Arbitration Procedures and Practice 2023 in Turkey - 1

1. How is commercial arbitration used and what are the recent trends?

Use of Commercial Arbitration and Recent Trends

In Turkey, arbitration traditionally evolved as a dispute resolution mechanism, which was used more frequently in large commercial disputes where a foreign party is involved and mostly when a legal counsel is involved in the preparation of the principal contract between the parties. For all other matters, particularly concerning disputes of smaller value, Turkish parties tended to grant jurisdiction to the Turkish courts.

Although arbitration is still underused in Turkey when compared to litigation, there is an upward trend in the use of commercial arbitration. Indeed, state courts started to lose their functionality with the substantially long length of proceedings and the concurrent promotion of the Istanbul Arbitration Centre (ISTAC). This paved the way for commercial disputes to be referred to arbitration more often.

In recent years, there have also been several inducements for the use of arbitration introduced by legislative activities. Accordingly, court practice on ruling fixed court fees instead of proportional for the enforcement of foreign arbitral awards became more settled, although there are still precedents favouring proportional fees. Also, certain provisions have been introduced to clarify which courts have jurisdiction over arbitration-related actions. With the initiatives of ISTAC and the amendment of key regulations, arbitration has been legally accepted as an alternative to state courts for the resolution of disputes arising from public procurement contracts.

According to the statistics published by ISTAC for the period between 26 October 2015 and 1 March 2018, 53% of the cases brought before ISTAC have an international nature, and 47% are domestic cases. In general, the values in dispute vary between TRY15,000 to TRY800 million. 47% of the cases are worth more than TRY2 million. Disputes concerning sales agreements, service agreements, and construction agreements take the lead in ISTAC arbitration.

Aside from the rising interest in arbitration, other alternative dispute resolution mechanisms have gained a broader field of application in terms of commercial disputes. For example, since 1 January 2019, mandatory mediation has been introduced as a cause of action to be exhausted before proceeding with court litigation in commercial disputes concerning receivables. According to statistics announced by the Ministry of Justice, between 1 January 2019 and 13 April 2022, 476,030 commercial cases were assigned a mediator, and 223,352 of these cases resulted in settlement. This is expected to increase the use of mediation for commercial disputes having an international nature that are intended to be enforced in Turkey. These statistics and recent developments indicate an upward trend towards alternative dispute resolution mechanisms in general, not limited to arbitration.

ISTAC recently introduced the world's first Mediation-Arbitration Rules (Med-Arb Rules), an alternative dispute resolution procedure with the characteristics of both mediation and arbitration. This mechanism aims to enable the use of both mediation and arbitration in the same proceeding. According to the Med-Arb Rules, parties will first try to resolve their disputes with mediation, and if they cannot settle, arbitration will be initiated to resolve the dispute.

Advantages/Disadvantages

The main advantages of the arbitration over court litigation are:

• Procedural flexibility
• Ability to select the language of the proceedings
• Faster resolution of the dispute
• Cost-effective where the amount in dispute is higher
• Ability to choose arbitrators who have experience and expertise in the subject matter of the dispute
• Ability to make the proceedings confidential.Easier and wider enforceability

The main disadvantage of arbitration compared to litigation is that it is generally more costly where the amount in dispute is high.

Compared to arbitration, mediation may be a more cost and time-efficient dispute resolution mechanism. However, the settlement minutes executed by way of international mediation cannot be enforced as easily as arbitral awards, which are subject to a regulated enforcement practice under the New York Convention. However, the Singapore Convention, which entered into force on 11 April 2022 in Turkey and provides an international set of rules facilitating the enforcement of settlement minutes, is expected to pave the way for mediation to become more appealing for cross-border commercial disputes.

Legislative Framework

Applicable Legislation

2. What legislation applies to arbitration? To what extent has your jurisdiction adopted the UNCITRAL Model Law on International Commercial Arbitration 1985 (UNCITRAL Model Law)?

International and domestic arbitrations are governed by different laws. The International Arbitration Code (No. 4686) applies to arbitrations of an international nature that are seated in Turkey or where its application is agreed to by the parties or arbitrators. Domestic arbitration is subject to the Civil Procedural Code (No. 6100), which only applies to arbitrations seated in Turkey with no international element.

Both laws are essentially based on the UNCITRAL Model Law.

Mandatory Legislative Provisions

Are there any mandatory legislative provisions? What is their effect?

The provisions of the International Arbitration Code and the Civil Procedure Code are based on the principle of party autonomy. The mandatory provisions for arbitration include:

• The right to a fair trial and the equal treatment of the parties.
• The number of arbitrators must be uneven.
• If interim relief is requested from state courts before initiating arbitration proceedings, arbitration proceedings must be initiated within 30 days (two weeks under the Civil Procedure Code), or interim relief will be removed automatically.
• An action to set aside the arbitral award can be filed within 30 days (one month under the Civil Procedure Code).
• The arbitration award must include the elements listed in the law.

Failing to comply with mandatory legislative provisions can lead to the setting aside of an arbitral award.

4. Does the law prohibit any types of dispute from being resolved through arbitration?

The International Arbitration Code prohibits the following disputes from being resolved through arbitration:

• Disputes arising from or relating to rights in rem over immovable properties that are located in Turkey.
• Disputes that cannot be subject to the parties' determination. This means that matters of public policy cannot be subject to arbitration. Having said that, whether a matter concerns public order is decided on a case-by-case basis. In general, disputes relating to bankruptcy, criminal, administrative or family law are not arbitrable.

The Civil Procedural Code shares this approach.

Limitation

5. Does the law of limitation apply to arbitration proceedings?

Under Turkish law, limitation periods are governed by substantive law rather than procedural law. Therefore, limitation periods are determined according to the law applicable to the merits of the case. If Turkish law is applicable, the general limitation period that applies to disputes arising out of contracts is ten years and is triggered when the claim becomes due.

The statute of limitation for tort claims is two years from when the claimant becomes aware of the tortious act, damage and the person committing it. It cannot be more than ten years from the date of the occurrence of the tortious act.

The limitation periods can be frozen/interrupted in certain circumstances.

Arbitration Institutions

6. Which arbitration institutions are commonly used to resolve large commercial disputes?

The main arbitration organisations located in Turkey are the:

• Istanbul Arbitration Centre (ISTAC).
• Istanbul Chamber of Commerce Arbitration and Mediation Centre (ITOTAM).
• Turkish Union of Chambers and Commodity Exchanges Court of Arbitration.
• Istanbul Chamber of Commerce Arbitration Institution.

The ICC International Court of Arbitration is often preferred, especially for cross-border transactions. Among the arbitration institutions in Turkey, ISTAC is most often preferred.

Jurisdictional Issues

7. What remedies are available where one party denies that the tribunal has jurisdiction to determine the dispute(s)? Does your jurisdiction recognise the concept of kompetenz-kompetenz? Does the tribunal or the local court determine issues of jurisdiction?

The principle of kompetenz-kompetenz is expressly recognised under Article 7/(H) of the International Arbitration Code for international arbitrations, and under Article 422 of the Civil Procedure Code for domestic arbitration. Therefore, tribunals are empowered to rule on their own jurisdiction. However, the tribunal's decision is not binding, and can be a reason for setting aside the final award.

If a party wishes to challenge the Turkish court's jurisdiction based on a valid arbitration agreement, the party must object in the first response petition at the latest. In such a case, the Turkish courts conduct an analysis of whether the arbitration agreement is valid or not.

Arbitration Agreements

Validity Requirements

8. What are the requirements for an arbitration agreement to be enforceable?

Substantive/Formal Requirements

The following substantive requirements must be fulfilled for an arbitration agreement to be valid:

• The parties must have the legal capacity to conclude arbitration agreements.
• The arbitration agreement must be valid under Turkish law (that is, for example, there was no fundamental error, deception or coercion).
• The subject matter must be arbitrable (see Question 4).
• The arbitration agreements must refer the disputes out of a specific dispute or relationship.

In terms of formal requirements, an arbitration agreement must be in writing. An arbitration agreement is deemed to exist where:

• The agreement to arbitrate is recorded with either:
• a document signed by the parties;
• a letter, fax, telegram or other means of telecommunication exchanged between the parties; or
• electronic means.
• The existence of an agreement has been alleged in a filed court petition, and the counterparty has not objected.
• 999A document containing an arbitration agreement is referred to, so it is an inseparable part of the main agreement.

Separate Arbitration Agreement

The parties can choose to either include an arbitration clause in the main contract or sign a separate arbitration agreement.

It is also possible to conclude a valid arbitration agreement by reference to another document (agreement or convention, and so on) containing an agreement to arbitrate (Article 4/3, International Arbitration Code).

Unilateral or Optional Clauses

9. Are unilateral or optional clauses, where one party has the right to choose arbitration, enforceable?

Unilateral or optional clauses are not enforceable under Turkish law.

Third Parties

10. In what circumstances can a party that is not a party to an arbitration agreement be joined to the arbitration proceedings?

Arbitration is based on consent and the principle of privity of contract. Therefore, a non-party to an arbitration agreement cannot be made to a party to arbitration proceedings without the non-party's and all parties' consent.

However, in certain circumstances, a non-party to the arbitration agreement can be treated as a party to it. These circumstances include:

• Agency.
• Piercing the corporate veil.
• Succession relation (that is, for example, where the insurer has the right to sue third parties based on the contract (with arbitration agreement) between the third party and insured).
• Assignment of the claim/contract, where the arbitration clause exists.

11. In what circumstances can a party that is not a party to an arbitration agreement compel a party to the arbitration agreement to arbitrate disputes under the arbitration agreement?

It is not possible to compel a non-party to arbitrate (see Question 10).

Separability

12. Does the applicable law recognise the separability of arbitration agreements?

Turkish law recognises the separability presumption (Article 4, International Arbitration Code and Article 412, Civil Procedure Code).

Breach of an Arbitration Agreement

13. What remedies are available where a party starts court proceedings in breach of an arbitration agreement or initiates arbitration in breach of a valid jurisdiction clause?

Court Proceedings in Breach of an Arbitration Agreement

If a party starts court proceedings in breach of a valid arbitration agreement, the defendant can raise an arbitration objection. An arbitration objection must be made in the response petition (Articles 116 and 117, Civil Procedure Code).

Arbitration in Breach of a Valid Jurisdiction Clause

If a party requests arbitration despite a valid agreement on the jurisdiction of state/foreign courts, the objection to the tribunal's jurisdiction must be raised by the counterparty in the first response petition at the latest. See Question 7.

14. Will the local courts grant an injunction to restrain proceedings started overseas in breach of an arbitration agreement?

There are no reported cases in which the Turkish courts have granted anti-suit injunctions. The local courts perceive granting of such an injunction to be an intervention of another state's sovereignty.

Arbitrators

Number and Qualifications/Characteristics

15. Are there any legal requirements relating to the number, qualifications and characteristics of arbitrators? Must an arbitrator be a national of, or licensed to practice in your jurisdiction to serve as an arbitrator there?

Except for sector-specific arbitrations, such as insurance arbitration, there are no qualification requirements relating to nationality, licensing, or the education of arbitrators, unless the parties agree otherwise. The number of arbitrators must be uneven (Article 7, International Arbitration Code and Article 415, Civil Procedure Code).

However, if the parties appoint more than one arbitrator, at least one of the arbitrators must have expertise in law with a seniority of five years or more (Article 416, Civil Procedure Code).

Independence/Impartiality

16. Are there any requirements relating to arbitrators' independence and/or impartiality?

An arbitrator must disclose any facts or circumstances that might cast reasonable doubts on their impartiality and independence, both before accepting their duty and during the arbitration proceedings (Article 7/C, International Arbitration Code and Article 417, Civil Procedure Code).

Article 12 of the ISTAC Rules also contains provisions regarding the independence and impartiality of arbitrators.

The IBA Guidelines on Conflicts of Interest in International Arbitration 2014 provide a non-exhaustive list of circumstances in which appointments should be declined or disclosures made to protect against bias. However, these guidelines only apply when the parties have agreed that they apply, or where the tribunal has adopted them.

Appointment/Removal

17. Does the law contain default provisions relating to the appointment and/or removal of arbitrators?

The parties are free to determine the procedure for the appointment/removal of arbitrators. Where the parties fail to do so, the main default mechanisms, contained in Article 416 of the Civil Procedure Code and Article 7 of the International Arbitration Code, are triggered.

Appointment of Arbitrators

If the number of arbitrators is not agreed on by the parties, then the number of arbitrators must be three.

If the number of arbitrators is three, each party appoints one arbitrator, and then the two arbitrators determine the third arbitrator, who acts as the chairman. If one of the parties fails to appoint the arbitrator within 30 days (one month under the Civil Procedure Code) of receipt of the notification, or if the appointed two arbitrators fail to appoint the third arbitrator, the civil court of first instance appoints a third arbitrator at the request of a party.

If the parties agreed to have more than three arbitrators, the arbitrators who will appoint the last arbitrator are determined according to the paragraph above.

Where the parties agreed to have a sole arbitrator but failed to appoint the arbitrator, the civil court of first instance appoints the arbitrator at the request of a party.

Removal of Arbitrators

Article 7/(C) of the International Arbitration Code and Article 417 of the Civil Procedure Code contain provisions for challenging arbitrators. The main grounds for challenging arbitrators are:

• Lack of qualifications agreed between the parties.
• The existence of circumstances and facts that give rise to doubts as to the arbitrators' impartiality and independence.
• The existence of another ground of removal as agreed by the parties.

The parties are free to agree on the procedure to challenge the arbitrators. If no procedure has been agreed, the party who wishes to challenge an arbitrator must submit its request within either:

• 30 days (two weeks under the Civil Procedure Code) of the appointment of the arbitrator or the tribunal.
• 30 days (two weeks under the Civil Procedure Code) of the date when the party learns the facts and circumstances on which the challenge is based.

The party requesting the removal of the arbitrator can challenge a decision on that request before the civil court of first instance.

Procedure

Commencement of Arbitral Proceedings

18. Does the law provide default rules governing the commencement of arbitral proceedings?

Article 10/(A) of the International Arbitration Code and Article 426 of the Civil Procedural Code provide default rules governing the commencement of arbitral proceedings. Arbitral proceedings are deemed to commence when either:

• The claimant notifies the respondent of the appointment of an arbitrator if both parties are to appoint the arbitrators according to the agreement.
• The counterparty receives the request for arbitration if the names of the arbitrators are stated in the agreement.
• An appointment is made by the court or authority entitled to appoint arbitrators.

If one of the parties has obtained interim relief from state courts before initiating arbitration proceedings, arbitration proceedings must be initiated within 30 days (two weeks under the Civil Procedure Code), or interim relief is automatically removed.

Article 10/(D) of the International Arbitration Code and Article 428 of the Civil Procedural Code set out mandatory minimum content requirements for the Request for Arbitration and Statement of Defence.

To read the rest of this article series, please click on Arbitration Procedures and Practice 2023 in Turkey - 2

First published by Practical Law in 01.12.2022