The settlement of investment disputes by arbitration is becoming accepted as an important and necessary step in the creation of an environment friendly to investors. Settlement of such disputes in a neutral forum, within a reasonable time frame and with awards that are enforceable all combine to produce a proper legal framework for investments. Host governments have used national legislation to encourage foreign investments. However, host states are subject to political, economic and even ideological pressures, which may influence their commitment to foreign investments. Bilateral Investment Treaties (BITs) are agreements between two countries for the reciprocal encouragement, promotion and protection of investments in each other's territories, that enables an increase in the level of commitment of the hosting state to the international level. For example, most BITs guarantee for international investors fair and equitable treatment, protection from expropriation, free transfer of capital and income and full protection and security. Perhaps most importantly, many BITs allow Alternative Dispute Resolution, whereby an investor can have recourse to international arbitration, often under the auspices of the International Centre for Settlement of Investment Disputes (ICSID). International agreements afford investors greater protection, where settlement of disputes by arbitration an important element of such agreements.
ICSID provides a specialized international method for investment dispute settlement and awards which can be enforced in any of the current 155 signatory states, in the case of ARB procedure where the ICSID rules are followed, as if it were the decision of its own courts (Washington Convention, Article 54). With such international agreements investors can obtain strong international protection for different aspects of investments, including settlement of investment disputes by arbitration between a host state and a foreign investor. Turkey has signed 80 BITs with different countries and 64 of them have entered into force. Furthermore, Turkey ratified the Energy Charter Treaty (ECT) that includes a provision regarding ICSID arbitration in 2001. Due to the steps taken by Turkey to create a more appropriate legal climate for investments during 90's, foreign investors have brought six arbitration cases before the ICSID against Turkey since 2002.
In an investment dispute which Turkey is party as a host state, a foreign investor has two alternative procedures to initiate an ICSID case against Turkey. These are ICSID Arbitration Rules (ARB Procedure) or ICSID Additional Facility Rules (AFR Procedure). Investors usually prefer ICSID ARB procedure, if two conditions are met for initiating an arbitration case. First, both host and home state (investor's state) should be party to the Washington Convention. Second, parties to the investment dispute should give their consent to the ICSID arbitration. Initiating ARB procedure is a more beneficial procedure than any other arbitration process for the investors because the arbitration award is enforceable in any country that is party to the Convention. Investors may prefer the AFR procedure for bringing a case before ICSID against Turkey when they are not eligible to initiate arbitration according to ARB procedure. In AFR procedure, unlike the ARB procedure, the arbitration award given by an ICSID tribunal cannot be recognized and enforced automatically in any country that is party to the Washington Convention. Despite enforcement difficulties, investors may follow AFR procedure for different reasons. For example, an investor may initiate the AFR procedure against Turkey in cases where his state is not party to the Washington Convention. Since there is no automatic enforcement in this process, requirements of Turkish Law for the enforcement of arbitral awards have to be met.
Mechanisms for Initiating ICSID Cases Against Turkey
The first mechanism (the ICSID arbitration clause in a contract between Turkey and the investor) has not been used so far, which makes the ICSID arbitration available. This was because of the legal obstacles to inserting international arbitration clauses in such contracts (so-called 'concession contract') until early 2000. In fact, majority of those contracts were originally domestic contracts before 2000, and were signed between Turkey and Turkish investors. After having signed those concession contracts, the Turkish investors transferred their share to foreign investors in order to make the disputes international. By doing so, they also made possible the ICSID arbitration for those disputes.
The second legal mechanism is found in the bilateral investment treaties signed between Turkey and the investor's state. As mentioned before, if a BIT provides ICSID arbitration, it means that contracting states give their consent to the ICSID arbitration by the BIT provision. In most of the cases against Turkey, ICSID arbitration process has been initiated by using BIT's between Turkey and the investor's State. For example, in the case of PSEG Global v. Republic of Turkey, the US investor initiated ICSID arbitration process through the second mechanism, which was the BIT between Turkey and the US. In this case, there was no ICSID or any other arbitration clause in the concession contract between Turkey and US investor. Another good example of this mechanism is in Saba Fakes v. Republic of Turkey. In this case, a Dutch investor who took over some shares of a Turkish investor relied on the ICSID arbitration provision in the BIT between Turkey and the Netherlands. In Motorola v. Republic of Turkey, the US investor brought the dispute before the ICSID through the provision in the BIT between the US and Turkey.
The third legal mechanism is multilateral international conventions. In this situation; investors cannot rely on BIT's simply because there is no BIT between Turkey and his state. Sometimes, even if there is a BIT between Turkey and the investor's State, an investor may prefer to rely on a multilateral convention such as the ECT to which his state and Turkey are party. As a multilateral convention, ECT provides international arbitration (including ICSID) for the settlement of energy investment disputes. In three arbitration cases against Turkey before ICSID, the foreign investors relied on the ECT to which Turkey and their states are party. In the Libananco case, there was neither a BIT between Turkey and the investor's State nor a contract between the investor and Turkey. The investor relied on article 26 of ECT, because both states (Turkey and investor's state) were party to the ECT. In Cementownia and Europe Cement Investment, the investors relied on Article 26 of the ECT. In both disputes arising out of an energy investment, the investors' state (Poland) was not party to the Washington Convention, however the Polish Investors, by relying on the reference in Article 26 of ECT, had the opportunity to initiate ICSID arbitration against Turkey pursuant to the ICSID AFR procedure.
Being a party to the Washington Convention does not mean that Turkey gives its consent to ICSID arbitration. Consent can usually be given by an investment contract, a BIT, or through the ECT. Although consent can be also given by a provision in national investment legislation, this is not relevant for Turkey since Turkey prefers international conventions to national investment legislation in this respect. However, being a party to the Washington Convention means that Turkey should consider carefully the effects of multilateral conventions which includes ICSID arbitration. Otherwise Turkey would deal with unexpected ICSID cases by investors whose states are not party to the ICSID convention. Since multilateral conventions may give an opportunity for foreign investors to have recourse to ICSID AFR arbitration, investors can easily initiate ICSID AFR procedure against Turkey, even in cases when their state is not a contracting state of the Washington Convention.
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.