Turkey: State Courts To Determine Effectiveness Of Turkey’s International Arbitration Law

With the introduction of the International Arbitration Law in July 2001 (the "Arbitration Law"), the Turkish legislator clearly expressed its intention to promote arbitration as a means of dispute resolution. Parties had their frights about filing arbitration proceedings in Turkey thanks to the Turkish courts’ tendency to review the dispute on its merits as well as procedure. For foreign investors, this usually meant excluding Turkey as the venue for arbitration, regardless of whether or not it would be the most convenient venue for the proceedings, relying on the fact that Turkey is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"). The Arbitration Law is intended to eliminate those frights and is expected to scale back the intervention by state courts to levels commensurate with international best practice.

The purpose of the Arbitration Law is to regulate the procedures and rules of international arbitration. It is applicable to disputes where the seat of arbitration is Turkey and there is a foreign element involved or where the Arbitration Law is selected by agreement of the parties, the arbitrator, or the arbitral tribunal.

The Arbitration Law was modelled after the principles of the UNCITRAL Rules of Arbitration, and provides for only one legal action for challenging an arbitral award, i.e. setting aside proceedings. Thanks to the Arbitration Law, the parties no longer need to file a separate suit for enforcing the award. However, either party may apply to a local court for setting it aside. The principal advantage of the Arbitration Law in this respect is that the possible grounds for setting aside proceedings have been set forth in a numerus clausus manner. These grounds were inspired by the New York Convention, and exclude the possibility of any appeal on merits. The Turkish Parliament’s general justification –published by the Parliament in connection with the draft law in 2001- states that the primary objective of the Arbitration Law is to ensure a speedy dispute resolution process with as little intervention by state courts as possible.

Turkish scholars have been consistently clear on the point that the state courts cannot review an arbitral award on its merits, if that award was rendered within the framework of the Arbitration Law. Thus far the Court of Appeals has not ruled otherwise. According to the Turkish Parliament’s justification for the Arbitration Law, state courts cannot intervene on any grounds outside the scope of those set forth under Article 15 of the Arbitration Law. The only remedy for a party that is not satisfied with the arbitral award is an action for setting aside (i.e. annulment). Under the Arbitration Law, the reasons for annulment are enumerated and these reasons are exhaustive. For instance, the award can be annulled if the court determines, among others, that (i) the procedure in selection or appointment of arbitrators set forth in the parties’ agreement or stipulated in the Arbitration Law is violated; or (ii) the award is not issued within the agreed upon or legal term for arbitration. The Arbitration Law expressly prevents the judge from going into the merits of the dispute when the award is evaluated as the result of the annulment action.

The Court of Appeals did create some confusion in 2003, when it held that the Arbitration Law was not applicable to arbitration proceedings that were pending at the time of its enactment in July 2001. Under Turkish law, disputes must, in principle, be reviewed in light of the substantive legal rules that are in force at the time of occurrence of the transaction in question; whereas if a procedural law is amended or a if new law related to procedure is introduced, then that law must be applied immediately. The rationale behind this principle is that the legislator introduces new procedural rules in order to make dispute resolution more efficient.

The Court of Appeals’ decision resulted in the application of Turkey’s Civil Procedural Code (according to the interpretation of which an award can be appealed on its merits). This approach of the Court of Appeals attracted heavy criticism by scholars, who drew attention to the fact that such narrow interpretation of the Arbitration Law would essentially hinder its effectiveness and remove its appeal. Consequently, in 2004, the Court of Appeals clarified its view, stating that the provisions of the Arbitration Law must be applied to any international arbitration with a seat in Turkey, regardless of when the proceedings were initiated and whether or not such arbitration was pending at the time of entry into force of the Arbitration Law.

In light of the Court of Appeals rulings, it is clear that any potential controversy or debate on this matter would be avoided by including an express provision in the Terms of Reference (as per Article 10(E) of the Arbitration Law) stating that the Arbitration Law shall apply to the resolution of the dispute. The lack of such provision in the Terms of Reference was the triggering point of the first Court of Appeals decision. If the parties agree on the Terms of Reference that the Arbitration Law is applicable to their arbitration, then the Arbitration Law would govern the dispute.

Recent legislative efforts reveal that Turkey is determined to establish the legal basics for an arbitration friendly environment. The practice also shows that Turkish courts are letting go of their fears regarding arbitration, allowing liberalization trends to find their way into practice in this area of law as well. The Arbitration Law seems to eliminate the previous concerns of foreign investors, by addressing the problems regarding the applicability, appeal process and local courts’ examination of the merits of a dispute and it is expected that future Court of Appeal decisions will confirm this. Indeed, Turkey is taking strong steps to create a better environment for international investment.

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