bank of the Republic of Türkiye.
[12] The 19th Civil Chamber of the Court of Cassation, File No. 2005/5976, Decision No. 2005/10004 dated 13 October 2005; The Enforcement and Bankruptcy Chamber of the Court of Cassation, File No. [year undetermined]/1332, Decision No. 1969/1729 dated 13 February 1969.
[13] The 23rd Civil Chamber of the Court of Cassation, File No. 2018/1512, Decision No. 2019/796 dated 4 March 2019; The 23rd Civil Chamber of the Court of Cassation, File No. 2016/5765, Decision No. 2018/5560 dated 29 November 2018.
[14] The 11th Civil Chamber of the Court of Cassation, File No.: 2022/2105, Decision No.: 2022/4906, dated 15 June 2022.
