Turkey: ICSID Arbitration: A Tool To Secure International Investments

We are all witnessing world's shrinking with the technological developments, as the time passes, fast and secured transportation of goods or energy lead investors to conduct commercial activities among various countries. While merchandising, international investors are handling with investing countries' regulations and proceedings and facing various of potential risks such as investment may be unlawfully expropriate or nationalize by host country, there might be currency transfer restrictions in the host states or the treatment of investment will be changed after the establishment of investment. And indeed, the host country may treat riskily national investor more favorable than foreign investor. Based on the observations, foreign companies investing in Turkey share these types of righteous concerns.

As a result of these risks, an autonomous and free arbitration and conciliation institution is established particularly focuses on international investment disputes, which is called:"International Centre for the Settlement of Investment Disputes (ICSID)."

Generally speaking, ICSID is an international institution, which provides facilities for eligible parties' conciliation and arbitration in order to solve legal disputes. Recourse to ICSID conciliation and arbitration is entirely voluntary. However, once the parties have consented to arbitration under the ICSID Convention, neither can unilaterally withdraw its consent. All of ICSID Contracting States (whether or not to be parties to the dispute) are required by the Convention to recognize and enforce ICSID arbitral awards.

ICSID's main purpose is to contribute international investments through the creation of a favorable investment climate. To fulfill this aim, the ICSID Convention grants some benefits both contracting states and foreign investors. The most essential benefit for investors is the provision of an independent and autonomous forum when a dispute arises. Thus Arbitration Tribunals' approach to investment treaties is to be required a fair and equitable treatment by Host States, likely according the tribunals decision: "This (fair and equitable treatment) provision of the Agreement (BIT), in the light of the demands of good faith required by international law, requires the Contracting Parties to the Agreement to accord a treatment to foreign investment that does not go against the basic expectations on the basis of which the foreign investor decided to make the investment." Going to arbitration is very important for legal security and to be judged equally and fairly. While States intend to resolve their disputes in ICSID cause many foreign investors to demand investing to host state country due to their beliefs of legal security. As a result of this, states inevitably take a benefit from international arbitration.

Pre-conditions Necessary for ICSID Arbitration

Main condition for applying to ICSID is to be ''a national legal person of a contracting State'' in accordance with Article 25 of ICSID Convention. This leads to an exclusion of jurisdiction over disputes that are between states or persons. As it is known almost all of the investors are corporations, so the issue of nationality is defined by the location of incorporation or the place of the head office. Besides being a member of a contracting state, the ICSID requires separate written consents from parties in the contract. It can be given in a direct agreement between host state and investor like a concession contract or given by a standing offer from the host state to investor and when the investor accept it in appropriate fashion, the consent will be legally proper.

Local Remedies Rule

Exhaustion of local remedies has been a disputable problem since the beginning of ICSID Arbitration. Some of arbitration provisions recognize the local remedy rule, which requires the prior exhaustion of all the remedies provided for by the law of the host state before resorting international arbitration.In the past, exhaustion of local remedies deemed to be a necessary stage in order to bring the case to international arbitration level. According to old Convention on the Settlement of Investment Disputes between States and Nationals of Other States: "Consent of the parties to arbitration under this Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy. A Contracting State may require the exhaustion of local administrative or judicial remedies as a condition of its consent to arbitration under this Convention.'' As we can see that, exhaustion of local remedies rule was a voluntary provision, after all States were too often avoiding putting exclusive arbitration clauses without the exhaustion of local remedies.

Choice of Law

According to Article 42 of the Convention, contracting parties have the freedom of choosing the law that will be applied to their disputes. Article 42 of the ICSID Code considerably shows a respect to parties autonomy by giving him freedom to choose any type of law (which includes investing states law, investors state law or a third country's law or even parties may agree Tribunal to give an award ex aequo bono) There are some situations that constitute an excess to the tribunal's authority and lead to the annulment of the award. The failure of application of rules, or chosen law by parties, or application of default provisions of Article 42(1) may cause to the annulment. IF the claim is brought according to the provisions of any BITs, the rules of chosen law for the aim of Article 42 will be those provided in the agreement under international law. In case of parties do not choose an applicable law, Tribunal requires to apply host state's law.  If there is a reference to the international law, this means that this reference is to all of the sources of international law that is referred to in Article 38 of the Statue of the International Court of Justice.


The duty of an arbitrational tribunal ends when the final award is submitted. At the stage of enforcement of the award, arbitration tribunal has no role and power to carry out, unless it requires correcting or interpreting its award. Enforcement of the awards is mainly an issue of Countries to be taken care of. In case of losing party is not fulfilling the requirements of an award, winning party shall apply to the authorized national court for recognition and enforcement of the award. Following the recognition is ratified, this award earns the power of a national court decision.

Even tough Turkey is a contractual party, without the existence of a binding international agreement in regards with recognition of awards, countries have no obligation about recognizing and enforcing the award that is made outside their domestic jurisdictions. Hence, States usually bind themselves with international conventions, which provide the recognition and enforcement of an arbitral award. As long as states give consent to submit the disputes arising from an investment of a foreign investor to arbitration tribunal, in Bilateral Investment Treaties, as is stipulated that "an award shall be final and binding for the parties to the disputes.'' It would be worthwhile to note that most of BITs include articles aiming to regulate the enforcement and recognition of arbitral awards. For example, Article VII (4) of the Turkey-Algeria Investment Treaty provides that "The ICSID awards shall be final and binding for all parties in dispute. Each party commits itself to execute the award according to its national law." In this case, foreign investors will be able to submit the ICSID awards any national enforcement service in the host country, without facing any problems regarding enforcement.

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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