Turkey: Developing Court Practice In Turkey Regarding Applications To Set Aside Arbitral Awards

With its aspiration to become an international arbitration venue, Turkey enacted new legislation on November 29, 2014 in order to establish the Istanbul Arbitration Center. With the establishment of its own arbitration center, the number of arbitration proceedings in Turkey is expected to increase substantially. It is inevitable that the increase in the number of arbitration proceedings will result in an increase in the number of set-aside lawsuits.

Although it has been more than ten years since the concept of setting aside an arbitral award was introduced in Turkey, Turkish courts are still developing their approach towards the grounds for setting aside an arbitral award, due to the distinct nature of arbitration. In an effort to show the Turkish courts' approach towards the most invoked set-aside grounds, this article aims to underline the general approach adopted by the courts of first instance of Turkey's two largest cities – Istanbul and Ankara – based on their decisions since 2012.

I. OVERVIEW OF SET-ASIDE LAWSUITS IN TURKEY

A. Applicable Procedural Law

There are two laws that govern arbitration proceedings in Turkey: the Civil Procedure Law (the "CPL") and the Turkish International Arbitration Law (the "IAL"). There are three types of arbitral awards: (i) a CPL-based arbitral award; (ii) an IAL-based arbitral award; and (iii) a foreign arbitral award.1 In the presence of a CPL-based or an IAL-based arbitral award, judgment debtors can challenge the award by filing an application to set it aside.

Before the enactment of the IAL in 2001, the former Civil Procedure Law (the "former CPL") governed arbitration proceedings in Turkey and the only way to challenge an arbitral award was to appeal it. Upon the IAL's enactment, however, an IAL-based arbitral award became subject to a set-aside lawsuit, while a former CPL-based award remained subject to appeal. This was the case until the CPL's enactment in 2011, as a result of which the possibility of appeal against arbitral awards was abrogated and a CPL-based award became subject to a set-aside lawsuit as well.

The Court of Appeals has held that an arbitral award rendered in connection with an arbitration agreement that was concluded before the enactment of the relevant procedural law (the CPL or the IAL) cannot be subject to a set-aside proceeding, even if the award is rendered after the relevant procedural law entered into force.2 The rationale behind these decisions is the following: before the enactment of the relevant procedural laws, the only way of challenging arbitral awards was to appeal them. As parties to an arbitration agreement could not have foreseen future legislative changes in procedural rules with regard to the method of challenges against an arbitral award at the time of signing the arbitration agreement, new procedural rules, allowing parties to file a set-aside lawsuit, should not be applicable to an award, even if that award is rendered after the enactment of the new rules.

B. Competent Court

The IAL provides that civil courts (among which are commercial courts, which deal with commercial matters3) are competent to hear set-aside lawsuits. The new Turkish Commercial Code (the "TCC"), which entered into force on July 1, 2012, however, changed the relationship between civil courts and commercial courts: both are still of the same degree, but commercial courts are no longer a division of the civil courts.

When the TCC entered into force and changed the relationship between civil and commercial courts, the competence of civil and commercial courts over set- aside lawsuits became a debated issue. As the wording of the IAL stipulates "civil courts" as competent courts, commercial courts began to dismiss set-aside lawsuits due to lack of competence.4 On the other hand, there were civil courts which opined that commercial courts had competence over set-aside lawsuits if the dispute at stake were commercial (which was already the case before the TCC's entry into force in 2012).5 On June 28, 2014, Law No. 6545 (Law Amending the Turkish Criminal Code and Other Laws – Omnibus Bill) put an end to this debate with its Article 45. This law provides that competent courts over set-aside lawsuits against arbitral awards rendered in accordance with the CPL and the IAL are commercial courts, regardless of the nature of the dispute at hand.

C. Scope of Examination – Prohibition of Revision Au Fond

Both the IAL and the CPL set forth nine grounds for setting aside an award, and also stipulate that in set-aside lawsuits, courts cannot examine the merits of a dispute, in accordance with the principle prohibiting revision au fond. Although Turkish courts (including the Court of Appeals) had a tendency to ignore this principle from time to time, they generally follow it and limit the scope of their examination:

[...] under the clear provision of the CPL, the court has no authority to examine the merits of the arbitral award [...]6

[...] Set-aside grounds are listed as numerus clausus. The merits of the arbitral awards cannot be examined. [...]7

D. Parties to the Arbitral Award/Arbitration Proceedings/Arbitration Agreement

Extension of arbitration agreements to third parties and rendering an arbitral award in favor of or to the detriment of a third party is still debated in Turkish law. Some scholars argue that arbitration agreements may be extended to at least group companies, while the majority does not accept this approach due to the exceptional nature of arbitration. The majority of scholars believe that no legal entity (even if it is a sister company) can be forced to be a party to arbitration proceedings, unless it signs the relevant arbitration agreement or gives its explicit consent to become a party to the relevant arbitration proceeding.

While Turkish courts have not directly encountered such an issue, and thus have not yet rendered a decision on this specific subject, on January 29, 2014, a local court rendered a decision that may be of guidance for future reference. In this decision, the local court accepted the existence of the arbitration clause for a non-signatory, which was a beneficiary of the concession agreement, as the third party had approved the concession agreement containing the arbitration clause and hence became a party to the arbitration agreement:

The existence of the arbitration clause is accepted for the third parties that are beneficiary of concession agreements. . . . The agreement containing the arbitration clause is approved, hence it is accepted that the third party became a party to the arbitration agreement. The International Court of Arbitration ordered an award for the third party, for which the concession agreement includes favorable conditions.8

II. THE MOST INVOKED GROUNDS FOR SETTING ASIDE

Both the CPL and the IAL set forth nine grounds for setting aside an award. In practice, the two most invoked grounds are: (i) violation of the parties' equality – i.e., their right to be heard9 and (ii) public policy.

Parties' Equality – Right to be Heard

If a party that requests an arbitral award to be set aside proves that the parties were not treated equally (or that its right to be heard was not respected) during the arbitration proceeding, the award will be set aside. This ground is one of the most invoked by Turkish courts. In practice, examination of this ground focuses on the following claims:

  1. One of the parties has not been duly informed of the arbitration proceedings.
  2. Arbitration-related submissions have not been duly served on one of the parties.
  3. One of the parties has not been duly informed of the hearing.
  4. Arguments raised by one of the parties have not been taken into account by the arbitral tribunal.

Turkish courts generally dismiss such claims based on the following reasons:

The parties' claims were examined in detail by the arbitral tribunal, expert witness reports were prepared, the agreement was scrutinized; . . . the claimant asserted his/her claims during the arbitration proceeding and these claims were assessed, therefore the claimant's right to be heard was respected.10

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Footnotes

* Okan Dermirkan is a partner at Kolcuo lu Demirkan Koçakl Attorneys at Law, Istanbul, Turkey. Burak Eryi it is admitted to the Istanbul Bar Association and is currently an LL.M. student at Queen Mary University, London.

1 A CPL-based arbitral award is an award rendered in an arbitration proceeding where (i) there is no foreign element; and (ii) the seat of arbitration is in Turkey, while an IAL- based arbitral award is an award rendered in an arbitration proceeding where (i) there is a foreign element; and (ii) the IAL is chosen as the applicable procedural law or the seat of arbitration is in Turkey. An arbitral award is a foreign award if the seat of arbitration is in a foreign country and the arbitration proceeding is carried out under a foreign law.

2 See, e.g., Decision of the 15th Civil Chamber of the Court of Appeals, E. 2013/2388, K. 2014/113, dated Jan. 9, 2014.

3 Civil courts and commercial courts are of the same degree. The purpose of the establishment of commercial courts was to address the need to have specialized courts in commercial disputes. Commercial courts were, before July 1, 2012, a division of civil courts. If the dispute was of a commercial nature, commercial courts heard set-aside lawsuits. If otherwise, civil courts were competent over set-aside lawsuits.

4 See Decision of the 50th Commercial Court of Istanbul, File No. 2013/299, dated April 29, 2014.

5 See Decision of the 24th Civil Court of Istanbul, File No. 2013/476, dated Oct. 9, 2013.

6 Decision of the 24th Commercial Court of Istanbul, File No. 2013/3, dated Jan. 9, 2014.

7 Decision of the 42d Commercial Court of Istanbul, File No. 2012/260, dated Dec. 18, 2012

8 Decision of the 3d Civil Court of Ankara, File No. 2013/273, dated Jan. 21, 2014.

9 Although the right to be heard is not clearly stipulated under the IAL, unlike the CPL, in practice, this concept is considered to be within the concept of the parties' right to be treated equally.

10 Decision of the 44th Commercial Court of Istanbul, File No. 2013/268, dated Dec. 19, 2013 (emphasis added).

© Kolcuoğlu Demirkan Koçaklı Attorneys at Law 2015

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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Burak Eryiğit
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