By: Ismail G. Esin,1Ismail G. Esin is the managing partner in Baker & McKenzie’s Istanbul office. Mr. Esin is a member of the Istanbul Bar Association, the ICC Turkish National Committee, the LCIA, the IBA, the Swiss Arbitration Association, the German Arbitration Institute, the German-Turkish Chamber of Industry and Commerce and the American Business Forum in Turkey. Ozgun Celebi2Ozgun Celebi is an associate in Baker & McKenzie’s Istanbul office. She is also a member of the Istanbul Bar Association. and Dogan Gultutan3Dogan Gultutan is an associate in Baker & McKenzie’s Istanbul office. He is also a member of the Istanbul Bar Association and the Bar of England & Wales and a scholar of The Honourable Society of Lincoln’s Inn.
A. Legislation, Trends and Tendencies
A.1 Legislation
International arbitration in Turkey continues to be governed by the International Arbitration Law of 2001 (IAL), to which no legislative amendment was made in 2015.
B. Cases
B.1 Law on the Istanbul Arbitration Center Is Constitutional
The Constitutional Court4Constitutional Court, File No. 2015/6, Decision No. 2015/63, Date: 01.07.2015. dismissed an application requesting the annulment of the Law on the Istanbul Arbitration Center (ISTAC)5Law on the Istanbul Arbitration Centre No. 6570 (LIAC) of 20 November 2014. for contravention of the public interest and the rule of law.
The Law on the Istanbul Arbitration Center (LIAC) entered into force on 1 January 2015 and established ISTAC. LIAC lays out the rules for the creation of ISTAC, defines the center’s organizational structure and identifies its planned activities in general terms. Article 6 of LIAC provides that four members of ISTAC’s general assembly must be lawyers elected by the presidents of Turkey’s 78 bar associations. 123 members of the Turkish parliament applied to the Constitutional Court requesting the annulment and suspension of certain portions of Article 6 on the grounds that elected general assembly members may not be independent and impartial, since elected officials tend to be partisan. The applicants argued that such provision therefore contravenes the public interest and the rule of law.
It is trite law that a law can be annulled for contravening the public interest if it serves another purpose – such as the interests of an individual – as opposed to the interests of the public at large. The court did not agree that Article 6 of the LIAC served the interests of an individual and disregarded the public interest at large. The court noted that according to the report issued by the Turkish Parliament’s Justice Commission, the purpose of Article 6 is to ensure pluralism in ISTAC’s structure. The court also noted that bar presidents themselves are elected to office and are representatives of the members of Turkey’s 78 bar associations. The court finally expressed that the legislator had discretion as to the Center’s organizational structure and had properly exercised that discretion.
B.2 Enforcement Claimants Must Pay Proportionate Court Costs
The Court of Appeal recently rendered three separate decisions6Court of Appeal (Yargıtay) 15th Civil Division, File No. 2015/385, Decision No. 2015/1303, Date: 18.03.2015; Court of Appeal 15th Civil Division, File No. 2015/1055, Decision No. 2015/1740, Date: 06.04.2015; Court of Appeal 19th Civil Division, File No. 2014/11188, Decision No. 2015/8132, Date: 02.06.2015. holding that when making an application to the courts for the enforcement of a foreign arbitral award, the claimant must pay proportionate court costs calculated by reference to the amount sought according to the tariff contained in the applicable law.7See Law on Fees No. 492 (“Law on Fees”) of 20 November 2014.
In all three cases, the Court of Appeal reversed the first instance decision, since in none of the cases had the lower court requested payment of proportionate costs before proceeding to the merits. The Court of Appeal in all three decisions noted that the payment of costs pursuant to the Law on Fees concerns public policy and must therefore be considered by the court on its own initiative (ex officio).
Pursuant to the Law on Fees, an applicant must pay a quarter of the proportionate judgment and writ fee, as well as a fixed nominal application fee, at the time of application.8Articles 16(1) and 28(1)(a), Law on Fees. In the event of failure to pay, proceedings will be suspended until payment is made.9Article 32, Law on Fees. If payment is not made within the period allowed, the case will be deemed not to have been filed.10Article 30, Law on Fees; Article 150, Code of Civil Procedure No. 6100 (CCP) of 12 January 2011.
B.3 Nature of Arbitration Bars Claims Against Third Parties
In relation to an application for the annulment of an ICC award concerning a concession agreement on the grounds that the arbitral tribunal exceeded its jurisdiction, the Court of Appeal held by a majority that an arbitral award cannot be enforced against a third party, thereby annulling the award.11Court of Appeal 11th Civil Division, File No. 2014/9538, Decision No. 2015/8707, Date: 25.06.2015.
In reaching its judgment, the court stated that “as a rule, it is not possible for arbitration proceedings to be commenced against persons who are not party to the arbitration agreement.” It further reasoned that the mere inclusion of provisions for the benefit of a third party in an agreement containing an arbitration agreement does not make that third party a party to the arbitration agreement. The court emphasized the exceptional nature of arbitration agreements, noting that the parties’ intent to arbitrate must be clear and definitive, leaving no room for doubt or confusion.
B.4 Interim Attachment Prior to Enforcement of the Award
Reversing the lower court’s dismissal of a request for an interim attachment (ihtiyati haciz), the Court of Appeal held that since an interim attachment is a precautionary measure temporarily suspending a debtor’s property and rights, a party is entitled to request interim attachment prior to finalization of the enforcement decision (tenfiz kararının kesinleşmesi).12Court of Appeal 6th Civil Division, File No. 2014/3906, Decision No. 2014/4941, Date: 14.04.2014. Relying on Article 6 of the IAL, the court noted that since a party is entitled to request interim attachment before or during arbitral proceedings, such a request should also be permitted once the award has been rendered.
As to the factual matrix, the commercial court ordered the enforcement of the award rendered by a tribunal in Moscow against which an appeal was brought. Before the appeal was concluded, the claimant requested the interim attachment order so as to prevent the debtor from dissipating its assets, arguing that the debtor was at that time in pursuit of such actions.
B.5 Failure to Draft Terms of Reference Does Not Justify Annulment
In a dispute subject to the IAL and concerning the transfer of shares of a company possessing mining rights, the Court of Appeal held that an arbitral tribunal’s failure to draft terms of reference does not justify the annulment of the arbitral award, provided that a procedure was adhered to and the failure does not effect the substance of the dispute (see Article 15A(1)(f), IAL).13Court of Appeal 11th Civil Division, File No. 2012/10542, Decision No. 2013/15531, Date: 12.09.2013. The absence of a party objection prior to the issuance of the award was an influential factor in the court’s decision.
B.6 Clear Carve-Out Clauses Do Not Negate Intent to Arbitrate
In a case where a construction agreement provided for arbitration in the case of dispute but that with respect to “disputes that cannot be resolved by arbitration…the Zonguldak [a city in Turkey] Courts and Execution Offices shall be competent,” the Court of Appeal held the arbitration agreement to be valid.14Court of Appeal 15th Civil Division, File No. 2014/2153, Decision No. 2015/918, Date: 23.02.2015. The court noted that the arbitration agreement was clear and definitive and gave rise to no doubts. The reference to the Zonguldak courts for the resolution of disputes not capable of being resolved by arbitrators did not, in the court’s opinion, negate the intent to arbitrate; according to the court it was a reference to disputes that were inarbitrable or required court intervention.
On a separate note, contrary to the widely held belief that the execution of the terms of reference does not constitute a new arbitration agreement, the court seems to suggest that the execution of terms of reference may constitute a new arbitration agreement. Referring to a document signed by arbitrators and party representatives, the court noted that it was accepted by all that the dispute would be resolved by arbitration and that such document therefore clearly demonstrates parties’ intent to arbitrate.
The court, holding the arbitration agreement to be valid, overruled the lower court’s decision. The lower court had exceeded its jurisdiction by ruling on the merits when in fact it should have dismissed the claim on jurisdictional grounds.
C. Costs in International Arbitration
C.1 Allocation of Costs
The allocation of costs is regulated in Article 16 of the IAL. The standard rule that costs “follow the event” is also valid with respect to the IAL. Unless parties have otherwise agreed, the unsuccessful party bears the costs of arbitration (Article 16D(1)). Where parties partially prevail on the merits, costs will be apportioned in accordance with ratio in which parties prevail.
C.2 Security for Costs
The IAL contains no express provision on the provision of security for the other party’s costs. However, the arbitral tribunal is entitled to request the claimant to pay an advance on costs to cover trial expenses, which may be used to serve the same function (Article 16C(1)). It is unclear whether the defendant may be requested to pay an advance on costs; the IAL is silent on the matter.
Trial expenses under the IAL include the following: arbitrator fees, arbitrators’ travel and other expenses, arbitrator-appointed experts’ fees, attorney fees, witnesses’ travel and other expenses approved by the arbitrators, court costs and notification costs.
On a separate note, a foreign claimant in Turkey must deposit security for costs when commencing a claim before the Turkish courts, unless an exemption can be established.15Law on International Private and Procedural Law No. 5718 of 27 November 2007, Article 48.
C.3 Recovery of Costs
The IAL has exhaustively listed the trial expenses (see C.2). Consequently, unless the expense incurred may be classified as one of the expenses listed, it will not be recoverable. As to whether outside counsel’s time charges are recoverable, no express rule exists. The IAL stipulates that attorney fees of the successful party are recoverable, the amount to be determined pursuant to the attorney minimum fee tariff published annually by the Turkish bar association. Since the attorney minimum fee tariff currently in force mandates the payment of the same amount regardless of the number of attorneys representing a party, the additional payment of outside counsel’s time charges appears unlikely. The same applies to in-house counsel’s costs and those of other members of a party’s staff (contract managers, engineers, etc.)
A party wishing recovery of outside counsel’s time charges could achieve that aim by seeking to agree rules of arbitration that adopt a broader view as to arbitration costs. For instance, the draft rules of arbitration of ISTAC provide that the trial costs include attorney fees, without reference to a minimum fee tariff (Article 41(2)). Such may be interpreted as allowing recovery of outside counsel’s time charges.
There are no clear rules regarding documentation required for recovery purposes or whether parties must state that they have actually paid the costs. These matters will therefore depend on the position taken by the other party and the approach of the particular tribunal or court.