International arbitration in Turkey, which is currently regulated by the International Arbitration Law No. 4686 (IAL), has been slowly evolving. The most recent decisions made by Turkey’s Court of Appeals regarding international arbitration illustrate how the field has developed in the decade since the implementation of the IAL.
The IAL, which came into effect on 5 July 2001, is largely based on the UNCITRAL Model Law on International Commercial Arbitration dated 1985, although it does include certain principles not codified in the Model Law. Having replaced the previous legislation pertaining to international arbitration codified in the Code of Civil Procedure (CCP) No. 1086, the question of how to determine the applicable law has been placed before the Turkish courts. In a 2007 decision, the Court of Appeals saw a case where the arbitration agreement was signed by the parties in 1993, at which time the CCP No. 1086 governed international arbitration. However, the dispute arose in 2005, after the IAL had gone into effect. The Court of Appeals ruled that the date of the arbitration agreement, regardless of when the dispute began, determined the governing law. Furthermore, the Court stipulated that proceedings initiated or agreements made before the IAL passed would require explicit accord from the parties in the form of a new arbitral agreement in order for the IAL to be the governing legislation.1
When it comes to the matter of arbitrable subjects, article 1 of the IAL provides that disputes regarding issues independent of the parties’ wills may not be arbitrated. Therefore, commercial matters may be referred to arbitration, yet disputes that concern criminal issues, family law or issues related to employees’ payments arising from labour contracts are not eligible.2 Furthermore, article 1 also provides that disputes relating to rights in rem over immovable properties located in Turkey are not arbitrable. Thus, any disputes regarding ownership of real estate may not be submitted to arbitration, a position that the Court of Appeals has upheld. In one case regarding the cancellation of title deeds, the Court ruled that a dispute requiring a change in the land register is non-arbitrable as such a matter pertains to public order.3 It has also been held by the Court of Appeals that only disputes capable of being settled by the parties’ agreement without requiring a court decision are arbitrable. In this particular decision, dated 2012, the Court found that the arbitration clause in the company’s articles of association was invalid because general assembly resolutions may only be cancelled by the courts.4
The IAL also governs a number of procedural issues, including the form and validity of the arbitration agreement, the appointment of arbitrators and any challenges to arbitrators. Moreover, the IAL codifies the procedure for challenging awards and determining arbitration expenses.
Form and validity of the agreement
Article 4 of the IAL, which governs the form and validity of the arbitration agreement, states that agreements to arbitrate may either be included in a contract as an arbitration clause or in the form of a separate agreement, whether or not the legal relationship between the parties is contractual in nature.
The form of the arbitration agreement is also regulated by article 4 of the IAL. It is provided under this article that the agreement to arbitrate must be in writing, even though there are a number of ways to record it. As a result, the agreement to arbitrate may range from a written, signed document to a ‘letter, telegram, telex, fax exchanged between the parties or in an electronic medium’. Pursuant to article 4, a valid arbitration agreement is considered to have been made in cases where a party advances the existence of a written arbitration agreement in a statement of claim and the other party fails to respond and object to this in its statement of defence, or where there is a reference to a document containing an arbitration clause that is intended to constitute a part of the main contract.
As regards validity, the Court of Appeals has held that for an arbitration agreement to be binding there must be clear intent, without any doubt, that the parties intended to submit the issue to arbitration.5 In this case, the parties had agreed that the dispute would be submitted to arbitration, but also that ‘the dispute shall be resolved at the courts’. Since it was unclear whether the parties actually intended to submit the dispute to the courts or to arbitration, the Court of Appeals ruled there was insufficient intent to arbitrate and, as a result, the arbitration agreement was invalid. This requirement of unambiguous party agreement to arbitration has been and continues to be applied by Turkish courts.6
The Court of Appeals has also dealt with the question of whether a representative can sign an arbitration agreement and, if so, under what conditions. In a 2007 decision, the Court applied article 388/3 of the Code of Obligations, which legislates that an arbitration agreement signed by a representative not granted special powers regarding his or her power of attorney will be invalid, to a case where an attorney had signed an arbitration agreement on behalf of his client.7 Thus, it was ruled that if a representative signs an arbitration agreement, the power of attorney authorising him to act on behalf of his principal must clearly specify that the attorney has been granted the authority to sign an arbitration agreement or to bind his or her principal to arbitrate.
In the same vein, amendments to arbitration agreements signed by representatives have also been examined by the Court of Appeals.8 In one case, the Court of Appeals held that the power of attorney conferred to the legal representative who signed the terms of reference was limited to claims, defences and the appointment of arbitrators in the arbitral proceedings, and did not cover amending arbitration agreements or entering into arbitration agreements on behalf of the parties.9 It further stated that the terms of reference cannot be considered as either an amendment to an arbitration agreement or a new arbitration agreement. Likewise, the Court of Appeals ruled in a similar case that amendments to arbitration agreements may not be made through the terms of reference.10 According to these decisions, arbitration agreements may only be entered into or amended by the parties themselves or by a representative clearly granted this special power.
Observing the principle of competence-competence as codified in the model law, article 7(h) of the IAL governs the procedure for jurisdictional challenges to be brought before the arbitral tribunal. Since a jurisdictional objection is decided by the tribunal as a preliminary matter, any objection should be made with the first reply brief at the latest. A party is required to submit an objection as soon as they believe that the arbitral tribunal has exceeded its powers, or else the objection will not be entertained. However, if the arbitral tribunal concludes that the delay in filing an objection is justified, it may admit jurisdictional objections at a later stage. Finally, in case the arbitral tribunal decides that it has jurisdiction, it will continue the arbitral proceedings and render an award.
Article 7(h) goes on to provide further parameters for jurisdictional challenges. When ruling on the tribunal’s jurisdiction, an arbitration clause shall be treated as independent from the other terms of the contract. Therefore, even if the main contract is decided by the tribunal to be null and void, the arbitration clause is not invalidated. Furthermore, the fact that a party chose an arbitrator or participated in the formation of a tribunal does not invalidate its right to raise a jurisdictional objection.
The IAL presents the issue of jurisdictional objections as one to be contested within the confines of arbitral proceedings. In a case where the validity of an arbitration agreement was contested before a court, the Court of Appeals ruled that, under the IAL, challenges of this sort should first be brought before the arbitrator or the arbitral tribunal.11 The Court of Appeals also stated that the decision of the arbitrator or the arbitral tribunal on jurisdiction would be subject to review in an annulment action brought against the final award.
One such review was undertaken after an annulment action was brought before the Turkish courts. In this instance, the Court of Appeals annulled an award in which the arbitral tribunal denied that it had jurisdiction despite the existence of an arbitration agreement.12 The Court noted that the dispute between the parties was within the scope of the contract and that the procedure outlined by the arbitration agreement had been properly followed. As a result, the tribunal’s award denying its jurisdiction was found to be invalid and, consequently, set aside.
In another decision on the issue of the arbitral tribunal’s jurisdiction, the Court of Appeals found that arbitrators are bound by the requests of the parties and they cannot render a decision exceeding those requests.13 In this dispute, the defendant requested in its defence for an amount to be deducted from the claimed receivables and stated that it reserved its right to file a counterclaim regarding this deductible; however, the defendant did not file such a counterclaim. The arbitrators ruled for the collection of the deductible amount in favour of the defendant as if a counterclaim had been made, instead of deducting this amount from the plaintiff’s receivable. The Court of Appeals determined that the award may be annulled because the arbitrators exceeded their authority.
In a recent case, the Court of Appeals affirmed the decision of a lower court which found an arbitration clause providing arbitration under the IAL to be valid despite the fact that the agreement also stated that ‘[i]n the event of a dispute, Bursa Courts and Execution Offices shall have jurisdiction󈧒 The lower court dismissed the case after the defendants raised an arbitration objection as per article 5 of the IAL,15 finding that the provision granting jurisdiction to the Bursa courts and execution offices was only related to those procedural matters of arbitration that must be resolved by the courts (such as interim injunctions), and thus did not invalidate the arbitration clause. The Court of Appeals affirmed this decision by stating that the arbitral tribunal has competence to determine whether the arbitration agreement is valid.
Annulment of arbitral awards
In accordance with the IAL, challenges to an arbitral award may only take the form of an annulment action, although the court’s decision regarding annulment may be appealed. Article 15 of the IAL states that an arbitral award may be annulled if one of the following grounds is proven by the party filing an annulment action:
- invalidity of the arbitration agreement stemming from incapacity of one or both of the parties subject to the arbitration agreement, invalidity of the agreement to arbitrate under the law the parties chose or, if the parties did not make a choice of law, under Turkish law;
- non-compliance in arbitrator appointment procedure under either the IAL or, if the parties had agreed otherwise, as defined in the parties’ agreement;
- failure to make a timely award during the arbitration period;
- unlawful decision of the arbitrator or the tribunal regarding the competence of the arbitrator or the tribunal;
- the decision by the arbitrator or the arbitral tribunal on a matter that falls beyond the scope of the arbitration agreement, that does not decide the entirety of the claim or that exceeds the arbitrator or the arbitral tribunal’s authority;
- non-compliance with the procedures set out in the parties’ agreement, or with the procedures set out in the IAL in the absence of such an agreement, which affected the final award; or
- unequal treatment of the parties.
Or if the Court ex officio determines that:
- the subject of the arbitration is non-arbitrable under Turkish law; or
- the award violates and is contrary to public order.
The Court of Appeals has issued decisions relating to the partial annulment of an arbitration award and the scope of a potential re-adjudication in such circumstances. In one case, the Court held that an arbitration award may be partially or wholly annulled. If only partially annulled, those parts not annulled will be considered to be procedural rights enjoyed by the party which has prevailed on the non-annulled parts. Arbitrators will then re-examine only the annulled parts and issue an award regarding them.16
Any annulment actions against a final arbitral award must be filed at the appropriate civil court of first instance within 30 days, which commences after the notification of the award or the notification of any decision correcting, interpreting or supplementing the award. Initiation of annulment actions halts the enforcement of arbitral awards.
In one dispute where it was found that the defendant did not have a residence, habitual residence or place of business in Turkey, the Court of Appeals ruled that the Istanbul commercial court of first instance was the competent court to hear the annulment action.17 First, the Court held that the location of a subsidiary incorporated in Turkey cannot be considered as the place of business of the defendant itself, which was a French company with its headquarters in France. Thus, as the defendant did not have residence in Turkey, the Court found that pursuant to article 3 of the IAL, which states that any reference to a court in the IAL will refer to the Istanbul civil court of first instance in those cases where the respondent is not domiciled in Turkey, the Istanbul civil court of first instance would be competent to hear the annulment case. However, the Court then took the provisions of the Turkish Commercial Code into account, which provide that where commercial courts of first instance are established, they should hear disputes of a commercial nature. Consequently, it ruled the Istanbul commercial court of first instance to be the competent court to hear the annulment case in question rather than the Istanbul civil court of first instance.
Enforcement of foreign arbitral awards
The majority of foreign arbitral awards enforced in Turkey are subject to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), which Turkey ratified on 2 July 1992. Consequently, the Court of Appeals has issued a number of decisions regarding enforcement under the New York Convention.
In a 2014 decision, the Court of Appeals ruled on interim attachment requests made prior to the enforcement of foreign arbitral awards. In this case, the Court held that an interim attachment order may be granted in the enforcement proceeding of a foreign arbitral award even if an enforcement decision has not yet been issued on the basis that the assets/rights of the debtor are only temporarily attached by the interim attachment orders. Consequently, an enforcement decision of a foreign arbitral award is not a condition required to grant an interim attachment order.18
The issue of court fees to be collected when applying for an enforcement decision is clarified by a 2009 Court of Appeals’ decision. According to the Court, a decision fee shall be collected from the party requesting the enforcement pursuant to the nature of the arbitral award. Therefore, in cases that are subject to a proportional fee, a proportional decision fee shall be collected.19 Likewise, in another case, the Court of Appeals held that if a foreign arbitral award requested to be enforced in Turkey is for the collection of a receivable, the enforcement proceedings must be subject to a proportional decision fee.20 In this instance, the Court of Appeals ruled that because the award related to the collection of a debt, the application for enforcement is subject to proportional court fees.
For those arbitral awards rendered in countries that are not party to the New York Convention, enforcement in Turkey is regulated by the International Private and Procedural Law No. 5718 (IPPL). The grounds for enforcement as codified in the IPPL are very similar to those in the New York Convention. Under article 62 of the IPPL, the court will reject enforcement of a foreign arbitral award if:
- there is no arbitration agreement, or there is no arbitration clause in the contract;
- the arbitral award is contrary to morals or public order;
- the dispute resolved in the award is not one which can be resolved through arbitration under Turkish law;
- one of the parties was not represented before the arbitral tribunal in accordance with due process and said party does not accept the tribunal’s award;
- the party against which enforcement is requested was not informed of the appointment of an arbitrator (or arbitrators) in accordance with due process;
- the arbitration agreement (or clause) is invalid under the law to which it was subject or, where there is no agreement, the arbitral award is invalid under the law of the state in which it was made;
- the appointment of the arbitrators, or procedural rules applied by the arbitrators, is contrary to the parties’ agreement, or if there is no agreement, is contrary to the law of the country in which the award was made;
- the arbitral award relates to a matter that was not in the arbitration agreement (or clause), or it exceeds the scope of the arbitration agreement (in which case the court only refuses to enforce the part which exceeds the scope of the arbitral agreement);
- if the arbitral award has not become final or enforceable or binding under:
- the law under which it was issued;
- the law of the state where it was made; or
- the procedural rules to which it was subject; or
- the arbitral award was annulled by the competent body of the place where it was made.
According to article 56(1) of the IPPL, the court may decide to enforce the whole or a part of the award, or refuse to enforce it. In a case where one of the three agreements between the parties did not include an arbitration clause, the Court of Appeals stated that the partial enforcement of the foreign arbitral award, as decided by the court of first instance, was impossible and the request for enforcement should be rejected. The Court of Appeals ruled that it was not possible to determine which portion of the damages awarded resulted from the agreement that did not contain an arbitration clause.21 Decisions on enforcement requests can be appealed and be subject to rectification; appeal stays the execution of the enforced award according to IPPL article 57(2).
Recent decisions by the Court of Appeals provide insight into when an arbitral award seated in Turkey may be annulled or when a foreign arbitral award may be denied enforcement for violating or contravening public order (also referred to as public policy).
In a 2012 decision, the Court of Appeals ruled that customs and tax laws pertain to public policy and, as a result, foreign arbitral awards calling for receivables that contravene the tax legislation may be denied enforcement on the basis of the public policy clause found in article V of the New York Convention. According to the Court of Appeals, in such cases the merits of the dispute may be partially examined by the Court, but only to the extent necessary to determine whether the award is contrary to public policy; thus, the merits of the case would not technically be reviewed. The Court of Appeals reversed the court of first instance’s decision to enforce the foreign arbitral award stating that the investigation conducted was not sufficient to determine whether enforcement would result in tax evasion and violate the tax legislation.22
Subsequent to this 2012 decision, the Court of Appeals ruled that an arbitral award regarding receivables in violation of the tax legislation may also be annulled on the basis that customs and tax laws are a matter of public policy, while stating that partial review of the merits may be necessary to examine objections relating to public order.23 In this case, which concerned a dispute between a Turkish governmental agency and a telecommunications company, the Court found the arbitral award to violate public order because the award ruled that it was no longer mandatory for the telecommunications company to make previously agreed-upon payments to the state for its expenses. The Court of Appeals held that even though these payments for the authority’s expenses are not taxes, they represent an important and continuous form of income deriving from the transfer of public services by the state and, thus, cannot be left to the discretion of the telecommunications company. Also of note in this decision was the Court’s finding that compliance with public order shall be evaluated pursuant to the governing law chosen by the parties, which was Turkish law in this particular case. Consequently, the award was annulled pursuant to article 15 of the IAL.
In a recent case regarding the enforcement of a foreign court decision, however, the Court of Appeals came to a different conclusion. The Court held that, during the examination of whether a foreign judgment is contrary to public order, the prohibition to review the merits of the content cannot be removed by discretionary right.24
In another enforcement decision, the Court of Appeals examined the extent to which an arbitration agreement may be contrary to public policy if such agreement grants a superior position to one of the parties during the arbitral proceedings. In this case, the Court ruled that an arbitration agreement or clause granting the right to appoint the arbitral tribunal to only one of the parties would be invalid and, as a result, not enforceable. However, since the arbitration agreement in this case granted the right to choose the arbitral tribunal to both parties, the agreement is valid and cannot be considered against public policy.25 The Court also found that an arbitration agreement providing the choice between two alternative arbitration centers is valid since the parties clearly intended to submit any dispute to arbitration. On the other hand, in a different decision, the Court of Appeals refused enforcement of an arbitral award rendered in a different arbitral institution than the one determined in the arbitration agreement.26
Finally, in a decision regarding the enforcement of a foreign court decision, the Court of Appeal’s General Assembly for Unification of Judgments addressed the issue of whether a foreign judgment that does not contain reasoning violates public order.27 The Court held that, although it is mandatory for all Turkish court decisions to contain the court’s reasoning, this cannot be a ground on which to deny the enforcement of a foreign judgment. Such a requirement would contravene the principle of lex fori, whereby a judgment is subject to the procedural laws of the country where it is rendered. During the course of determining whether a lack of reasoning violates public policy, the Court provided examples of what would constitute a public order violation:
- the violation of fundamental principles of Turkish Law, Turkish morals and public decency;
- the basic notion of justice and general policy behind the Turkish legislation, fundamental rights and freedoms in the Turkish Constitution;
- the general principles of international law;
- the good faith principle of private law; and
- the violation of human rights and freedoms.
The Istanbul Arbitration Center
Concrete steps, including the drafting of legislation, have been taken for the establishment of an arbitration centre in Istanbul. The purpose of the Law on the Istanbul Arbitration Center No. 6570 (LIAC), which was published in the Official Gazette on 29 November 2014 and came into effect on 1 January 2015, is to establish the Istanbul Arbitration Center (ISTAC) and regulate the procedures and principles regarding the organization and operations of the ISTAC. Pursuant to article 1 of the LIAC, the ISTAC will oversee the settlement of disputes, including those containing a foreign element, through arbitration or alternative dispute resolution methods.
It is stated in article 2 of the LIAC that the ISTAC, which has legal personality and is subject to private law provisions, is established in order to perform the duties assigned to it by law.
Pursuant to article 4 of the LIAC, the duties of the ISTAC are as follows:
- to determine the rules regarding arbitration and alternative dispute resolution methods;
- to ensure the conduct of services;
- to promote and issue publications regarding arbitration and alternative dispute resolution methods and to incentivise, support and realise scientific works on this subject; and
- to cooperate with relevant individuals, institutions and organisations that are inside and outside Turkey.
The LIAC provides in article 5 that the ISTAC shall be composed of the General Assembly, the Board of Directors, auditors, the Advisory Board, National and International Arbitration Tribunals, and the Office of the Secretary General.
One of the duties of the Board of Directors, as stated in article 9, is to draft the rules applicable to arbitration and alternative dispute resolution methods, and the procedures and principles regarding the operation of the ISTAC. The Board of Directors shall then submit them to the General Assembly for approval after obtaining the opinion of the Advisory Board.
According to provisional article 1/3 of the same law, the above-mentioned rules, procedures and principles shall be drafted and put into effect by the ISTAC within six months after the establishment of the Board of Directors.
The General Assembly, Board of Directors, auditors and the Advisory Board have been established as of May 2015; however, the rules applicable to arbitration and alternative dispute resolution methods as well as the procedures and principles regarding the operation of the ISTAC have not been established yet.28
There have not been any fundamental changes in the Turkish international arbitration system since its enactment in 2001. However, there have been changes to domestic legislation; namely, the ratification of a new CCP, which entered into force on 1 October 2011, in addition to a new Code of Obligations and new Commercial Code, which entered into force on 11 July 2012 and 1 July 2012, respectively. The new CCP governs domestic arbitration, specifically those disputes that do not contain a foreign element and for which Turkey is designated as the place of arbitration, while the IAL remains the governing legislation for international arbitration. The arbitration provisions of the new CCP (articles 407-444), which are being drafted along the lines of the UNCITRAL Model Law, are mostly parallel to the provisions of the IAL.
- Court of Appeals Plenary Session of Civil Law Chambers, 18 July 2007, File No. 2007/15-444, Decision No. 2007/554; Court of Appeals, 13th Civil Law Chamber, 17 April 2012, File No. 2012/8426, Decision No. 2012/10349.
- Court of Appeals, 9th Civil Law Chamber, 22 March 2004, File No. 2004/5846, Decision No. 2004/5621.
- Court of Appeals, 15th Civil Law Chamber, 18 June 2007, File No. 2007/2680, Decision No. 2007/4137; Court of Appeals, 15th Civil Law Chamber, 10 October 2011, File No. 2011/4411, Decision No. 2011/5792.
- Court of Appeals 11th Civil Law Chamber, 5 December 2012, File No. 2011/13485, Decision No. 2012/19915.
- Court of Appeals 15th Civil Law Chamber, 18 June 2007, File No. 2007/2680, Decision No. 2007/4137.
- Court of Appeals 15th Civil Law Chamber, 13 April 2009, File No. 2009/1438, Decision No. 2009/2153.
- Court of Appeals 19th Civil Law Chamber, 21 May 2007, File No. 2007/380, Decision No. 2007/5114.
- Court of Appeals Plenary Session of Civil Law Chambers, 18 October 2006, File No. 2006/15-609, Decision No. 2006/656; Court of Appeals Plenary Session of Civil Law Chambers, 18 July 2007, File No. 2007/15-444, Decision No. 2007/ 554.
- Court of Appeals Plenary Session of Civil Law Chambers, 18 October 2006, File No. 2006/15-609, Decision No. 2006/656.
- Court of Appeals Plenary Session of Civil Law Chambers, 18 July 2007, File No. 2007/15-444, Decision No. 2007/554.
- Court of Appeals, 15th Civil Law Chamber, 27 June 2007, File No. 2007/2145, Decision No. 2007/4389.
- Court of Appeals, 11th Civil Law Chamber, 16 July 2009, File No. 2007/13799, Decision No. 2009/8820.
- Court of Appeals, 15th Civil Law Chamber, 11 May 2011, File No. 2010/7197, Decision No. 2011/2857.
- Court of Appeals 15th Civil Law Chamber, 01 July 2014, File No. 2014/3330, Decision No. 2014/4607.
- Pursuant to article 5 of the IAL, if a dispute subject to an arbitration agreement was brought before the courts, the counter party may raise an arbitration objection. If the court accepts such objection, it dismisses the case based on procedural grounds.
- Court of Appeals, 15th Civil Law Chamber, 15 November 2007, File No. 2007/3708, Decision No. 2007/7216.
- Court of Appeals, 11th Civil Law Chamber, 15 March 2012, File No. 2012/ 2110, Decision No. 2012/3915.
- Court of Appeals, 6th Civil Law Chamber, 14 April 2014, File No. 2014/3906, Decision No. 2014/4941.
- Court of Appeals, 19th Civil Law Chamber, 15 September 2009, File No. 2007/5703, Decision No. 2009/8256.
- Court of Appeals, 19th Civil Law Chamber, 14 April 2012, File No. 2012/1885, Decision No. 2012/5598.
- Court of Appeals, 19th Civil Law Chamber, 18 December 2003, File No. 2003/7270, Decision No. 2003/12888.
- Court of Appeals Plenary Session of Civil Law Chambers, 08 February 2012, File No 2011/13-568, Decision No. 2012/47.
- Court of Appeals, 13th Civil Law Chamber, 17 April 2012, File No. 2012/8426, Decision No. 2012/10349.
- Court of Appeals Plenary Session of Civil Law Chambers, 26 November 2014, File No. 2013/11-1135, Decision No. 2014/973.
- Court of Appeals Plenary Session of Civil Law Chambers, 09 June 1999, File No. 1999/19-467, Decision No. 1999/489.
- Court of Appeals, 19th Civil Law Chamber, 07 June 2011, File No. 2011/4149, Decision No. 2011/7619.
- Court of Appeal’s General Assembly for Unification of Judgments, 10.02.2012, File No. 2010/1, Decision No. 2012/1.