Turkish Law Blog
Turkish BITs and Applicable Law to the BIT Disputes
Bilateral Investment Treaties (BITs) are international agreements concluded by and between two states to regulate the terms and conditions for the investments made by an investor of a contracting party in the other’s jurisdiction. According to the database of the United Nations Conference on Trade and Development (UNCTAD) there are 2369 BITs that are in force as of January 2019 all around the world. Turkey’s share in the total amount of the BITs has reached to 128, 110 of which is currently in force. The contracting states that are party to Turkish BITs vary from the EU member states to the developing countries such as Ethiopia, Kazakhstan and Kyrgyzstan etc.
The purpose of the BITs is to promote the flow of capital between the contracting parties by establishing a favorable and stable investment environment. For foreign investors, it is important to safeguard their investments from any potential economic and political risks. BITs are the most effective tools to secure protection of foreign investments especially for the investors investing in countries like Turkey where there is an erosion of rule of law and lack of economic instability. Such protection is ensured by way of granting exclusive rights by the host state to the prospective investors under the relevant BITs.
Turkey has also its own BIT Model text, and updates it regularly to meet international standards as well as to reflect its experience gained through international arbitration cases involving Turkey. Turkey has updated its BIT text in the end of 2009, in close collaboration with the UNCTAD and International Institute for Sustainable Development (IISD).
The Turkish BITs are designed to promote long term investments and offer the following rights that are in line with the international standards for the protection of foreign investments;
- Fair and equitable treatment
- Full protection and security
- Most favored nation clause and national treatment
- Protection against (indirect) expropriation
- Guarantee for transfer of returns & profits
- Compensation for losses
- International arbitration as a dispute settlement mechanism
The Turkish BITs provide State-State and investor-state arbitration clauses as a dispute settlement mechanism. Whereas general principles such as fair and equitable treatment or full security and protection of the investment are found in many international, regional or national legal systems, the arbitration clause is an important security for the investors since arbitration is considered the best guarantee to protect investments against wrongful acts of the host state. The Eastern Sugar arbitral tribunal declared that the arbitration clause is the most essential provision of the intra-EU BITs since it is the best guarantee that the investment will be protected against potential undue infringements by the host state.
The reasons why the arbitration clause is considered as the best guarantee in BITs could be summarized as follows;
- Arbitration allows settlement of the disputes, which are in general complicated and require in-depth technical knowledge, by the arbitrators who are experts in the relevant field instead of by the local judges who do not possess such specific technical knowledge.
- In the event of a settlement of a dispute by the local courts of the host state, there is a substantial risk of issuance of a judgement against the foreign investor and favorable to the host state. However, for the arbitration, this risk is lowered to the minimum degree since the foreign investor and the host state appoint their own arbitrators.
- As opposed to the proceedings before the national courts, the foreign investor and the host state are free to choose the law that will apply to the dispute subject to the arbitration procedure. The foreign investor may choose a legal order which would furnish him with more wide ranging possibilities of proof to defend his case.
In this article, we will briefly analyze the freedom of choosing the applicable law to the arbitral proceedings, prohibition of non-liquet and principle of ex aequo et bono.
As opposed to the proceedings before national courts of the host state, the parties are free to choose the law that will apply to the merits of the dispute (substantive law) to the arbitration procedure, to the arbitration agreement and to the award. If the parties have not expressly chosen the applicable laws, they mostly refer to the international instruments concerning arbitration proceedings such as the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention), UNCITRAL Model Law on International Commercial Arbitration (UNCITRAL Rules), International Chamber of Commerce Rules of Arbitration (ICC Rules).
In the absence of such choice of law, the second sentence of Article 42(1) of ICSID Convention applies. In this event, the tribunal shall apply the law of the host State, including its rules on the conflict of laws and such rules of international law as may be applicable. The provision undoubtedly orders the tribunal to apply the law of the host state. However, the question of applicability of international law is not entirely clear, because of the formula “as may be applicable”. The French version of the convention includes the formula “en la matière” which is probably best translated as “on the subject”. Accordingly, the formula “as may be applicable”, simply means that the relevant rules of international law are to be applied.
In this regard, treaty law is an important source of international law to be applied by ICSID tribunals. The most relevant treaties would be BITs. Further, multilateral treaties to which the state parties to BITs can be relevant as long as such treaties regulate the foreign investment regime. Other international treaties containing non-investment obligations can also be relevant, i.e Vienna Convention on the Law of the Treaties, human rights treaties, UNESCO Convention for the Protection of the World Cultural and Natural Heritage.
Similarly to the ICSID Convention, Article 35 (1) UNCITRAL Rules and Article 21(1) ICC Rules confirm the freedom to choose the law to be applied to the merits of the case. In the absence of choice of law, the arbitral tribunal apply the law which it determines to be appropriate. For instance, if an investor is from an EU member state and the host state is, or in the process of being a member of the EU, the arbitral tribunal may decide to apply EU law if it finds it appropriate.
What if the chosen law is silent on a specific matter which is required for the settlement of the dispute by the arbitral tribunal? With regard to legal loopholes in the chosen law, Article 42(2) ICSID Convention and Article 35(2) UNCITRAL Rules, provides for the prohibition of non-liquet. According to this principle, the arbitral tribunal may not refuse to give a decision on the ground that the law is not sufficiently clear. In the case where domestic law has been chosen and such domestic law is either silent on a matter or its application brings an obscure result, the tribunal may apply relevant rules of international law to fill the gap. In this event, relevant regional and multinational agreements protecting foreign investments, which are part of international law, may find application even though the parties did not specifically choose this source of law.
Another applicable law that the parties could select is the principle of ex aequo et bono. Article 42(3) ICSID Convention, Article 35(3) UNCITRAL Rules and Article 21(3) ICC Rules provide that the tribunal may also decide ex aequo et bono only if the parties have expressly authorized the arbitral tribunal to do so. In this event, the arbitral tribunal shall decide in accordance with equitable principles. 'Ex aequo et bono' is an ancient concept which means "according to the right and good" or "from equity and conscience". This principle requires that the arbitrators shall decide on the case according to what they consider to be fair and equitable in the case at hand. Arbitration ex aequo et bono grants arbitrators the power to deviate from the strict application of rules of law and settle the dispute according to their sense of justice and fairness instead of strictly applying the rules of a specific body of law.
The nature and scope of ex aequo et bono is highly criticized by several scholars stating that this principle could lead to unpredictable results and potential arbitrariness by arbitrators. This would explain the limited application of this concept. According to Gary Born, only 2-3% of arbitral tribunals apply ex aequo et bono per year.
The uncertainty of the enforceability of an ex aequo et bono award is considered as another downside of this principle. Except for the ICSID awards, for which the enforcement is automatic and not subject to the enforcement proceedings of the host state, the enforcement of an ex aequo et bono award depends on the law of the host state whether it recognizes this principle or not.
 For instance, NAFTA and Energy Charter Treaty.