Turkey: Arbitration In Turkey - National Arbitration

[Extracts from a report prepared for the Turkish Union of Chambers and Exchanges concerning the current state of arbitration in Turkey.]

Commercial arbitration is the settlement of disputes that have arisen or will arise between the parties, not by the courts of any State but by an arbitration award rendered at the end of arbitral proceedings conducted by the arbitrators, who are natural persons appointed by the parties and/or by persons and authorities empowered by law, on the basis of an arbitration agreement between the parties or a contractual provision termed an arbitration clause provided that the relevant laws do not prohibit the subject-matter of a certain dispute to be resolved by arbitration.

The Court of Appeals has the long-standing view that arbitral awards rendered "under the authority of the laws of the Republic of Turkey" (i.e. according to Turkish rules of procedure) are national arbitral awards. In the Turkish legislation, the procedural rules applicable to national arbitration are included in Articles 516 to 536 of the Code of Civil Procedure ("CCP").

Commercial law scholars generally view voluntary arbitration as a private law institution. Procedural law scholars, however, view arbitration as a procedural law institution. The decisions of the Court of Appeals reflect that the Court views national arbitration as a secondary procedural law institution which supersedes litigation within the limits of Article 518 of the CCP which states that "arbitration is not permitted in matters which are not subject to the disposal of the parties".

In national arbitration, the case before the arbitrators must normally be concluded within 6 months after the first hearing. Under Article 529 of the Code of Civil Procedure ("CCP"):

"The arbitrators must enter the award within six months after their first meeting. Otherwise, the proceedings will be deemed void and the dispute will be settled by a competent court. This period may be extended only by express written approval of all the parties to the dispute or by a judge's order." (see endnote 1)

The arbitrator or arbitrators will be held liable if it is determined that they have fault in failing to enter the award within the prescribed period.

In matters that are related to public order, the dispute will be settled not by arbitration but by the courts. In general, disputes which "are not related to public order" may be settled by means of the rules of arbitration provided that there exists a valid arbitration agreement or arbitration clause. Court of Appeals decisions also state that, matters which relate to public order, e.g. disputes which could result in a transfer of title, which relate to lease of certain real property or are subject to the jurisdiction of administrative courts, may not be settled by arbitration.

In addition, arbitrators may not give any provisional remedies as such remedies involve the use of public power.

The decisions of the Court of Appeals reflect the established view of the high Court that, in accordance with Article 516 and subsequent provisions of the CCP, parties must clearly express in the arbitration agreement (or arbitration clause) their will to resolve any disputes between them by arbitration. Any provisions which refer disputes that could not be settled by arbitration would render the arbitration clause invalid.

The arbitration agreement must be made in writing. An arbitration agreement that is not made in writing is void (CCP 517). In its more recent decisions, the Court of Appeals has the view that an arbitration agreement may also be validly made by telex.

We are of the opinion that Article 517 of the CCP, like all other legal provisions requiring a specific form for the validity of a certain act, is subject to the principle of bona fides (good faith). For example, if one of the parties, who has appointed an arbitrator and then taken part in and pursued the arbitration, later claims that a valid arbitration agreement does not exist, such claim would be against the principle of bona fides. The Court of Appeals also shares the same opinion in one of its recent decisions.

On the other hand, a clause providing that either party may first refer a dispute that arises from the performance of a contract to an expert (e.g. an engineer) would not render the arbitration agreement invalid. The function of "arbitrator-experts", which is limited to making a determination of a matter assigned to them (e.g. determination of damage), is different from the function of arbitrators. Arbitrator-experts express such determination in a report but do not give a decision on the matter assigned to them. However, such reports would be binding on the arbitrators in the event that the agreement between the parties includes a provision thereto.

If there exists a valid arbitration agreement between the parties, the parties must refer any disputes to the arbitrators and must not initiate any lawsuits at a court. Nevertheless, even if there is an arbitration agreement between the parties, the court may not dismiss the case ex officio on jurisdiction grounds, but may do so upon an arbitration objection of the defendant. Although the Court of Appeals does not view the arbitration objection as a so called "initial objection" (i.e. a procedural defense which must be made within the period prescribed for the filing of the statement of defense), it would be useful to make such an objection with the statement of defense.

In a national arbitration that does not involve any foreign elements, the dispute will normally be settled by applying the substantive laws of Turkey. On the other hand, if the parties have expressly agreed that the arbitrators shall apply equity principles to the dispute, the arbitrators may validly apply such principles.

In a Unifying Decision of the Court of Appeals dated 28 January 1994 it is stated that:

"If the parties to an arbitration agreement (or arbitration clause) have agreed that substantive legal provisions shall be applied to any dispute between them, then the arbitrators must decide in compliance with such rules. While applying the substantive legal provisions, the arbitrators must take into consideration the provisions relating to public policy, particularly the provisions of the Constitution, jurisprudence and the decisions of the Court of Appeals. Any of the parties may appeal from the arbitral award on grounds that the arbitrators did not comply with such substantive legal provisions, and such an appeal should be examined by the Court of Appeals in the same way as it examines a court decision upon appeal."

Consequently, in cases where the parties have not stated in the arbitration agreement that the disputes shall be resolved within the framework of the principles of equity, it will be possible during an appeal to claim that the arbitral award rendered is not in compliance with the substantive legal provisions of Turkey, and the Court of Appeals may deny an arbitral award upon such appeal on grounds of noncompliance with substantive legal provisions (including but not limited to those relating to public policy).

In addition to the above, a national arbitral award may be denied by the Court of Appeals upon appeal under Article 533 of the CCP in the event that it:

• is rendered after the expiry of the arbitration period (CCP 529);
• is concerned with a matter that was not claimed;
• is about an issue that is not within the jurisdiction of the arbitrators; or
• does not address any claim of any of the parties.

In the event that an arbitral award is denied on the basis that it was not rendered within the arbitration period, then such award is deemed invalid and the dispute must be resolved by a court of competent jurisdiction. In the event that the arbitral award is denied on the basis of any of the other three grounds, then new arbitrators shall be appointed and a new arbitration period shall be determined. (CCP 533)

Pursuant to a Unifying Decision of the Court of Appeals dated 23 October 1972, the newly appointed arbitrators must examine the dispute, and render their award, within the limits of the particular ground on which the initial award was denied. The arbitrators may not repeat an arbitral award if such award was denied by the Court of Appeals. The parts of an arbitral award that survive the denial of the Court of Appeals constitute procedural vested rights for the party in favor of whom they are given.

Under Article 534 of the CCP, the parties may waive neither the right to appeal from the arbitral award nor the right to initiate the procedure for revision of a judgment. In the event that a party waives the foregoing rights, such waiver will be deemed void. The parties may, however, waive the right to appeal after the arbitral award is rendered.

In a recent decision, the 15th Chamber of the Court of Appeals states that "notwithstanding Article 24 of the Rules of Arbitration of the ICC, which stipulates that arbitral awards are definitive, it is possible to appeal from a Turkish arbitral award. A waiver ab initio will not be valid."

Arbitral awards that become definitive upon being affirmed by the Court of Appeals or upon not being appealed from within the required period, constitute res judicata within the meaning of Article 237 of the CCP.

In the case of arbitral awards that become definitive by not being appealed from, a certification from the competent judge is required before the award may be enforced (CCP 536). Certification pursuant to CCP 536 will not be required, however, in order to enforce an arbitral award that has been affirmed by the Court of Appeals.

Arbitral awards that are not appealed from within the required period and are duly certified by the judge, as well as arbitral awards that are affirmed by the Court of Appeals, may be enforced in accordance with the provisions of the Code of Execution and Bankruptcy, as if they were court decisions.

1 Decisions which accept or deny a petition for an extension of the arbitration period according to Article 529 of the CCP may not be appealed.

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.