Construction Arbitration: Türkiye - Part 4

Enforcement of binding (but not finally binding) dispute adjudication board (DAB) decisions

41. For a DAB decision awarding a sum to a contractor under, say, sub-clause 20.4 of the FIDIC Red Book 1999 for which the employer has given a timely notice of dissatisfaction, in an arbitration with its seat in your jurisdiction, might the contractor obtain: a partial or interim award requiring payment of the sum awarded by the DAB pending any final award that would be enforceable in your jurisdiction (assuming the arbitral rules are silent); or interim relief from a court in your jurisdiction requiring payment of the sum awarded by the DAB pending any award?

The DAB decisions alone do not have the res judicata effect. Therefore, any DAB decision on the matter cannot be enforced unless an arbitral tribunal renders a final and binding award on the matter.

Nevertheless, the parties have tools available under Turkish law to make the terms of a DAB decision enforceable by agreement, such as a mediation agreement where the statutory conditions are met.

Courts and arbitral tribunals

42. Does your jurisdiction have courts or judges specialising in construction and arbitration?

The 15th Civil Chamber of the Supreme Court previously handled the disputes arising from contracts of work, including construction contracts. The First Presidency Board of the Supreme Court decided with its decision dated 22 June 2021 that the 15th Civil Chamber of the Supreme Court be changed to the 6th Civil Chamber. Accordingly, the 6th Civil Chamber of the Supreme Court looks at the cases relating to construction law at the final appeal stage.

43. What are the relevant levels of court for construction and arbitration matters? Are their decisions published? Is there a doctrine of binding precedent?

The nature of the construction dispute determines the court of competent jurisdiction, depending on the parties to the dispute the matter may be handled by consumer courts, civil courts or commercial courts.

Turkey has a three-tiered judicial system composed of courts of the first instance, courts of appeals and the CoC. Although the judicial processes carried out by courts are constitutionally open to the public in prin- ciple, not all court judgments are available on open sources. However, there are online services that provide their subscribers with judgments made by higher courts, such as the CoC and courts of appeals. Decisions made by first instance courts – although rare – are available too.

The Supreme Court, composed of 12 individual chambers for civil law matters, operates on a division of work basis. Each chamber has its own share of the division. The disputes arising from contracts of work are assigned to 6th Civil Chamber.

There is no chamber in the Supreme Court that is specifically assigned to settle matters relating to the enforcement or setting-aside of foreign arbitral awards and court judgments. These matters are assigned to the substance of the initial dispute, meaning that matters relating to the enforcement of foreign judgments in relation to construction contracts are also assigned to the 6th chamber.

The decisions made by the highest court, the Supreme Court, are principally not binding for other disputes, yet they are taken as guidelines for the interpretation of the law by lower courts. However, decisions on the unification of conflicting judgments made by the Supreme Court are legally binding.

44. In your jurisdiction, if a judge or arbitrator (specialist or otherwise) has views on the issues as they see them that are not put to them by the parties, can they raise them with the parties? Is the court or arbitral tribunal permitted or expected to give preliminary indications as to how it views the merits of the dispute?

No, the judges and arbitrators are strictly prohibited from expressing their views on a dispute. Expressing of views prior to the conclusion of the dispute may give rise to challenges against both judges and arbitrators. The judges must be impartial and independent. Pursuant to Article 36 of CCP, one of the parties may reject the judge or the judge may refrain from the case. Specific reasons for the rejection of the judge or the refusal of the judge from the case are regulated in the article, as follows:

• Giving advice or guidance to either party in the case.

• Expressed opinion to one of the two parties or to a third party, even though it is not required by law.

• Being heard in the case as a witness or expert or acted as a judge or arbitrator or acting as a mediator or conciliator in the dispute.

• The case belongs to the minor relatives, including the fourth degree.

• Having a lawsuit with one of the two parties or there is an enmity between them, during the lawsuit.

As per article 12 of the Turkish International Arbitration Act, the arbitrators may only settle a dispute ex aequo et bono or as amiable compositeur only if they are explicitly authorised to do so by the parties.

45. If a contractor, say, wishes to arbitrate pursuant to an arbitration agreement, what parallel proceedings might the employer bring in your jurisdiction? Does it make any difference if the dispute has yet to pass through preconditions to arbitration (such as those in clause 20 of the FIDIC Red Book 1999) or if one of the parties shows no regard for the preconditions (such as a DAB or amicable settlement process)?

Within the scope of the principle of freedom of contract, the parties can freely determine the dispute resolu- tion method in the contract. Accordingly, if a procedure (amicable settlement meetings, expert report, etc.) is specified in the contract before arbitration, this procedure must be implemented first.

In cases where the pre-arbitration process is not completed, the arbitral tribunal may decide to suspend the arbitration in order for the pre-arbitration process to be conducted.

46. If the seat of the arbitration is in your jurisdiction, might a contractor lose its right to arbitrate if it applied to a foreign court for interim or provisional relief?

No.

Expert witnesses

47. In your jurisdiction, are tribunal- or party-appointed experts used? To whom do party- appointed experts owe their duties?

In parallel with the international arbitration practice, most commonly the experts are appointed by the parties. Particularly in domestic arbitrations, the parties sometimes request the tribunal to appoint experts, which is a practice that is most used in litigation in Turkey. Party-appointed experts are liable towards the party who appointed them.

State entities

48. Summarise any specific limitations or requirements that apply when the employer is a state entity or public authority (including, for example, public procurement rules, limits on rights to suspend or terminate, excluded lien rights and arbitrating – as well as enforcing an award – against such an employer).

In terms of tenders and determining the terms of contracts, state entities and public authorities in Turkey are bound by the public procurement legislation. Once the contract is signed it is governed by private law under which the employer and the contractor are equal.

For construction contracts, there are no regulations preventing Turkish public entities from settling disputes by arbitration. According to article 82/1 of the Bankruptcy and Enforcement Law, both public and private properties of the state are non-seizable on the grounds of the continuity and non-disruption of public services. Immunity of state entities from enforcement is limited to the assets necessary for the due conduct of public services.

Settlement offers

49. If the seat of the arbitration is in your jurisdiction, on what basis can a party make a settlement offer that may not be put before the arbitral tribunal until costs fall to be decided?

A settlement offer in an arbitral dispute seated in Turkey is subject to article 12 of the Turkish International Arbitration Act, as per which parties are free to submit their settlement offers until the issuance of the final award or a tribunal’s order that concludes arbitral proceedings. Deferral and acceptance of claims are to be construed as an integral part of the concept of settlement.

Privilege

50. Does the law of your jurisdiction recognise “without prejudice” privilege (such that “without privilege” communications are privileged from disclosure)? If not, may it be agreed that a sum is payable if communications to try to achieve a settlement are disclosed to a court or arbitral tribunal?

The concept of “without prejudice” privilege is recognised for the stage of settlement. Parties cannot use that correspondence or offers exchanged during settlement negotiations later in the court proceedings.

Similarly, parties cannot submit statements or documents obtained during the mediation process as evidence and cannot testify about them during a lawsuit or an arbitration. This prohibition is regulated in article 5 of the Law on Mediation in Civil Disputes.

Under the principle of freedom of contract, the parties may agree on a sum payable if such communica- tions are disclosed to a court or arbitral tribunal.

51. Is the advice of in-house counsel privileged from disclosure under the law of your jurisdiction? Is the relevant law characterised as substantive or procedural law?

Under Turkish law, there is no specific law on the relationship between in-house counsels and their employers. In a decision (Decision No.15-42/690-M), the Turkish Competition Board found that documents and correspondence between an in-house counsel and their employer will not be considered privileged and will not be protected, since an in-house attorney and his or her “client” have a regular employment relation- ship. This decision can only be considered as soft law.

Guarantees

52. What are the requirements for a guarantee under the law of your jurisdiction? Are oral guarantees effective?

Under Turkish law, a guarantee scene can be set by the employment of two different types of contracts. The first of them being suretyship agreements and the other being guarantee agreements.

The surety contracts are regulated in article 581 et seq of the TCO, whereby guarantee contracts are governed under article 128.

In accordance with article 582, a suretyship contract can only be made for existing and valid debt. Article 583 regulates that the suretyship contract must be made in writing and the maximum amount for which the surety will be held liable and the suretyship date must be specified in own handwriting. In the case of a joint guarantor, it should be stated in his or her own handwriting.

For guarantee contracts, no special form requirements have been stipulated; however, in accordance with article 603 of the TCO, the terms sought in surety contracts shall be applicable for guarantee contracts where real persons act as guarantors.

Oral guarantees may be valid as there is no form requirement for legal entities in guarantor contracts.

53. Under the law of your jurisdiction, will the guarantor’s liability be limited to that of the party to the underlying construction contract, if the guarantee is silent? Can the guarantee’s wording affect the position?

According to the mandatory statutory regime, the surety may in any case be held liable with the maximum amount specified in the underlying contract.

However, the liability under the guarantee contract, although it rarely exceeds the limit in the underlying contract in practice, but is not subject to a mandatory regulation as in TCO 589/1 and may exceed the limit in the underlying contract. Here, the wording of the guarantee will affect liability.

54. Under the law of your jurisdiction, in what circumstances will a guarantor be released from liability under a guarantee, if the guarantee is silent? Can the guarantee’s wording affect the position?

By signing a surety agreement, the surety undertakes to indemnify the creditor for the damages that arise from the initial debtor’s failure to fulfil its contractual commitments. Suretyship is of subordinate nature; thus the suretyship will be invalid under circumstances where the principal contract is invalid (article 598 of TCO). Similarly, under circumstances where the principal contract is duly performed by the initial debtor, the surety will be released from liability.

In contrast with suretyship, guarantee agreements are not of subordinate nature and the liability of guar- antor, for the performance of the initial debtor, is autonomous within itself.

A guarantee scheme’s wording can alter the liability regime for the surety or guarantor by making it subject to contractual conditions. Moreover, in a suretyship scheme – due to the subordinate nature of the suretyship – the surety may raise the objections that the initial debtor has raised (article 591 of TCO). The guarantor in that case is not allowed to raise the same objections as the initial debtor, whereby it has the freedom to raise its own individual arguments arising from the contract.

On-demand bonds

55. If an on-demand bond is governed by the law of your jurisdiction on what basis might a call be challenged in your courts as a matter of jurisdiction as well as substantive law? Assume the underlying contract is silent on when calls may be made.

Under Turkish law, on-demand bonds scheme can be established by suretyship or guarantee agree- ments. Therefore, objections against the call for a bond can be raised, depending on the specific statutory requirements.

If the on-demand bond is provided as an ordinary suretyship, the creditor should request the payment from the debtor first (article 585 of TCO). In the event that the creditor requests the payment from the surety prior to the debtor, the surety can refuse to pay. In cases where an on-demand bond is provided as a joint surety, such requirement is not applicable and the creditor can request the payment from both the debtor and the surety at the same time (article 586 of TCO). The surety benefits from all substantive defences avail- able to the debtor.

If the on-demand bond is provided as a guarantee agreement, the call can be made at the discretion of the creditor. Theoretically, the debtor may apply for an injunctive relief against the guarantor or the surety arguing that the creditor will be abusing its right to call.

In principle, the guarantor or the surety is required to litigate the merits of the matter after the completion of the call or liquidation of the bond.

56. If an on-demand bond is governed by the law of your jurisdiction and the underlying contract restrains calls except for amounts that the employer is entitled to (such as sub-clause 4.2 of the FIDIC Red Book 1999), when would a court or arbitral tribunal applying your jurisdiction’s law restrain a call if the contractor contended that: (i) the employer does not have an entitlement in principle; or (ii) the employer has an entitlement in principle but not for the amount of the call?

Only the occurrence of the event prescribed under the on-demand bond can result in an on-demand bond or bank guarantee. The employer is not allowed to call the bond if such an event has not occurred.

The court may prohibit the employer from calling the bond in whole or to the extent that the amount of the call is regarded as disproportionate, to the extent the contractor can establish that the requirements for calling the on-demand bond are not met.

Since the purpose of on-demand bonds is to protect the employer’s rights, the court will not prevent the employer from calling the bond in principle, even if there are controversies arising from the grounds under- lying the call. Therefore, the “pay first, litigate later” rule is adopted by Turkish law.

Further considerations

57. Are there any other material aspects of the law of your jurisdiction concerning construction projects not covered above?

Not applicable.