Turkey: Istanbul Arbitration Center

Arbitration Centers

Globalization, cross-border transactions and transnational disputes increase the need for a reliable dispute resolution mechanism, which inevitably results in emphasis on international arbitration. Despite the costs, corporations are inclined to prefer arbitration over litigation before courts, recognizing it as better suited to meet their needs1.

Although ad hoc arbitration remains a valid and effective choice, agreements usually include dispute resolution clauses that refer disputes to arbitration under well known arbitration institutions. While the International Chamber of Commerce ("ICC") remains the most preferred institution, followed by the World Intellectual Property Organization ("WIPO") and the American Arbitration Association ("AAA"), other arbitration institutions, such as the London Court of International Arbitration ("LCIA") and Singapore International Arbitration Center give rise to new arbitration centers.2

Factors such as costs, distance and logistics, expertise in a field or competence in national laws favor choosing various arbitration institutions. For instance, the similarity of Turkish Law with Swiss Law is one of the reasons why Switzerland is chosen as the place of arbitration by Turkish parties, and the "Swiss Rules" are chosen as applicable rules of arbitration3. The diversification of choices result in an increase of arbitration centers, not just in Europe and America but also in Asia, such as Singapore and Hong Kong. States increasingly promote their institutions for international arbitration, stressing their geopolitical advantages and arbitration friendly legal infrastructure.

Istanbul as International Center of Finance and Arbitration

Istanbul is not only the financial center of Turkey, but also, due to its geopolitical advantages and developing economy, a prominent and increasingly dominant headquarters in the region for cross-border financial transactions. Unsurprisingly, the Turkish Higher Planning Council adopted a resolution, dated September 29, 2009, and numbered 2009/314, designating Istanbul as the center of international finance, and foreseeing the establishment of the Istanbul International Finance Center ("IFC")5. One of the pillars of the IFC and the second priority specified in its Strategy and Action Plan, dated October 2009, is the establishment of an independent and autonomous institutional arbitration center that is capable of competing internationally with respect to cost, speed and effectiveness6.

Draft Law on Istanbul Arbitration Center

In accordance with this objective of establishing an institutional arbitration center, the Council of Ministers submitted a Draft Law on the Istanbul Arbitration Center ("Draft Law")7 to the national parliament on March 25, 2013. The Draft Law was referred from the Justice Commission to the Turkish Grand National Assembly on July 15, 2014, and is currently in the assembly's agenda. Even though an accurate projection cannot be made on the timing of the promulgation of the Draft Law, and despite the risk of predominance by other political agendas, the Istanbul Arbitration Center is expected to be established in 2015.

In preparing the Draft Law, the working group examined numerous arbitration institutions including the ICC, AAA and LCIA. The two institutions chosen as models by the working group were the German Institution of Arbitration, and the Arbitration Court of the Czech Chamber of Commerce and the Agricultural Chamber of the Czech Republic. The Draft Law regulates the establishment of the Istanbul Arbitration Center, defining its duties, bodies, structure and envisions two separate arbitration courts for national and international disputes.

Arbitration Rules

The Draft Law does not provide for the arbitration rules, or the resolution of disputes referred to the Istanbul Arbitration Center; but addresses its organization. Pursuant to the Draft Law, the Istanbul Arbitration Center will have the duty to determine and establish the rules for, as well as promote arbitration and other alternative dispute resolution mechanisms.

The arbitration rules to be set by the Istanbul Arbitration Center will not be the first set of institutional arbitration rules in Turkey. The Union of Chambers and Commodity Exchanges in Turkey ("TOBB"), the Istanbul Chamber of Commerce ("ITO") and the Izmir Chamber of Commerce have institutional arbitration rules. Notwithstanding, neither institution acts as an international arbitration center. The ITO rules require that at least one of the parties to a dispute is its member; rendering their scope mostly local. Moreover, these rules require that the matter to be resolved through arbitration be a commercial dispute. The number of arbitrators available in these institutions is very limited. Therefore the establishment of the Istanbul Arbitration Center and the preparation of its rules are essential.

Organization

The Draft Law foresees that the İstanbul Arbitration Center is established as a legal entity subject to civil law provisions. The center shall be composed of a general assembly, a board of directors, auditor, advisory board, national and international arbitration courts and a secretary general.

Emphasis should be made on the composition of certain bodies. Pursuant to the Draft Law, the Istanbul Arbitration Center shall have a general assembly which, among others, shall have the duty of forming the board of directors, approving the applicable arbitration rules, and the budget.

The general assembly shall consist of 23 members. Among these members, six shall be elected by the TOBB (which already has an institutional arbitration); three shall be elected by the Council of Higher Education; and the Ministry of Justice, the Capital Markets Board, the Istanbul Stock Exchange, the Banking Regulation and Supervision Agency shall each elect one member. This composition could easily raise concern about the independence of the Istanbul Arbitration Center, as many members of the general assembly are indirectly elected by the state. Moreover, only five members are required to have a legal background. Especially bearing in mind the nature of the duties of the general assembly, such as approval of the rules, we believe that more lawyers should be engaged.

Material Milestones for an Arbitration Center

The Draft Law constitutes merely the starting point for Istanbul becoming an internationally recognized center of arbitration. The rules to be adopted also are among the first steps. In fact, the rules of arbitration adopted by institutions mostly referred to in practice are not drastically different from each other. Undoubtedly, the rules to be adopted by the Istanbul Arbitration Center need to be suitable for international arbitration, and should not disregard the internationally accepted and frequently applied rules. However the choice of an arbitration institution by the parties for dispute resolution in their transactions is less determined by the institution's rules, and more by matters which specifically affect the arbitral proceedings, such as the choice of arbitrators or enforceability of awards.

Thus, the autonomous character of an institution, the appointment of impartial and independent arbitrators, as well as the arbitration-friendliness of the applicable legislation and the general practice of courts play an important role.

The International Arbitration Code No. 4686 mainly adopts the UNCITRAL Model Law on arbitration. Additionally, Civil Procedure Code No. 6100, which entered into force as recent as October 1, 2011, also reflects the model law. Turkey is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, in addition to other international treaties on arbitration. In addition to the legislative infrastructure, the recent Turkish jurisprudence mostly favors arbitration. Notwithstanding, reasons for overturning enforcement requests of arbitration awards, such as the time limit for rendering awards and public order, and the lack of coherence between courts and chambers of the Court of Cassation determining the practice regarding arbitration, still continue to overshadow the acceptance of Turkey as an arbitration friendly country. The unification of jurisprudence favoring arbitration is therefore necessary in order for the Istanbul Arbitration Center to be an internationally recognized arbitration institution.

As emphasized in the legislative justification of the Draft Law, the independence and autonomy of Istanbul Arbitration Center will play a central role in it being recognized as an international center for arbitration. As briefly explained above, the current composition of bodies may need to be reconsidered in order to avoid doubts of impartiality which foreign parties may have when deciding whether or not to refer their disputes to be resolved before the Istanbul Arbitration Center. Additionally, expertise in arbitration, constant promotion, consistency and continuity will be necessary and essential.

Conclusion

International arbitration is increasingly chosen as the dispute resolution mechanism in cross-border transactions. The ICC, AAA, LCIA and other arbitration institutions are preferred by international actors. Cost, reliability, independence, choice of arbitrators, expertise, location, arbitration-friendliness and many other factors play an important role in parties referring their disputes to be resolved under the rules of these arbitration institutions.

As a material part of the vision of the IFC project aiming to render Istanbul a regional and global finance center, the foundation of an international arbitration center is planned in Istanbul. Accordingly, the Draft Law recently included in the agenda of the Turkish Grand National Assembly foresees the establishment and structure of the Istanbul Arbitration Center. Once the Draft Law is promulgated, the Istanbul Arbitration Center that will be established will have the duty, among others, to determine the arbitration rules and promote arbitration.

In order for Istanbul to become a center for international finance and arbitration, factors such as arbitration-friendliness, expertise, autonomy and independence, will be essential. The composition of the bodies of the Istanbul Arbitration Center will have a material effect on its independence, which needs to be carefully assessed prior to the promulgation of the Draft Law.

In short, while the promulgation of the Draft Law and the establishment of the Istanbul Arbitration Center will be important milestones, they will only be the starting points for Istanbul to be internationally recognized as a center for arbitration on par with Zurich, Geneva, Paris, London, New York, Singapore and others.

Footnotes

1. See International Arbitration Survey of PriceWaterhouseCoopers, Queen Mary University School of International Arbitration for the year 2013 http://www.pwc.com/gx/en/arbitration-dispute-resolution/assets/pwc-international-arbitration-study.pdf (accessed on July 30, 2014).

2. For the breakdown of choice of selected arbitration institutions see the WIPO Center International Survey on Dispute Resolution in Technology Transactions for the year 2012 on http://www.wipo.int/export/sites/www/amc/en/docs/surveyresults.pdf (accessed on July 30, 2014).

3. See, Prof. Dr. Ziya Akıncı, "Neden İstanbul Tahkim Merkezi?", http://journal.yasar.edu.tr/wp-content/uploads/2014/01/3-Ziya-AKINCI.pdf (accessed on July 30, 2014).

4. Published in the Official Gazette dated October 2, 2009, and no. 27364.

5. See Newsletter article "Will Istanbul Become A Center For International Arbitration?" dated November 2009 http://www.erdem-erdem.com/en/articles/will-istanbul-become-a-center-for-international-arbitration/ (accessed on July 30, 2014).

6. See http://www.ifm.gov.tr/Shared%20Documents/Strategy%20and%20Action%20Plan%20for%20IFC%20Istanbul.pdf (accessed on July 30, 2014).

7. See http://www2.tbmm.gov.tr/d24/1/1-0758.pdf (accessed on July 30, 2014).

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.

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