I. Overview of Legislative Framework
It is a realization globally acknowledged that in international and domestic markets, there is an increasing trend towards settlement of disputes by arbitration and alternative dispute resolution mechanisms. International arbitration clearly challenges the local jurisdictions in the last few decades, and foreign investors undeniably favor the more informal procedural rules of the ICC, LCIA and DIAC and awards that are relatively "faster," which are granted by arbitral tribunals. Turkey has not been immune to this global transformation and, indeed, has undertaken substantial legal reforms to harmonize its domestic jurisprudence, specifically in the alternative dispute resolution area, international norms. Turkey's legal reforms in the area of arbitration have significantly cleared the road for international and domestic arbitration.
Civil Procedural Law No. 6100 (the "CPL"), International Arbitration Law No. 4686 (the "International Arbitration Law"), and the Law on International Private Law and Procedure No. 5718 ("Law No. 5718") are the primary statutory sources for the settlement of disputes through arbitration and enforcement of arbitral awards in Turkey. While the International Arbitration Law is the main piece of legislation governing international arbitration, the CPL regulates domestic arbitration procedures, and also provides enforcement guidelines for domestic arbitral awards.
The CPL entered into force on October 1, 2011, replacing the now-repealed Civil Procedure Law No. 1086 dated 1927. Unlike the old code, the CPL's arbitration section is aligned with the International
Arbitration Law to a great extent. Section 11 of the CPL was enacted based on the United Nations Commission on International Trade Law (UNCITRAL) Model and the Swiss Federal Act on Private International Law (1987). Notably, the CPL has significantly brought domestic arbitration into line with international arbitration standards, and, therefore, it is useful to review the most particular changes.
II. What is new in the CPL?
- Scope of Application
The CPL explicitly limits its application to arbitrations seated in Turkey that do not contain a "foreign element." A "foreign element" exists when the parties have their domicile or place of business in different countries, or when the place of arbitration is not in the same country as the domicile, or place of business of the parties, or the site of the actual business operation of the underlying contract, or where the relationship between the parties involves foreign investment. In summary, the revised Section 11 of the CPL regulates domestic arbitration for local parties who wish to resolve their 'local' disputes.
- Non-Arbitrable Issues
Similar to the limitation set forth under International Arbitration Law, the CPL also envisages that real property related disputes, and matters that are not subject to the parties' own discretion, will not be subject to arbitration. The non-arbitrability of these matters arises from the fact that the legislature attaches a public interest feature to these categories of legal disputes.
- Waiver of Objection
Waiver of the right to object is newly introduced under Article 409 of the CPL. In an arbitral proceeding, objections to non-compliance with the arbitration agreement must be raised within 15 days of having become aware of such non-compliance. Unless such objection is raised within the relevant term, the objection will be deemed to be waived.
- Role of Regional Courts of Justice
The CPL also introduces a new provision that authorizes the Regional Courts of Justice as the competent courts for arbitration proceedings. Unless the parties have determined the seat of arbitration, then the regional court of justice at the defendant's domicile or business place will be authorized to attend to the relevant arbitration procedure.
- Written Form Requirement
The CPL specifies what constitutes a "written form arbitration agreement." In line with the International Arbitration Law, the CPL allows a letter, telegram, telex, and fax exchange between the parties, as well as any other written, signed document as an arbitration agreement. The CPL also stipulates that a reference made by the principal contract to another document that contains an arbitration clause for the purpose of ensuring the latter be an integral part of the principal agreement, satisfies the written form requirement, as well.
- Severability Principle
Like the International Arbitration Law, the CPL adopts the "severability principle," and does not enable objections against the arbitration agreement that challenge the validity of the main agreement or claim inexistence of the dispute. Indeed, the CPL indicates that the arbitrator's or the arbitral tribunal's decision regarding nullity of the main agreement will not entail the invalidity of the arbitration clause or agreement ipso jure.
- Arbitration Objection
The CPL regulates that during an arbitration process, if one of the parties have simultaneously initiated legal proceedings before local courts, the counterparty will be entitled to raise preliminary objections in connection with pending arbitration. The CPL states that unless the arbitration agreement is void, ineffective or lacks any capacity for implementation, the relevant local court will be required to reject the pending lawsuit based on procedural grounds. Nonetheless, the extent and the duration of the local courts' assessment of such procedural objections are not tested yet. If the local court decides to review the details of the dispute to evaluate the validity of the arbitration agreement, such review may lead to the continuance of two parallel procedures, endangering the fast and equitable solution-oriented approach intended through arbitration.
- Interim Measures
In parallel with the International Arbitration Law, the CPL authorized arbitrator(s) or arbitral tribunal to grant interim measures or preliminary injunction. The availability of interim measures in arbitration procedures is one of the main issues in developing a legal setup for arbitration, and, therefore, it may play a significant role especially when protection of evidence is at issue before or throughout the arbitral proceedings.
On the other hand, it is notable that the CPL gives discretion to the arbitrator or arbitral tribunal to change or abrogate the interim decision of national court(s). In other words, under the CPL the arbitrator or arbitral tribunal are entitled to rule over interim measures granted by national courts during the course of the arbitration proceeding. Since these procedures are not yet tested before Turkish courts, it is not possible to make an assessment as to whether the local courts will be prone to accept the arbitral tribunal's authority, or whether these two different players will manifest hostility towards each others' decisions.
- Constitution of the Arbitral Tribunal
In line with the International Arbitration Law, the CPL also introduces a new provision, regarding the constitution of the arbitral tribunal. The CPL gives the parties the freedom to determine the number of arbitrators, as well as their appointment procedure. The relevant article states that when the arbitral tribunal is comprised of more than one arbitrator, at least one arbitrator must be a "legal professional" with minimum experience of five years in his or her particular area. The definition of "legal professional" is not provided under the CPL and, therefore, it is not possible to determine in advance whether the parties to a dispute will be willing to appoint non-academics or non-lawyers as arbitrators.
- Challenge of Arbitrators
In line with the International Arbitration Law, the CPL entitles parties to challenge the arbitrators on the basis of the lack of qualifications, impartiality or independence, or based on the existence of any grounds provided in the arbitration procedure agreed upon by the parties.
The CPL also extends the objection period from 5 days to 15 days.
- Jurisdiction Objection
In parallel with Article 16 of the UNCITRAL Model, under the CPL, the initial jurisdiction decision is determined ex officio by the tribunal. In order to speed up the arbitration process, the CPL requires such objections be raised together with the respondent's statement of reply at the latest.
- Equality of the Parties and Free Determination of Rules
As a reflection of international principles, the CPL emphasizes the equality of the parties, and the equality of arms throughout the arbitral proceedings. The CPL states that the parties will mutually determine the rules governing the proceedings and the seat of arbitration, provided that they are in compliance with the obligatory provisions. Unless this issue is regulated under the arbitration agreement, the arbitral tribunal will be entitled to determine such rules.
- Conduct of the Proceedings
As is the case under the International Arbitration Law, the arbitral tribunal has the discretion to determine whether to conduct proceedings solely on the basis of the parties' submissions or to hold oral hearings. Unless the parties have agreed not to hold a hearing, the arbitrator or arbitral tribunal will hold a hearing at the appropriate stage of the proceedings upon the request of any of the parties. The parties will be notified in advance of any inspection date, expert review or any other meeting and hearing to be conducted by the arbitrator or the arbitral tribunal for review of other evidence, as well as the consequences of the parties' failure to attend such hearings.
- Duration of the Arbitration Process
Adopting a more realistic approach, the CPL extends the duration of the arbitration process. Unless the parties mutually agree, or the arbitral tribunal decides on an extension, the award must be issued within a year after drawing of the first meeting minutes.
- Change or Expansion of Claims
Unless the parties agree otherwise, the parties are entitled to change or expand their claims or defenses during the arbitral proceeding. However, in particular circumstances, the arbitral tribunal is authorized not to allow such change or extension, if it deems that the requested action is initiated in bad faith to prolong the arbitration process.
- Termination of Proceedings
In line with the International Arbitration Law, the CPL introduces a provision regarding termination of proceedings. If the claimant fails to communicate its statement of claims in prescheduled term without sufficient reasoning, or if the statement of claim is incomplete and such incompleteness is not remedied within the term to be determined by the arbitrator or arbitral tribunal, the proceedings may be terminated.
- Appointment of Experts
The CPL also includes a specific provision granting the arbitrator or arbitral tribunal the discretion to appoint experts. It is not clear from the wording of the CPL as to whether this authority granted to the arbitral tribunal may be deemed as removal of the parties' right to appoint experts without approval of the tribunal. This is one of the significant issues that will be clarified once the arbitration process is tested more frequently.
- Parties' Settlement
Another new provision introduced by the CPL relates to the parties' settlement. If the parties settle on the merits of the dispute during arbitral proceedings, the arbitrator or the arbitral tribunal will terminate the proceedings, and the settlement decision will be deemed to be arbitral award.
- Correction, Clarification and Completion of Arbitral
The CPL also includes provisions regarding partial decisions of the arbitrator or arbitral tribunal; correction, clarification and completion of award; and the right to a new trial by a new arbitral tribunal in certain circumstances set forth under Article 375 of the CPL.
- Setting Aside Grounds
The CPL provides an exhaustive list of grounds upon which an arbitral award may be set aside. As clearly stated under the CPL, commencement of annulment proceedings does not preclude enforcement of the arbitral tribunal's decision, unless collateral is given as security for the subject of the tribunal's decision.
- Arbitration Expenses
Under the CPL, unless the parties agree otherwise, arbitrator fees will be determined among the arbitrator or arbitral tribunal and the parties by taking into consideration the amount subject to dispute, the nature of the dispute, and the term of the arbitration. The CPL also enumerates all of the expenses to be incurred during an arbitration process, which also include the arbitrators' expenses.
In addition, the CPL includes a specific provision regarding advance payment of the arbitration expenses, to be equally paid by the parties, if necessary. Accordingly, if such payment is not made within one month, the arbitrator or arbitral tribunal will be entitled to terminate the proceedings. Also, in line with the International Arbitration Law, under the CPL, unless the parties agree otherwise, the arbitration expenses will be borne by the defaulting party.
The main difficulty associated with arbitration in Turkey has long stemmed from the fact that international and domestic arbitration, and the enforcement of international and domestic arbitral awards, were all addressed under separate legal frameworks with conflicting regulations. This problem has recently been addressed by the legislature through drafting domestic arbitral procedures and enforcement mechanisms in line with the provisions of the International Arbitration Law and Law No. 5718. The CPL's arbitration section is revised in anticipation of encouraging domestic arbitration in Turkey, and the local courts' reputation as a reliable forum for the settlement of disputes through arbitration will depend greatly on how they can effectively and speedily handle arbitration procedures by these new rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.