Turkey: The Rise Of Arbitration In Turkey

Current Dispute Resolution Landscape in Turkey

Commercial disputes are on the rise in Turkey due to recent economic instability arising from local and regional political fragility. The Turkish lira weakening against the US dollar and euro should have fuelled exports; however, regional instability has hindered exports by Turkish companies. Therefore, manufacturers relying on local sales and regional exports have suffered as they could not turn their products into cash. As a result, they could not make payments to suppliers during recent months, giving rise to lawsuits, collection proceedings and applications to delay or execute bankruptcies.

The recent political crisis between Turkey and Russia has added another problematic dimension to cross-border deals and transactions. Tourism and leisure sectors have been hit seriously. Contract cancellations or contract breaches have given rise to commercial or treaty claims already, given that Turkish companies in Russia are now receiving hostile treatment, several Russian state-supported projects have been suspended and Russia has imposed sanctions over certain goods exported from Turkey.

And the recent terrorist activities in and around Turkey have deteriorated the situation in a way that parties to commercial contracts either opt for force majeure clauses or objective impossibility when cancelling their contracts, cashing in the bank guarantee letters or seeking for restructurings contract terms.

Even though commercial court judges in big cities are quite experienced, the fact that they heavily rely on expert opinions and that they lack sectorial knowledge make parties sceptic in taking their issues to courts unless there is no alternative. Indeed, lack of specialized courts in Turkey is the Achilles' heel of Turkish commercial dispute resolution mechanism.

In fact specialised courts do exist in Turkey, such as IP courts. However, the degree of specialism and the immeasurable variety of commercial transactions seem to require more specialised courts than currently exist. The reflection of lack of specialized courts in Turkey is that commercial judges place increased significance on court appointed experts in commercial courts; the more complex the case, the more judges rely on experts.

Such an approach distances parties from Commercial courts to the extent they can unless there is no other alternative to court proceedings. Indeed, Turkish construction industry for example have reached to a level that they use every type of alternative dispute resolution methods from mediation to dispute boards while the arbitration is not and alternative but the principal method to them.

Use of Alternative Dispute Resolution in Turkey

In Turkey, for a variety of reasons, parties have not preferred domestic arbitration institutions. These reasons include costs, as well as a lack of awareness and general arbitral culture in Turkey. Several arbitration institutions exist, operated by chambers of commerce, with minor market share in Turkey. In the absence of reliable arbitral institutions, ad hoc arbitrations composing academic arbitrators have been more attractive to parties. However, the lack of arbitrators' industry expertise, secretariat and pace are heavily criticised. As in the case of commercial courts, local arbitral panels rely heavily on expert opinions, raising questions of efficiency.

Although panels at local arbitrations are more flexible in selecting experts, the way experts can impact cases has almost no difference to court proceedings. Besides, arbitrator fees are extremely high in local ad hoc proceedings, despite their slow pace and questionable expertise. Accordingly, parties are prompted to think twice before choosing arbitration instead of court processes.

With these concerns in mind, a new arbitral centre was recently established in Turkey, the Istanbul Arbitration Centre ("ISTAC"). The new forum is intended to provide the necessary expertise, impartiality and independence, as well as to promote a culture and use of arbitration in Turkey, along with other alternative dispute resolution methods. The Centre recently declared its fee structure, under which it seems arbitrations will be resolved for fees equalling no more than 10 percent of court fees.

ISTAC in a Nutshell

ISTAC unanimously approved the ISTAC Arbitration Rules ("Rules") on 26 October 2015.

The Rules are generally compliant and sit well alongside those issued by high profile arbitration centres around the world. The ISTAC appears to be heavily influenced by the ICC Arbitration Rules, along with lessons learnt by other international arbitration bodies. The Rules are notably similar to the ICC Rules of Arbitration, except for provisions regarding fast track arbitration.

The ICC has a long history in Turkey, so local parties and practitioners are already familiar with the ICC Rules. Statistically, Turkish parties have usually opted for ICC arbitration and disputes involving Turkish parties are usually taken to the ICC. Therefore, it is understandably why the ISTAC has introduced arbitration rules which are substantively similar to the ICC's rules.

During drafting, the ISTAC appears to have taken into account revisions which other arbitral bodies made to their respective rules over time. Accordingly, the Rules benefit from the results of many discussions and experience-based amendments which have occurred in wider international commercial arbitration.

ISTAC's Points of Difference

Institutional arbitration has been widely criticized in terms of its effectiveness, pace, fees, and flexibility. Similarly, arbitration has globally faced serious questions about the impartiality, availability and expertise of arbitrators. These factors have damaged arbitration's overall attractiveness as a dispute resolution mechanism.

Against this background, the ISTAC offers:

  • A similar (but less bureaucratic) institutional supervision system for arbitrations.
  • An effective Secretariat.
  • Fast track arbitration procedures.
  • Appointment of emergency arbitrators.
  • Flexible and relatively low fee structure, compared to regional and international bodies.

The ISTAC's fee levels and structure have already received positive feedback. Application fees are calculated on a pro-rata basis, relative to a case's quantum. The ISTAC's fees are low compared to regional and international arbitration bodies. The ISTAC aims to provide high quality dispute resolution services faster and cheaper than Turkish commercial courts.

The competitive fee structure is potentially ISTAC's biggest marketing strength. However, when parties test an arbitration institution over time, it is service quality, impartiality and continuity which become more important factors than fees alone. 

Commentary on ISTAC

The short time limit imposed for granting an arbitral award is one of the ISTAC's key advantages for users. Concerns about timelines are understandable in a jurisdiction where commercial cases before courts might take anywhere between two and ten years to finalize.

The pace and inefficiency of arbitral institutions have been widely discussed. Introducing expedited arbitrations is a promising feature for the ISTAC and seems to reflect its intention to establish an efficient system, delivering relatively faster awards. It also indicates the ISTAC's mind-set about how it wants to position and differentiate itself in the region, amongst other arbitral institutions and the Turkish courts.

The ISTAC's approach to the expedited procedure is also encouraging. For disputes below a certain amount, the ISTAC does not wait for the parties to request an expedited process. Instead, the ISTAC begins trying those lower-value cases according to expedited rules automatically. Expedited rules are still exceptions for many arbitral institutions, requiring party initiation. Therefore, the ISTAC's practical approach in this respect deserves recognition.

Parties can request appointment of an Emergency Arbitrator and detailed procedures are established for emergency arbitrators. These factors again illustrate the ISTAC's intention to pragmatically address urgent issues in an efficient manner, without forcing parties to seek interim decisions before the courts.

The ISTAC's rules require the arbitral tribunal to prepare a procedural timetable, including aspects such as dates for hearings, submissions and other procedural events. The timetable is prepared on consultation with the parties. The approach seems to have been improvised from the ICC's rules. However, the ISTAC's lack of a "Case Management Conference" for parties to share their opinions on the arbitration proceeding and to agree upon procedural matters, should be seen as point for future development.

The ISTAC's Rules allows new claims to be introduced, even after the terms of reference are signed or approved by the Board. However, amendments to claims and defences are not regulated under the Rules. Few arbitral institutions offer these elements. Arguably, such flexibilities could prolong proceedings due to parties abusing the process. However, the six month time limit applied for the tribunal to render the arbitral award following the Secretariat notifying the terms of reference to the arbitral tribunal could address any concerns in that respect.

On the other hand, disputes with international elements may require immediate communication by distant parties and persons, offering such methods to users will be an advantage in that it prevents loss of time due to communication methods and travel. However, the Rules do not include any provision related to these methods. The ISTAC's Rules seem to improve adopting relevant rules of ICC in this respect. The provisions in Appendix IV of the ICC Arbitration Rules (titled "Case Management Techniques") allow meeting or hearing to be held via media, such as teleconference or videoconference. While hardly any international arbitration centres offer these options to the users, we believe the ISTAC will find this element to be a necessity.

From an institutional point of view, the fact that ISTAC has two Boards, National Arbitration Board and International Arbitration Board, may not be a mainstream method. However, it indicates two issues that the ISTAC wishes to address. The first point is that the ISTAC principally would like to attract local users and disputes. Turkish parties are frustrated by the ineffective court system. A good reliable alternative could be their first choice in case of disputes. The second point is that local disputes could be different in nature compared to international ones. Also, the dynamics and culture of local disputes are different in nature. Therefore, the National Arbitration Board of the ISTAC could be better positioned to address local issue that might arise and respond to the needs of Turkish parties. Such an approach will ultimately help improve the reliability and trustworthiness of the ISTAC, sooner rather than later.

Unlike major arbitral institutions, the ISTAC hesitates to claim a confident exclusivity in the appointment of arbitrators to the extent possible. In fact, the authority of arbitration institutions over the selection of arbitrators is undeniably significant in that the quality of arbitrators appointed for the cases determines the success of institution too. For this reason, prestigious arbitration institutions such as ICC or LCIA claim strict exclusivity and have the final word in the appointment of arbitrators. ISTAC may have wanted to give as much freedom as possible to the parties for the appointment arbitrators to eliminate concerns about ambiguity over the arbitrators who will try their cases. Such flexibility may perhaps be at the expense of its institutionalism, efficiency and reputation, particularly in the long run.

Turkey as Seat a for Arbitration Proceedings

Turkey should be seen as an appropriate arbitral seat for all foreign and domestic parties. Particularly, Istanbul has huge potential, given that it is a centre which ties not only continents, but also cultures and history. Turkey is unique in a geographic sense because Istanbul can be reached by 50 percent of the world's population within four hours.

Although the International Chamber of Commerce in Paris or the London Court of International Arbitration Centre are regularly selected as institutions, due to visa problems for non-European parties, it is increasingly common to have trials in Turkey.

International or regional trade and business in sectors such as construction, transport and energy, often involving Turkish parties, puts Turkey in a position to be good seat for international arbitrations. Consequently, Istanbul has a higher chance to be an international arbitration seat rather than being an arbitration centre in the region, at least in the short term. Having said that, if Istanbul becomes a preferred seat for international arbitration, the Istanbul Arbitration Centre will follow this lead and gain momentum compared to other international arbitration institutions.

Strategies for Arbitrations with Turkish Parties

While it firmly depends on the sector in which parties operate, all alternative dispute resolution mechanisms should be considered wisely. For instance, construction companies in Turkey rely heavily on mediation or negotiation before taking their issues to arbitration. Because they work for sovereigns, it is understandable that they do not opt for arbitration easily without exhausting other methods available.

Turkish construction industry is a trendsetter in terms of dispute management and avoidance, achieved through dispute avoidance and dispute review boards. Involving experts in contracts long before disputes arise contributes massively to developing a manageable and sustainable relationship.

However, if disputes are inevitable, the way in which parties kept their records will be quite decisive, irrespective of whether they engage in institutional or ad hoc arbitration. If the rules of Turkish Civil Procedural Law are followed during arbitrations in Turkey, written evidence submitted by the parties will play a crucial role.

Equally, parties should carefully select their arbitrators in Turkey or for arbitrations having Turkish element. Academics without any commercial tenure, or without a practitioner's experience or knowledge about commercial arbitration, can slow down the process, as well as make unpredictable procedural or substantive decisions. It is equally important to appoint arbitrators who are acquainted with Turkish parties, industries in question.

In addition to the above, parties should be aware of the fact that experts are as important as the arbitrators which is why same, if not more, degree of market, culture, industry knowledge should be sought whilst appointing the experts.

Autonomy of Arbitral Process in Turkey

Pursuant to Article 424 of Turkish Civil Procedural Code numbered 6100, parties are entitled to determine procedural rules for arbitrators to apply in the course of arbitration proceedings, provided the rules do not contradict mandatory aspects of the Code.

However, arbitral awards can be cancelled by state courts. Therefore, the autonomous character of parties seeking recourse to arbitration can be interfered with on the basis that the arbitrated decision is against public order. There is no question that complete autonomy is necessary for arbitration proceedings to reflect parties' true intentions.

Arbitration Friendly Courts in Turkey

In accordance with the New York Convention, to recognise a foreign arbitral award in Turkey, the arbitral decision must not contradict the Turkish public order. However, Turkish judges are particularly interested in this public order exception as a method to review the merits of arbitral decisions. Turkish judges continue to find reasons to set aside arbitral awards.

Nevertheless, commercial courts in big cities such as Istanbul and Ankara have a more reasonable approach. It is a relief that courts in other cities have started to be influenced by this approach. Another challenge is that no special chamber of the Turkish Supreme Court exists to review set-aside applications. Therefore, there is no uniform approach on which parties can rely when enforcing their awards.

Orçun's work includes all aspects of disputes, corporate, and employment law matters. He regularly supports both local and foreign clients during cross-border disputes and debts, often involving high values or complex liability issues. Orçun advises clients on a broad range of issues including contractual claims, shareholder and partnership issues, joint ventures, construction, real estate, agency, professional negligence and employment matters, as well as administrative issues, tax disputes, customs, international trade and business crimes.

First published in the IBA Arbitration Committee newsletter, August 2016.

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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