1. Significant court decisions in the last trimester concerning arbitration
1.1 Decision of the 14th Civil Chamber of the Istanbul Regional Court on timing of raising the arbitration objection1
The dispute between the parties arose from an amendment extending the term of a surety agreement. The parties have agreed that the disputes arising from the surety agreement will be resolved through arbitration. The plaintiff initiated execution proceedings for the collection of the receivable deriving from the general loan arrangement and surety agreement. Thereafter, the defendant objected to the execution proceedings and the plaintiff therefore initiated an action for cancellation of the objection to be able to proceed with the execution proceedings. The action for cancellation of the objection was initiated before Turkish courts despite the existence of an arbitration agreement, therefore, the defendant raised an arbitration objection against the jurisdiction of Turkish courts. The arbitration objection was upheld by the court, which then dismissed the plaintiff's lawsuit on the basis of lack of jurisdiction.
The plaintiff appealed the decision of the court of first instance and argued that the arbitration objection was not raised during the mandatory mediation phase, and that raising this objection for the first time during the execution phase is against the principle of good faith. In addition, the plaintiff argued that the arbitration clause in the surety agreement was invalid as the parties' intent to arbitrate was not clear and definite due to the general loan agreement having a clause referring to the Turkish courts' jurisdiction instead as arbitration.
The 14th Civil Chamber of Istanbul Regional Court concluded that not raising the arbitration objection during mediation is not contrary to the principle of good faith. The regional court further emphasized that the surety agreement was an annex to the general loan agreement and that the respondents' guarantee was provided for the purpose of securing the performances set out in the general loan agreement. Therefore, choice of arbitration in the surety agreement cannot be considered as invalid due to the clause regarding the jurisdiction of the Turkish courts in the general loan agreement. As a result, the regional court dismissed the plaintiff's appeal and upheld the court of first instance's decision.
1.2 Decision of the 11th Civil Chamber of Court of Cassation on validity of the arbitration agreement2
The dispute between the parties arose from a personal guarantee agreement that included an arbitration clause as an annex. The parties had agreed that any disputes arising from this agreement should be resolved in accordance with the Arbitration Rules of the International Chamber of Commerce (ICC) ("ICC Rules"). Although the parties had chosen German law as the governing law of the extension agreement (for the personal guarantee agreement), they had not determined the law to be applied to the arbitration agreement in the annex.
The bank (defendant in the set-aside proceedings) initiated arbitration against the guarantor in connection with prolonging the guarantee term and obtained an arbitral award. The guarantor (plaintiff) then initiated setaside proceedings against the arbitral award in Türkiye, claiming, among others, that (i) the arbitral tribunal unduly applied German law during the arbitration and falsely found itself to have jurisdiction, (ii) the arbitration agreement was not signed and therefore does not meet the formal requirement for validity, (iii) the arbitral tribunal breached the principle of equality of the parties by assisting the defendant in proving its damages, and (iv) the arbitral tribunal inaccurately found itself to have the authority to decide on the penalty for the unjust objection to the execution proceedings. The guarantor thereby requested the arbitral award to be set-aside. On the other hand, the bank argued that formal requirement to execute a valid arbitration clause had been satisfied and the parties had chosen German law.
The regional court determined that the annex extending the term of the personal guarantee agreement contains a provision that the parties would submit any dispute relating to the agreement to arbitration under the ICC Rules and that this annex was signed by the plaintiff. The regional court further ruled that the arbitral tribunal finding itself authorized, in principle, to rule on penalty for the unjust objection to the execution proceedings was not contrary to public order and, therefore, did not constitute a ground for setting-aside. As a result, the setaside lawsuit was dismissed by the regional court. This judgment was appealed by the plaintiff. The Court of Cassation dismissed the request for appeal with the same reasoning as the regional court.
1.3 The Permanent Court of Arbitration renders its award on proceedings under the Indus Waters Treaty
The Permanent Court of Arbitration (PCA) has issued its Award on the Competence of the Court ("Award") in an arbitration initiated by the Islamic Republic of Pakistan against the Republic of India. The dispute relates to a disagreement between Pakistan and India regarding the design of a hydro-electric project in an Indian river called KHEP and whether it is in line with the Indus Waters Treaty signed between the parties in 1960.
The PCA ruled that its jurisdiction remains unaffected by India's absence in the proceedings, and it has the authority to determine its own jurisdiction as per Paragraph 16 of Annexure G to the Indus Waters Treaty 1960 ("Treaty"). The PCA acknowledged that the issues raised in Pakistan's Arbitration Request represent a dispute under Article IX(2) of the Treaty. It confirmed that the current proceedings align with Articles IX(3), (4), and (5) of the Treaty, and the PCA was correctly constituted in accordance therewith. The PCA also established that the appointment of a neutral expert at India's request by the World Bank doesn't impede the PCA's jurisdiction per the Treaty. The PCA therefore deemed itself eligible to examine Pakistan's arbitration request, and any matters left undecided are held over for future consideration.3
2. Other developments in the arbitration practice
(a) Albania introduces new arbitration rules to attract foreign investment
As we reported in the previous edition of Esin Arbitration Quarterly, the Albanian Parliament passed a new arbitration law, which not only follows the 1985 United Nations Commission on International Trade Law (UNCITRAL) Model Law, but also contains elements of influence from the arbitration laws of Germany, Italy, France, Spain, Kosovo, Croatia, and Serbia.
This new legislation sets up a comprehensive legal structure that applies to all domestic and international arbitrations in Albania, in addition to managing the enforcement or revocation of any arbitral awards under its jurisdiction. The draft law empowers the arbitral tribunal to decide on its own jurisdiction and allows parties the liberty to determine the law that will preside over their conflict. In situations where the parties fail to decide on a governing law, the principles of private international law or relevant Albanian statutes will come into effect.
The new legislation requires arbitration agreements to be in written form meaning that any oral agreement will be deemed invalid. Furthermore, the draft law explicitly states that the arbitration clause can be concluded independently from the main agreement. The draft law further outlines the process for setting-aside awards, stipulating that they must be filed before the Court of Appeal. Valid grounds for setting-aside include where one party is incapacitated, the governing law deems the principal agreement unlawful, or if the award conflicts with public policy. The draft law makes it so that the parties cannot further appeal to the Supreme Court where the Court of Appeal has ruled on the potential setting-aside of the arbitral award.
The draft law permits the parties to the arbitration to decide on the number of arbitrators; however, if no consensus is achieved, the arbitral tribunal will consist of three arbitrators. The draft law further introduces important qualifications for the arbitrators, such as not having criminal convictions and maintaining impartiality and independence from the parties. The draft law allows for parties to challenge an arbitrator where they fail to comply with mutually agreed-upon criteria or has had previous advisory or testimonial roles for one of the disputing parties. The requirement of impartiality further extends to the spouses of the arbitrators to ensure that neither the arbitrator nor their spouse has a familial or professional interest in the case.4
(b) Hungary's bold move: Shaping arbitration in construction disputes
The Hungarian government has implemented a new provision in Act XXXI 2023, which enables the courts to set-aside arbitral awards rendered in relation to construction disputes if the arbitral tribunal fails to consider expert opinions issued by the Jeliesitésigazolási Szakértői Szerv (TSZSZ), a board of technical experts. This change was adopted by a recent act amending the Hungarian Arbitration Act 2017. The TSZSZ provides technical opinions on performance and fee claims in construction disputes.
With the implementation of the new provision, the arbitral tribunals are now obligated to consult the expert opinions of TSZSZ and are required to justify their decision if they choose not to rule in line with an expert report. The new provision introduces a third ground for setting-aside awards, in addition to the grounds of non-arbitrability and public policy, in line with the UNCITRAL Model Law. However, experts have expressed concerns about the independence of the TSZSZ and its impact on the integrity of arbitration and its international application. Some practitioners believe that the provision may create uncertainty but is unlikely to have a significant impact on practice. The applicability of the amendment to pending cases is also under discussion. Despite some concerns, the President of the Hungarian Arbitration Association stresses the importance of maintaining Hungary's reputation as a safe place for arbitration and the pro-arbitration stance of its courts.5
(c) Cloud-based technologies to supplement ICC Case Connect
ICC has announced its partnership with tech specialist Opus 2 to build a new case management system that will complement the existing ICC Case Connect, which is a case management platform that was launched in 2022 that allows its users to securely share relevant documents and is accessible to all case users.
This collaboration follows the ICC Dispute Resolution Services 2023 pledge to become a pioneer in the transformation of dispute prevention and resolution by magnifying the benefits of a digitalized economy and harnessing technology.
The ICC believes that the new ICC Case Connect, which will be released in 2024, will be the "first of its kind to manage the scale and complexity of cases managed under the ICC Rules of Arbitration and ADR" and will allow its network to handle the volume of cases with ease.6
(d) New code of conduct for arbitrators
As we reported in the previous Esin Arbitration Quarterly,7 UNCITRAL and the International Centre for the Settlement of Investment Disputes (ICSID) collaborated on a code of conduct for arbitrators in investor-state disputes, which has finally been adopted by UN member states during UNCITRAL's 56th annual session held in July 2023 in Vienna.
The ICSID has revealed its intention to engage in further consultations with its member states regarding the possible application of the code to ICSID proceedings. Nonetheless, the code will be applicable to arbitration proceedings if the parties agree on its application or as required in the arbitration agreement (instrument of consent).
The initial draft of the code of conduct, introduced in 2020, included provisions limiting the number of cases arbitrators can handle concurrently, introducing penalties for unethical conduct, and implementing measures to prevent "double-hatting" – the practice of arbitrators also serving as counsel or experts in other Investor-State Dispute Settlement (ISDS) cases.
The practice has been a subject of contention, with arguments spanning from its alleged impact on arbitrators' neutrality to the potential benefits of offering them a more comprehensive perspective. According to the finalized code of conduct, arbitrators are prohibited from functioning as legal counsel or expert witnesses in any ISDS case, or similar action involving the same measure or parties, for three years after their arbitration role. In situations where the same provisions of the same instrument of consent are involved, the prohibition period gets reduced to a year. However, the code allows for opposing parties to reach an agreement and opt out of these clauses.
Recognizing the necessity for a set of norms to control the mediation process, UNCITRAL also issued guidelines on the use of mediation in investor-state dispute settlement, which refers to the ICSID rules for investor-state mediation.8
(e) SVAMC AI Regulations on International Arbitration
In cooperation with leading technology companies, law firms, ADR organizations, and educational institutions, the Silicon Valley Arbitration and Mediation Center (SVAMC) inaugurated an AI Task Force in February 2023. The 34-person group, under the leadership of Benjamin I. Malek, is dedicated to addressing the distinct issues arising from uncontrolled mishandling of sophisticated AI instruments. In response, the AI Task Force formulated the Guidelines for the Use of AI in International Arbitration ("AI Guidelines"), aiming to substantiate the optimal strategies concerning AI's application in current and forthcoming arbitration procedures.
Click here to continue reading . . .
1. 14th Civil Chamber of Istanbul Regional Court File No: 2022/438, Decision No: 2023/610, dated 6 April 2023.
2. 11th Civil Chamber of Court of Cassation File No: 2022/5454, Decision No: 2022/8276 dated 23 November 2022.
3. You may find more details on the case here.
4. You may find more details here.
5. You may find more details here.
6. You may find more details here.
7. The eight issue of Esin Arbitration Quarterly can be accessed here.
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.