Arbitrability of Disputes Arising From Joint Stock Company Law
Cem Veziroğlu, MJur (Oxon)
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INTRODUCTION
While only contractual claims may be requested in arbitral proceedings carried out in accordance with shareholders' agreements (“SHA”), it is not always possible to prevent claims peculiar to corporate law [1] from being asserted in local courts, and therefore contradicting judgments may be given in these parallel proceedings. [2] For this reason, the rights and obligations stipulated in the SHA are carried into the articles of association (“AoA”) in order to make these mechanisms applicable on corporate level as well. However, the validity of a statutory arbitration clause in the AoA entails a series of issues in terms of both arbitration law and corporate law. [3] Since the provisions of the AoA cannot be adequately examined by trade registries in practice, the validity of a statutory arbitration clause that has been registered and published remains uncertain until a court decision or arbitral award is rendered. Our analysis addresses the validity of an arbitration clause in the AoA of a joint stock company in respect of arbitrability [4] , in proceedings governed by Turkish Civil Procedure Code No. 6100 ("CPC") and Turkish International Arbitration Code No. 4686 ("IAC").
I. Distinction Between Arbitrability and Contractual Freedom within the Articles of Association
The statutory arbitration clause stipulated in the AoA of a joint stock company may gain validity only in respect of arbitrable disputes. At this point one must pay attention to the distinction between arbitrability and contractual freedom within the AoA. Because, whether an arbitration clause in the AoA concerning a certain dispute is permissible under corporate law and arbitrability of such dispute are two distinct issues. In the event that a dispute is non-arbitrable, an arbitration clause can neither in the AoA, nor in SHA be validly stipulated. However, there may be cases where the arbitration clause cannot be included in the AoA, although the dispute is actually arbitrable.
As a matter of fact, contractual freedom in the joint stock company law is much more restricted, compared to that of contracts based on the law of obligations. Through the enactment of Turkish Commercial Code No. 6102 (“TCC”), the principle of mandatory provisions (TCC 340), the so-called Satzungsstrenge, was introduced into our legal system from German Stock Corporation Act § 23/5, and this principle further narrowed the limits of such freedom. [5] Because, according to said provision, the AoA of the joint stock company may deviate from the TCC only in cases where it is explicitly permitted. If the provision is interpreted in a strict way, stipulating a provision in the AoA on any issue not regulated under the TCC would constitute a deviation from the law, as it would not be “explicitly permitted”. [6]
If such an interpretation is accepted, an arbitration clause regarding the disputes related to the controlling company’s right to purchase the minority’s shares (TCC 208) cannot be included in the AoA whilst there is no provision in the TCC allowing an arbitration clause in an AoA for such a dispute or any dispute in general. Nevertheless, an arbitration agreement can be validly concluded in a SHA, since this dispute is in fact arbitrable.
II. Arbitrability of Joint Stock Company Law Disputes in Doctrine and Case Law
Under Turkish law the issue of arbitrability is regulated in similar way for international (IAC 1/4) and domestic (CPC 408) arbitration. Accordingly, disputes relating to rights in rem over an immovable property in Turkey and disputes arising from issues not subject to parties’ consent are non-arbitrable. Being subject to parties’ consent means that parties may freely dispose of the matter in dispute by way of settlement. [7] However, there are not any positive norms in corporate law as to which disputes are arbitrable and whether the AoA may include arbitration clause or not.
Although disputes arising from joint stock company law are generally considered to be arbitrable in the doctrine [8], it is usually argued that it is not possible to arbitrate the disputes relating to invalidity of general assembly or board of directors resolutions, as well as corporate insolvency and dissolution cases. [9] It is observed that the Turkish Court of Cassation (“CC”) respects the distinction adopted by the majority of the doctrine. In its judgment dated 7.4.1983, the CC indeed upheld the decision that the dispute over the request for registration in the stock ledger must be resolved by arbitral tribunal in accordance with the arbitration clause in the AoA. [10] Similarly in a judgment dated 15.2.2010, it was affirmed by the CC that the liability suit brought by a member of limited liability company against directors (who are also members of the company) for recovery of reflective losses could be adjudicated via arbitration by virtue of the arbitration clause in the AoA. [11] Although the judgment concerns a limited liability company, there is not a reason to reach a different conclusion for joint stock companies.
However, in its judgment of 9.4.2014, the CC ruled for invalidity of arbitration agreement concerning corporate dissolution for just causes [12] (TCC 531) or for lack of mandatory organs (TCC 530). [13] Although the arbitration clause was included in the SHA in the subject matter of this judgment, the same conclusion can be reached for the arbitration clause in the AoA since the reason of the judgment were based on non-arbitrability. Besides, the court’s statement that “an arbitration clause in an agreement among the shareholders or an arbitration agreement is null and void” should be understood as exclusive to actions for corporate dissolution, because the CC conducted an examination only in terms of action for dissolution as per TCC 530 and 531 and restricted the non-arbitrability only to action for dissolution in its reasoning. The CC ruled in its judgment dated 5.12.2012 that arbitration is also not possible for the annulment of general assembly resolutions. [14] Although this judgment involves a quite generic statement that “a provision regarding arbitration in the articles of association or an arbitration agreement is null and void”, for the same above mentioned reasons, this expression should be understood as exclusive to the annulment of general assembly resolutions.
III. Our Proposals in Consideration of Swiss and German Laws
Although intra-corporate disputes are generally considered arbitrable in German law [15], it is observed that the discussion in the doctrine and case law centers around the invalidity of general assembly resolutions. [16] The problem has been resolved through case law with respect to partnerships, limited partnerships and limited liability companies. [17] Although the German Federal Court of Justice has not yet delivered a judgment concerning joint stock companies in this context, the discussion in the doctrine focuses on the contractual freedom within the AoA ( Satzungsstrenge), and it is widely accepted that the Satzungsstrenge does not prohibit incorporation of arbitration clause into the AoA of privately held joint stock companies. [18] Following the judgment of the Federal Court in 2009, Supplementary Rules for Corporate Law Disputes [19] and Model Clause for Corporate Law Disputes [20] published by German Arbitration Institution [ Deutsche Institution für Schiedsgerichtsbarkeit e.V (DIS)] entered into effect as of 15.9.2009. Between 2010 and 2017, a total of thirty two arbitration proceedings relating to corporate law disputes have been filed before DIS which are subject to these rules. [21]
Similarly, it is seen that a positive attitude is adopted almost unanimously in Switzerland in favor of arbitrability of corporate law disputes. [22] The discussion in the context of disputes regarding the invalidity of general assembly and board of directors resolutions, as well as corporate dissolution concentrates on the principle of sole liability in joint stock companies (Swiss Code of Obligations Article 620/2, 680; TCC 480/1) . [23] It appears that the pro-arbitration approach in Switzerland has also been reflected in legislative activities with a view to put an end to debate on this issue and to ensure legal security. In fact, Article 697n of the Swiss Draft Code of Obligations [24] ("Draft") dated 23 November 2016 explicitly stipulates that the arbitration clause may be incorporated in the AoA of a joint stock company. The preamble to the Draft states that said article aims to clear the doubts by providing a legal basis for the statutory arbitration clauses in the AoA. Moreover, it is confirmed once again that such actions as invalidity of general assembly resolutions, corporate dissolution and liability of board members are already arbitrable. [25]
Since Turkish corporate law is under the influence of Swiss and German laws, it can be assumed that a more liberal approach in this context is likely to be adopted in our country over the time. However, since the issue is at the intersection of corporate law and arbitration law, differences in the arbitration rules of the relevant countries are not to be ignored. For instance, Turkish law requires that the parties should be able to freely dispose of the matter in dispute with respect to arbitrability, whereas the criterion adopted in Article 177 of Swiss Federal Code on Private International Law [26] ( Bundesgesetz über das Internationale Privatrecht) and §1030 of German Code of Civil Procedure [27] ( Zivilprozessordnung) is whether the claim relates to economic interests.
Conclusions and Proposals
- Arbitrability and contractual freedom within the AoA are two distinct issues. If a dispute is non-arbitrable, an arbitration clause can be stipulated neither in the AoA nor in the SHA. However, there may be cases where the dispute is an arbitrable one, but arbitration clause cannot be included in the AoA pursuant to the joint stock company law.
- It is suggested by the majority of the doctrine that disputes arising from joint stock company law are generally arbitrable, but that the disputes concerning the invalidity of general assembly and board of directors resolutions, as well as actions for corporate insolvency and dissolution are non-arbitrable. It is observed that the CC respects this distinction in general terms. As a matter of fact, the CC upheld the decision that a lawsuit brought against the directors (who are also members of the company) for recovery of reflective losses, and the action filed against the company for registration in the stock ledger may be resolved by arbitral tribunal in accordance with the arbitration clause in the AoA. However, it also decided that disputes related to corporate dissolution for just causes or for lack of mandatory organs and the annulment of general assembly resolutions are non-arbitrable.
- In German and Swiss laws, corporate law disputes are, in principle, considered to be arbitrable. In Switzerland, the validity of the arbitration clause in the AoA is discussed from different aspects, however the Draft aims to provide a clear legal basis to arbitrability question. In Germany, the arbitrability discussion regarding the invalidity of general assembly resolutions of partnerships, limited partnerships and limited liability companies has been resolved through case law. The discussion with respect to joint stock companies centers around the principle of mandatory provisions (Satzungsstrenge), and the doctrine shows a positive approach especially for privately held joint stock companies.
- The necessary actions to be taken in order to increase the legal certainty in the context of this problem under Turkish law can be listed as follows:
- The availability and conditions to stipulate an arbitration clause in the AoA should be clearly regulated under the TCC.
- Supplementary rules as annex to the ISTAC Arbitration and Mediation Rules should be established by taking the problems specific to corporate law disputes into consideration,
- With a view to facilitate incorporation of an applicable and valid arbitration clause into the AoA by the parties, a model arbitration clause referring to the above-mentioned rules should be prepared and published.
[1] Invalidity of general assembly and board resolutions, actions for dissolution and directors’ liability are common examples for such claims.
[2] Olivier Bloch, Les Conventions d’Actionnaires et le Droit de la Société Anonyme, Genève 2006, 371-372.
[3] Arbitrability of the dispute, exclusive jurisdiction of the court, the parties’ consent to arbitration and written form requirement of the arbitration agreement can be cited among those related to arbitration law, while those related to corporate law include whether the arbitration clause in the AoA is of corporative nature or not, the limits of contractual freedom within the AoA and the quorum for amendment of the AoA including an arbitration clause.
[4] In this paper the term “arbitrability” is used to solely express the question of whether the subject matter of the dispute can be settled by arbitration proceedings rather than whether an arbitral tribunal has the authority to decide.
[5] The provisions relating to the principle of sole liability of shareholder (TCC 480/1) and nullity of general assembly resolutions restricting the shareholders’ cause of action (TCC 447/1.a) must also be considered within the context of arbitration clause stipulated in the AoA.
[6] The Turkish Court of Cassation (“CC”) decided in 11 th Civil Chambers Date 7.7.2015, Case No. 2014/15813, Decision No. 2015/8851, that the AoA may introduce the obligation of being shareholder for the members of the board of directors, because TCC 359, which regulates the eligibility of board members, is not a conclusive provision, hence “complementary” provisions may be stipulated in the AoA. However, the decision does not pertain to “deviation” from law according to TTC 340 sentence 1, but to “completion” of an existing provision of law. The CC has not addressed the question of whether stipulating a clause in the AoA on an issue not regulated by law would constitute a deviation from law or not.
[7] Yavuz Alangoya/Kamil Yıldırım/Nevhis Deren-Yıldırım, Medeni Usûl Hukuku Esasları, İstanbul 2009, 601; Baki Kuru/Ramazan Arslan/Ejder Yılmaz, Medeni Usul Hukuku, Ankara 2014, 783; Hakan Pekcanıtez/Ali Yeşilırmak, Ed.; Hakan Pekcanıtez/Muhammet Özekes/Mine Akkan/Hülya Taş Korkmaz, Pekcanıtez Usul Medeni Usul Hukuku, C.III, 15. bası, İstanbul 2017, 2636.
[8] For the period of Turkish Commercial Code No. 6762, see Hayri Domaniç, Anonim Şirketler Hukuku ve Uygulaması, TTK Şerhi II, İstanbul 1988, 230; Reha Poroy (Ünal Tekinalp/Ersin Çamoğlu), Ortaklıklar ve Kooperatif Hukuku, 11. bası, İstanbul 2009, N. 731; Arslan Kaya, Anonim Ortaklıkta Pay Sahibinin Bilgi Alma Hakkı, Ankara 2001, 331-332; Mehmet Bahtiyar, Anonim Ortaklık Anasözleşmesi, İstanbul 2001, 209-211; Mehmet Helvacı, “Anonim Ortaklık Genel Kurul Kararlarının İptali Davalarının Tahkim Yargılamasına Uygunluğu Üzerine Düşünceler”, II. Uluslararası Özel Hukuk Sempozyumu, TMSF/Marmara Üniversitesi, İstanbul 2009, 190; Burak Huysal, Milletlerarası Ticari Tahkimde Tahkime Elverişlilik, İstanbul 2010, 292-332. For the period of TCC, see Rauf Karasu, Anonim Şirketlerde Emredici Hükümler İlkesi, 2. bası, Ankara 2015, 173-174; Ayşe Şahin, Anonim Ortaklığın Haklı Sebeple Feshi, İstanbul 2013, 373.
[9] For the opinion that only disputes relating to economic interests (refund of profit shares, interest before commencement of operations, financial rights and responsibilities of the board members, request for default interest and penalty due to capital commitment etc.) are arbitrable, but disputes related to annulment of company organs’ resolutions and corporate insolvency and dissolution are not arbitrable, see. Bahtiyar, 211; Karasu, 173; Pekcanıtez/Yeşilırmak, 2637. On non-arbitrability of annulment of general assembly resolutions, see. Erdoğan Moroğlu, Anonim Ortaklıkta Genel Kurul Kararlarının Hükümsüzlüğü, 7. bası, İstanbul 2014, 292-293; Hasan Pulaşlı, Şirketler Hukuku Şerhi, C. I, Ankara 2011, 865; In the same vein due to exclusive jurisdiction of local courts for annulment of general assembly resolutions, see. Cemal Şanlı/Emre Esen/İnci Ataman Figenmeşe, Milletlerarası Özel Hukuk, 4. bası, İstanbul 2015, 396 fn. 147. Helvacı holds that the subject matter of such disputes is arbitrable, but the mandatory procedural rules of the action prevent the arbitration, see. Helvacı, 200-202. For the opinion that annulment of general assembly resolutions is arbitrable and one may have recourse to arbitration under certain conditions, but the requests as to nullity and inexistence of such resolutions are non-arbitrable, see. Huysal, 320. Although the annulment of general assembly resolutions is considered to be a part of the law of legal entity under CCP 367/2, they are arbitrable as being subject to parties’ consent, because Turkish law does not have significant differences in this respect when compared to German and Swiss laws, see. İsmail Kırca (Feyzan Hayal Şehirali Çelik/Çağlar Manavgat, Anonim Şirketler Hukuku, C. 2/2, Ankara 2016, 229 fn. 531 , 233.
[10] CC 11 th Civil Chambers Date 7.4.1983, Case No. 1983/1595, Decision No. 1983/1780, (www.kazanci.com)
[11] CC 11 th Civil Chambers Date 15.2.2010, Case No. 2008/9429, Decision No. 2010/1648, (www.kazanci.com). However, the CC refused the request for arbitration on the ground that the case could not be separated with regard to the directors who are not members of the company. In our opinion, if it is accepted that arbitration clause in the AoA is applicable on corporate level, the arbitration clause must also be binding for directors who are not shareholders.
[12] It is suggested that statutory arbitration clauses with regard to corporate dissolution for just causes should be permissible, provided that the claimant has the option to apply to local court or arbitration, see Şahin, 373.
[13] CC 11 th Civil Chambers Date 9.4.2014, Case No. 2014/141, Decision No. 2014/6951, (www.kazanci.com).
[14] CC 11 th Civil Chambers Date 5.12.2012, Case No. 2011/13485, Decision No. 2012/19915, (www.kazanci.com).
[15] Christoph Benedict/Burkhard Gehle/Uwe Schmidt, in: Born/Ghassemi-Tabar/Gehle (hrsg.), Münchener Handuch des Gesesellschaftsrechts, B. VII, § 146 Rdn. 1-4.
[16] Christian Borris, “Die Schiedsfähigkeit gesellschaftsrechtlicher Streitigkeiten in der Aktiengesellschaft”, NZG 2010, 481-482.
[17] In 1996 the German Federal Court of Justice did not find the actions for annulment and nullity of limited liability company’s general assembly resolutions as non-arbitrable per se. However, the Federal Court held that the arbitral award could not have erga omnes effect, since every shareholder’s right to be heard could not be respected in an arbitration based on the arbitration clause in question (BGH 29.3.1996 II ZR 124/95). In 2009, the Federal Court specified the prerequisites and minimum standards of an arbitration clause to be stipulated in the AoA for the arbitral award to have erga omnes effect: (i) unanimous vote is required for inclusion of such a clause in the AoA, (ii) the availability of shareholders to participate in the arbitration must be ensured, (iii) participating shareholders must be granted to have a say on the appointment of arbitrators and (iv) consolidation of actions must ensured in order to prevent contradictory judgments (BGH 6.4.2009 II ZR 255/08). Lastly the Federal Court confirmed these requirements in its judgment of 6.4.2017 with respect to partnerships and limited partnerships as well.
[18] Martin Beckmann, Statutarische Schiedsklauseln im deutschen Recht und internationalen Kontext, Frankfurt Am Main 2007, 86; Diana Bechte-Horbach, Das Schiedsverfahren bei innergesellschaftslichen Streitigkeiten von Kapitalgesellschaften, Dresden 2015, 56-60; Christian Duve/Philip Wimalasena, in: Böckstiegel/Kröll et.al. (hrsg.), Arbitration in Germany: The Model Law in Practice, 2.ed., 2015, 938-940.
[19] DIS-Supplementary Rules for Corporate Law Disputes 09 (SRCoLD), (www.disarb.org).
[20] DIS-Model Clause for Corporate Law Disputes 09, (www.disarb.org).
[21] For statistical data, see. www.disarb.org.
[22] Peter Forstmoser/Arthur Meier-Hayoz/Peter Nobel, Schweizerisches Aktienrecht, Bern 1996, 111, N 85; Peter Böckli, Schweizer Aktienrecht, 4. Auf 2009, 2302 N 149; Gabrielle Kaufmann-Kohler/Antonio Rigozzi, International Arbitration: Law and Practice in Switzerland, Oxford 2015, N 3.47.
[23] Acting on the basis that Swiss Federal Court defines arbitration clause only as a procedural rule, the principle is not violated, see. Dieter Gränicher, in: Honsell/Vogt/Schnyder/Berti (ed.), Basler Kommentar zum IPRG, Basel 2013, Art 178 N 67. Karş. Benjamin Büchler/Hans Caspar von der Crone, “Die Zulassigkeit statutarischer Schiedsklauseln”, SWZ 3/2010, 263.
[24] FF 2017, 625. (https://www.admin.ch/opc/fr/federal-gazette/2017/625.pdf).
[25] FF 2017 353, 494. (https://www.admin.ch/opc/fr/federal-gazette/2017/353.pdf).
[26] In Switzerland, claims that the parties can dispose of freely are arbitrable according to Article 354 of the Swiss Civil Code of Procedure (Schweizerische Zivilprozessordnung), to which domestic arbitration is subject.
[27] The provision applies to both international and domestic arbitration.
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Enforcement of ISTAC Arbitral Awards in Turkey
Att. Ceren Çakır Akgün, LLM. & M. Ece Uyanık
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One of the most frequently raised questions is whether an ISTAC arbitral award will be subject to recognition and enforcement of foreign arbitral awards action in order to be executed before the enforcement offices in Turkey, or not.
If a domestic arbitral award is concerned, a separate action is not required. Recognition and enforcement of the ISTAC arbitral award will only be necessary when there is a foreign award, i.e. the seat of arbitration is in a state other than Turkey.
Accordingly, determining the nationality of an arbitral award has a great importance to ascertain whether the award is directly enforceable without an additional proceeding for recognition and enforcement of foreign arbitral awards action or not.
ISTAC Rules are silent on defining foreign or domestic arbitral award likewise other reputable foreign arbitration institutions’ arbitration rules. Although neither the International Private Procedural Law numbered 5178 nor the 1958 New York Convention on Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) provides a definition of a foreign arbitral award; the issue is considered both by Turkish Legal Scholars and Court of Cassation judgements. Accordingly, in the presence of an arbitration award rendered in a foreign country, proceedings for recognition and enforcement of the award is required. As a result, the nationality of the parties or the arbitrators, their place of residence, the language applicable to the proceedings or the law applicable to the merits of the case do not matter while determining the nationality of the arbitral award.
If the seat of arbitration is designated by the parties in the arbitration agreement as Turkey or any city in Turkey; or failing the agreement by the parties designated by the arbitral tribunal to be Istanbul by default in accordance with the article 23/1 of ISTAC Rules; the arbitral award will be a domestic arbitral award. In other words; the award will be enforceable in Turkey without the need to pursue an action of recognition or enforcement. In this case, even though the requirement for an enforcement or recognition ceases, the need for certificate of enforceability is decided by deciding the applicable law.
Under Turkish law, there is a dual arbitration regulation system: (i) internal arbitration subject to the Law of Civil Procedure numbered 6100 (LCP) and (ii) international arbitration subject to International Arbitration Law numbered 4686 (IAL). The decisive difference between internal and international arbitration is the ‘foreign element’. If the seat of arbitration is designated as Turkey and the dispute has a foreign element, the IAL is applicable. Under Article 2 of the IAL the arbitral award is deemed “foreign” provided that:
- The domicile, habitual residence or place of business of the parties to the arbitration agreement are in different countries;
- The domicile, habitual residence or place of business of the parties to the arbitration are in different countries from the seat of arbitration, which is agreed in the arbitration agreement or designated on basis of this agreement;
- The domicile, habitual residence or place of business of the parties to the arbitration are in different countries from the country where the essential part of the obligation will be fulfilled or which the dispute is highly associated with;
- Any of the shareholders of the parties to the arbitration have brought foreign capital to Turkey in accordance with the regulations on incentives on foreign capital or have made financial agreements in order to provide foreign capital;
- The main agreement or the relationship which constitutes the ground of the arbitration agreement is signed for the purposes of transfer of goods or capital from one country to another.
By ascertaining that the case at hand contains a foreign element, IAL is applied. Following the final award is rendered and the parties are notified by the ISTAC Secretariat of the signed award as per the article 36(2) of the ISTAC Rules, parties have thirty (30) days starting from the date of notification of the final award or correction or interpretation of the final award to apply for a set aside action to the Commercial Courts of First Instance [1]. Application for the setting aside of the award automatically suspends the enforceability of the award. If the parties renounce from their rights to apply for the setting aside of the award, or the 30 days period for the set aside action expires without an application or the application is rejected by the court and the decision of rejection is finalized, the authorized court provides the requesting party with the certificate of enforceability as per the Article 15 of the IAL. The courts issue the certificate of enforceability upon making a preliminary examination over the file to confirm that the dispute subject to the arbitral award is arbitrable and is not against the public policy. The certificate of enforceability is not subject to any fee.
If the domestic arbitral award does not contain any foreign elements and Turkey is designated as the seat of arbitration; the applicable law will be the LCP. Pursuant to the LCP, domestic arbitral awards instantly become enforceable at the time that they are given and there is no need for any certificate of enforceability. Likewise to the procedure regulated under IAL, the parties have the right to apply for the setting aside of the award. However, this application does not directly suspend the enforceability of the award. If one of the parties is requesting the suspension of the enforcement of the arbitral award, that party needs to provide a security in the amount ordered in the award.
As a conclusion, a domestic arbitral award rendered under the ISTAC Rules is not subject to any recognition and enforcement procedure. Therefore, convenient enforcement process in Turkey makes also ISTAC arbitration preferable in practice to have an efficient, rapid and prospering settlement of disputes.
[1] In the lack of a Commercial Court of First Instance, the lawsuit is filed before the Civil Court of First Instance.
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All Tools of ADR at Your Disposal Under Auspices of the ISTAC
Dariya Shiyapova
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It is acknowledged that disputes can be more expeditiously settled through ADR techniques. Many arbitration institutions have procedural rules which provide for reasonable and relatively short timelines for rendering a final award.
Furthermore, the very recent trend is hybrid dispute resolution: Arb - Med proceedings. The proceedings allow parties signing an arbitration agreement to refer their dispute to mediation either before arbitration or in the course of it.
Med – arb proceedings are tailored for parties who submit a dispute initially to mediation and arbitration is to be commenced, if mediation doesn’t result in settlement. These two types of proceedings combine the advantages of both ADR tools – the confidentiality of arbitration and the flexibility of mediation.
For example, the Singapore International Arbitration Centre (the SIAC) and the Singapore International Mediation Centre have launched the innovative ‘hybrid’ Arb-Med-Arb proceedings under the Arb-Med-Arb Protocol of 5 November, 2014.
Hong Kong Arbitration Centre (the HKIAC) has encouraged the presence of mediation and hybrid med-arb ADR tools. The facilitation of the modes is stipulated in the recent promulgated rules - the Practice Direction on Mediation, the Civil Justice Reform of 2009 or the new Hong Kong Arbitration Ordinance (the Ordinance). Under the Ordinance, if an arbitrator acts as a mediator, the arbitration proceedings shall be stayed until exhaustion of all mediation resources. Both the Arbitration and the Mediation Rules of the DIFC – LCIA (essentially a joint venture between the Dubai International Financial Centre and the London Court of International Arbitration[1]) also provide for settlement of dispute with possible conversion to different ADR.
One of the main advantages of mediation is its flexibility. In 2002 the United Nations recognized that the use of conciliation and mediation “results in significant benefits, such as reducing the instances where a dispute leads to the termination of a commercial relationship, facilitating the administration of international transactions by commercial parties and producing savings in the administration of justice by States.”[2]
Presently the UNCITRAL Working Group on Arbitration and Conciliation is working on a convention on the international enforcement of commercial settlements. The New York Convention is predictably a basis for this draft convention. The main problem in this regard is the absence of domestic legislation for enforcing mediated settlements in many countries.[3]
As it is evident from the above, the recent trends in dispute resolution demonstrate the strong tendency towards mediation. The trend of launching med – arb or arb - med proceedings reflects a strong preference for settlement of disputes in many Asian and Middle – Eastern jurisdictions as part of their legal tradition.
This experience is supposed to be applicable to Turkey who historically has a very convenient location for purposes of dispute resolution Furthermore, dispute settlement is historically and traditionally foreseen in Turkish culture. This approach has influenced widespread recognition of the benefits of mediation given the new Mediation Law in force.
Furthermore, Turkey is a significant example of successful legislative changes encouraging creation of the world-recognised arbitration hub having attracted international as well as domestic med - arb proceedings.
Firstly, the Turkish International Arbitration Act (dated 2001, Law no. 4686) is based on the UNCITRAL Model Law. Secondly, the New Mediation Act reflects good practices of this tool of ADR and thirdly, the new centre for ADR was launched in Istanbul - The Istanbul Arbitration Centre (ISTAC). It’s worth noting that Turkish legislation governing domestic arbitration proceedings also complies with the UNCITRAL Model Law. This fact additionally demonstrates investment – friendly environment which was created by Turkish authorities.
ISTAC observes different types of local models of ADR for catering to both domestic and international markets. ISTAC encouraging the dispute resolution industry in the region issued both the Arbitration and the Mediation Rules and, thus, demonstrates its readiness to become the regional hub for ADR which is attractive both for Middle Eastern countries and European investors of the region.
Being trendy, the ISTAC Rules provide for a flexible hybrid arb – med tools.It is worth noting that Article 38 of the Arbitration Rules provides that if the parties reach a settlement after the transmission of the file to the Sole Arbitrator or the Arbitral Tribunal, the arbitration proceedings shall be terminated. The most important factor for the purposes of enforcement is a possibility to issue an award by a request of parties. If parties manage to settle their dispute, their settlement may be recorded as a consent award which is enforceable in the approximately 150 New York convention member states. If the parties fail to do it, they may continue with the arbitration proceedings.
The ISTAC Arbitration Rules provide for time and cost efficient arbitration proceedings according to Article 20. As of Articles 38 and 39 of the Rules the settlement is possible and it may be recorded in the form of an award. It is obvious that that settlement of the dispute is both time and cost – efficient (compared to the whole arbitration proceedings) and allows an arbitrator to try for a role of a conciliator, partly even a mediator. In this case, we could state that arb – med proceedings is partly applied.
Furthermore, the ISTAC Mediation Rules in Article 12 describing events terminating the proceedings envisages that in cases where the mediation process is terminated upon the parties’ agreement, if requested by the parties and if there is an arbitration agreement between the parties, the Board may appoint the Mediator as an Arbitrator. In such event, the settlement agreement may be recorded in the form of an arbitral award.
This provision directly anchors med – arb approach and demonstrates the flexibility of the Mediation Rules.
Thus, given all described above we can assert that both the ISTAC Arbitration Rules and the ISTAC Mediation Rules provide for arb – med/med – arb proceedings which caters to the very demanding needs
Summarizing all mentioned above it is obvious that ISTAC provides for further advantages of arb – med/med - arb proceedings:
- the parties have the opportunity to resolve their dispute by means of mediation. Should they not be able to do so, they will be given an option to convert the dispute resolution tool in a relatively short time frame;
- the parties can save both time and money;
- the award issued in the arbitration proceeding can be quickly enforced under the New York Convention;
[1] http://www.difc-lcia.org/overview.aspx##
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Turkish Court Fees for Enforcing a Foreign Arbitral Award- A Step Forward
Emir Jami & Alper Bekdoğan
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The payment of court fees when enforcing a foreign arbitral award has been a controversial issue in Turkey. Parties who are in possession of foreign arbitral awards are often unpleasantly surprised to find out that, after years of incurring arbitration costs and fees, they are then required to pay additional proportional court fees ( nispi harç) in order to be able to enforce their award in Turkey. Since these fees vary according to the amount claimed, they could end up being significantly high depending on the amount ordered in the award. For example, in the year 2013, proportional court fees, on average, amounted to 6.831% of the value of the claim. Consequently, if a party were to seek to enforce a foreign arbitral award ordering the payment of USD 10M, for example, the party would first have to pay approximately USD 683,100 to the Turkish courts. This provision has been strongly criticized [1], since the aim of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which Turkey is also a party, was to simplify the enforcement proceedings of foreign arbitral awards. In addition, unlike cases where the merits of the dispute have to be analysed by the Turkish courts (hence the practice of proportional court fees), there is a prohibition on revision au fond in enforcement proceedings of foreign arbitral awards, and therefore, the merits of the dispute cannot be analysed.
The basis for this practice was the Turkish Code on Fees numbered 492 (“ Code on Fees”) and its appendix: tariff numbered 1, which is updated annually. Before the change in legislation, which shall be explained below, came into effect, the tariff for 2016 stipulated that fifty percent of the proportional fees should be paid if the case at hand relates to an arbitral award [2]. This change only remained in force for a very short time, and it is believed that this step was taken by the authorities following the criticisms of the previous law as mentioned above. The tariff which was in force before February 2014 did not include the fifty percent rule, and as a result, the proportional court fees had to be paid in full just like cases in which the merits would be fully analysed.
Turkish court practice also supported the payment of proportional fees. In nearly all of its decisions, the Turkish Court of Appeal relied on the Code on Fees and ruled that, for arbitral awards with monetary subject matters, proportional fees have to be paid [3]. However, irrespective of this practice, there have also been exceptional Court of Appeal decisions which have stated that enforcement proceedings have the characteristics of declaratory lawsuits ( tespit davası) and not lawsuits for performance ( eda davası), and therefore, fixed court fees ( maktu harç) should be applied instead of proportional court fees [4].
The law has since changed following amendments which were made to the Code on Fees on 09.08.2016.
The Law on Amendments to Certain Legislation for the Improvement of the Investment Climate (“ the Law”) amended the provision relating to proportional court fees in tariff number 1 and abolished the provision ordering the payment of fifty percent of the proportional court fees. The law now indicates that “no court fees will be obtained based on this article in arbitral proceedings.”
However, the wording of the new law is ambiguous, and what the law makers intended by referring to “arbitral proceedings” is not self-evident from the text. The preambles of the Law and the specific article present the ratio legis of the amendments as promoting dispute resolution by way of arbitration in Turkey. When considering previous practice and criticisms about paying proportional fees in cases where the merits are closed to scrutiny, it is reasonable to interpret the change in the law as the abolition of proportional court fees in enforcement proceedings of foreign arbitral awards.
Assuming that the article is interpreted as above, from now on, fixed and minimal court fees will have to be paid when enforcing arbitral awards in Turkey. We are of the opinion, therefore, that this law change is a step in the right direction for international arbitration and for improving the investment environment in Turkey. However, considering the recentness of the amendment and the lack of clarity with respect to its interpretation, how Turkish courts will apply the amendment to enforcement cases is not yet certain, and it will only be once an enforcement case comes before the Turkish courts that we will know whether the unfair practice of having to pay proportional court fees to enforce arbitral awards in Turkey is over for good.
[1] Prof. Dr. Nuray Ekşi, Yabancı Mahkeme Kararlarının Tanınması ve Tenfizi (İstanbul: Beta Publications, 2013), p.53-54.
[2] Tariff numbered 1 in the Appendix to Code on Fees dated 2/7/1964 and numbered 492 includes the following sentence under the Part on “III- Fee on Decision and Verdict” – Section One- Subsection (a): “In arbitration proceedings the fifty percent of the fee calculated pursuant to this subsection is applied”
[3] Decision numbered E.2015/1629 K.2015/14117 dates 5.11.2015 by 19th Chamber.of Court of Appeal.
[4] Decision numbered E.2015/3987 K.2015/10984 dated 26.10.2015 by 11th Chamber.Court of Appeal.
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Arbitration Agreements Concluded by Agents and the Specific Authority Problem
Fatih Işık & Tilbe Birengel
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Introduction
In order to conclude an enforceable arbitration agreement, various validity conditions are required. These conditions could be categorized as the merits, capacity, and form requirements. In this manner, the authority of the signatory agent to conclude an arbitration agreement on behalf of the principal must also be examined[1].
The Requirement of Specific Authority under Country Laws
Under Turkish Law, there are significant regulations covering the authority to conclude an arbitration agreement. According to the third subparagraph of Article 504 of the Turkish Code of Obligations, and Article 74 of the Code of Civil Procedure, the agent is required to be specifically and/or explicitly authorized to conclude an arbitration agreement on behalf of the principal. Therefore, an agent authorized with general power of attorney, but without an explicit statement on the authority to conclude an arbitration agreement, is not entitled to conclude so on behalf of the principal. Once an arbitration agreement is concluded by an agent who lacks specific authority, the regulations on unauthorized representation become applicable, which thereby enable the principal not to be bound by the agreement, unless he so ratifies. Consequent to these provisions, the arbitral tribunal’s authority may be challenged, the award may be annulled, or the enforcement of the award may be rejected.
Within this context, the Turkish Court of Appeal emphasizes the requirement of the specific authorization of the agents to conclude an arbitration agreement, and declares the arbitration agreements signed by agents who lack specific authority null and void. In some cases, the Court of Appeal attaches the specific authority rule to public order[2]. Notwithstanding this, in other cases, the Court of Appeal rejects the claims for nullity raised from lacking specific authority by ruling that these claims have not been made in good faith[3].
It must be noted that the mentioned regulations are related to the voluntarily appointed agents, but not to the representatives of legal entities. Hence, the persons acting as the representative body of a company are not required to have specific authority in order to conclude an arbitration agreement on behalf of the legal entity that it is representing. However, if the stated company is represented by voluntarily appointed agents, which are appointed by the representative body of the legal entity, then the voluntarily appointed agents will be required to have specific authority. Regarding commercial auxiliaries, commercial representatives who act as the alter ego of the merchant are not required to have specific authority, while the remaining auxiliaries are required to have it in order to conclude an arbitration agreement on behalf of the merchant[4].
In parallel with Turkish law, the third subparagraph of Article 396 of the Swiss Code of Obligations, Article 1989 of the French Civil Code, Article 1989 of the Belgian Civil Code, Article 1008 of the Austrian Civil Code, Article 702 of the Egyptian Civil Code, Article 1713 of the Spanish Civil Code, and the Law of Hong Kong require agents to have specific authority in order to conclude an arbitration agreement on behalf of the principal. Contrary to the provisions of the listed states, Italian, British, German, Swedish, American and Dutch laws do not require such specific authority.
Form Requirements for Specific Authorization to Conclude an Arbitration Agreement
The method of authorization of the agent to act on behalf of the principal must also be examined. One may ask whether the validity conditions of arbitration agreements, such as being in written form, are required for the specific authorization of the agent to conclude an arbitration agreement.
According to some, the written form requirement as regulated under the New York Convention for an arbitration agreement shall be applicable merely to the arbitration agreement, and should not be applied to the specific authorization[5]. To the contrary, an opposing view defends that the written form requirement regulated under the New York Convention should be extended to the authorization[6]. The third view on this issue affirms that non-regulation of this issue at the Convention shall not be interpreted as the Convention failing to require any form for authorization. Hence, the form requirement on authorization is to be determined by national laws that may require specific methods for authorization[7].
In Turkish Law, apart from the conclusion of arbitration agreements, the matter is discussed for other transactions related to specific authorization. According to one opinion, unless the opposite is stated in law, legal transactions are not subject to form requirement, and there is no regulation as to the formal requirements of authorization[8]. Another view in the doctrine claims that granting the power of authority is subject to the form of the underlying transaction, and adds that a contrary interpretation would conflict with the protective purpose of the law on parties[9].
It is observed that comparative law has varying opinions on the matter. For instance, the second subparagraph of Article 217 of the Greek Code of Procedure requires the same form for the authorization and the transaction to be made. While Article 1008 of the Austrian Civil Code does not require written form for the authorization in order to conclude an arbitration agreement, the doctrine and case law accept the necessity of the written form. According to Article 1985 of the French Civil Code, and the third subparagraph of Article 110 of the French Commercial Code, the authorization on concluding an arbitration agreement is not subject to a form requirement in line with the British, Swedish, Finnish and Italian laws. Second subparagraph of Article 167 of the German Civil Code explicitly regulates that authorization is neither subject to any form requirement, nor does it need to be in line with the form requirement of the transaction to be made.
Law Governing the Requirement of Specific Authority
As stated above, the lack of specific authority of an agent for an arbitration agreement may result in a challenge of the arbitral tribunal, annulment of the award, as well as refusal of the enforcement of the award. However, neither national nor international legislation regulating the stated sanctions has an explicit answer as to which law governs the requirement of specific authority. In other words, none of the stated legislations answer whether or not the issue shall be governed by the “law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made,” or “the law applicable to them (to the parties)”.
Therefore, in order to ascertain the law governing the authority, a qualification on this issue must be made[10]. According to one view, the nullity of the arbitration agreement which was signed by an agent who lacks specific authority must be evaluated under the scope of the merits or material validity of the arbitration agreement. This opinion defends that the principal who did not grant authority to the agent to conclude an arbitration agreement never had the intent for an arbitration agreement, which causes the nullity of the agreement based on its merits. Another view associates this issue with capacity, and interprets Article V/1(a) of the New York Convention in a wider scope by including the authority. The last view on this issue affirms that the conclusion of an arbitration agreement through an agent is a matter of representation and the issue must be determined as per the law governing the representation/agency relationship or the effects of representation authority. Accordingly, under Turkish law, if an arbitration agreement is concluded by an agent, the applicable law shall be determined pursuant to Article 30 of the Private International and Procedural Law. As per the stated Article, the conditions required to bind the principal against third parties through the agent’s act are subject to the law of the representative’s work place. In cases where the agent does not have a work place, or the third parties are unaware of such a work place, or the representative authority is exercised elsewhere aside from the work place, the power of agency is subject to the law of the state where it is virtually exercised.
The scholars have no consensus on qualification of authority. Similarly, the court decisions and arbitral awards given on the authority to conclude an arbitration agreement do not provide explicit argumentations on the qualification of the authority. According to the classifications made in line with above-mentioned results, the issue is assessed under the scope of “merits,” “capacity” and “representation.”
In some disputes, judges and arbitrators directly apply substantive rules of lex fori without raising any argumentation on the authority to conclude an arbitration agreement. The implementation of international practice and internationally acknowledged principles, such as the good faith principle on authority, is commonly agreed upon. According to the French doctrine and court decisions which are in line with this view, no specific authority shall be required to conclude an arbitration agreement. Moreover, the representatives entitled to govern a company should be able to conclude an arbitration agreement without being subject to the limitations of company regulations and law. Lastly, authorization to conclude an arbitration agreement should not be subject to any formal requirement. As also stated above, in some disputes related to the authority to conclude an arbitration agreement before the Turkish Court of Appeal, the court has disregarded the discussions on applicable law, and has granted its decision by merely focusing on the good faith principle.
Conclusion
As seen above, the issue of authority which arises in case of conclusion of an arbitration agreement on behalf of a third person by an agent may cause several discussions since the matter is not explicitly regulated by national and international provisions. From the perspective of Turkish law, the provisions on requirement of specific authority for the agent remain as an important pitfall of Turkish arbitration law which should be revised as per the international commercial practices.
[1] The term “authority” is commonly misstated as “capacity.” However, these terms are distinctly different from each other. For details on this issue, please see: Fatih Işık, Authority to Conclude Arbitration Agreement in International Commercial Arbitration and the Law Applicable to this Authority, On İki Levha, Istanbul 2015, p. 8-17.
[2] Please see the decision of the Assembly of Civil Chambers of the Turkish Court of Appeal dated, 11.10.2000, numbered 2000/19-1122 E., 2000/1256 K.; the decision of the 19 th Civil Chamber of the Turkish Court of Appeal dated 01.05.2003, numbered 2002/3763 E., 2003/4764 K. (Kazancı).
[3] The decision of the 11 th Civil Chamber of the Turkish Court of Appeal dated 09.04.2004 and numbered 2003/6774 E., 2004/3751 K. (Nuray Ekşi, Arbitration Agreements By Incorporation in International Maritime Trade, Beta, Istanbul 2010, p. 69-70, fn. 173).
[4] Regarding the discussion of the requirement of the specific authority of the commission agent, broker, agency and marketer who represent, indirectly, the principals to mediate in order to conclude an arbitration agreement, please see: Işık, p. 62-67.
[5] Andreas Reiner, “ The Form of the Agent’s Power to Sign an Arbitration Agreement and Article II(2) of the New York Convention”, ICCA Congress Series No: 9, 1998, p. 90; Gary Born, International Commercial Arbitration, Kluwer Law International, 2014, p. 663.
[6] For the scholars of this view, please see Reiner, p. 83, fn. 8 and p. 84, fn. 12.
[7] Jean François Poudret / Sebastien Besson, Comparative Law of International Arbitration, translated by Stephen V. Berti and Annette Ponti, 2. Edition, Sweet & Maxwell, London 2007, p. 236.
[8] Necip Kocayusufpaşaoğlu /Hüseyin Hatemi / Rona Serozan / Abdülkadir Arpacı, Law of Obligations General Part, Volume 1, 6. Edition, Filiz Kitabevi, Istanbul 2014, s. 667-668; Turhan Esener, Representation Related to Authority under Comparative Law and Turkish-Swiss Law of Obligations, Ankara Law Faculty Publications, Ankara, 1961, p. 38; Selahattin Sulhi Tekinay / Sermet Akman / Haluk Burcuoğlu / Atilla Altop, Law of Obligations General Part, 7. Edition, Filiz Publications, Istanbul 1993, p. 173; Fikret Eren, Law of Obligations General Part, 21. Edition, Yetkin, Ankara 2017, p. 454. For the opinion that this is the prevailing view in doctrine, please see: Murat İnceoğlu, Direct Representation in Law of Obligations, On İki Levha, Istanbul 2009, p. 140.
[9] Kemal Oğuzman / Turgut Öz, Law of Obligations General Part, Volume 1, 12. Edition, Vedat Bookstore, Istanbul 2014, p. 225. For the opinion that this is the minority view, and which has been gaining more supporters, please see: İnceoğlu, s. 143-144.
[10] For the discussions, please see Işık, p. 71-75.
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Enhancing the Right of Access to Justice Through Third Party Funding in International Arbitration
İrem Kürkçü
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Introduction
The use of third party funding has increased in recent years and drawn attention of many jurisdictions. As large and well-funded companies prefer to use third party funding as well as small sized companies, third party funding is an issue, which cannot be ignored in today’s arbitration practise. This article builds on two pillars: human rights and third party funding in international arbitration. Firstly, third party funding is going to be explained (I). Later, the link between third party funding and the right to access to justice shall be demonstrated (II). It is going to be questioned whether there is a place for human rights in international arbitration, with a particular focus on the right of access to justice.
Third Party Funding in International Arbitration
It is well known that the use of third party funding has grown rapidly through last years. Just like many current developments, there are positive and negative arguments for third party financing. Before examining these arguments, it is necessary to define third party funding and explain how it functions. Third party funding can simply be defined as “financing by a third party of all costs of the arbitral proceedings for one of the parties to the dispute” [Marco de Morpurgo, A Comparative Legal and Economic Approach to Third-Party Litigation Funding, Cardozo Journal of International & Comparative Law, 2011, p. 360].
There are two possible outcomes that may arise when third parties decide to shoulder another parties’ financial liability. The first outcome is that the party whose claim is financially supported by a third party is awarded compensation by the arbitral tribunal. In this case third party receives a certain percentage of the finally awarded compensation. In case the financed party loses, third party does not receive any compensation but still be liable for all the arbitral costs [Dr Eric De Brabandere and Julia Lepeltak, Third Party Funding in International Investment Arbitration, Grotius Centre Working Paper No. 2012/1, p. 5].
It should also be clarified in some cases, third party funders choose not to seek any final compensation in return even if the financed party wins on its claim. In one of the most well-known ICSID proceedings, the Bloomberg Foundation decided to fund the claim of Uruguayan Government without any financial compensation in return [Philip Morris Brand Sàrl (Switzerland), Philip Morris Products S.A. (Switzerland) and Abal Hermanos S.A. (Uruguay) v. Oriental Republic of Uruguay (ICSID Case No. ARB/10/7)].
Main reason lying underneath the decisions of the parties who decide to ask for a support from a third party is the high costs of arbitral proceedings for the financial situation of the related party. High costs of arbitration may cause financially feeble party to refrain from bringing their well-founded claims before the arbitral tribunals. The third-party funding provides a solution for the parties who hesitate to apply to arbitration due to the high costs of the arbitral proceedings. Third party funders provide for financial sources which cover all costs of arbitral proceedings before the arbitral institutions like the ICC, ICDR and ICSID, and other out-of-pocket costs and expenses of the claimant itself” [Mark Kantor, Third-Party Funding in International Arbitration: An Essay About New Developments, ICSID Review, 10 November 2012, p. 70].
Does Third Party Funding Enhance the Right of Access to Justice?
Parties who are unable to pursue their meritorious claims because of the expensive proceedings get a chance to access to arbitration. Even in Hong Kong where third party funding is still in question and only allowed in certain situations during litigation proceedings, access to justice considerations seem as a reasonable justification [White & Case Client Alert, July 2016; Third Party Funding: a New Chapter in Hong Kong & Singapore].
The Paris Court of Appeal dated 2011 is an example on the importance of right to access to justice in arbitration. The court held that “arbitral tribunals are not exempt from applying the right of access to justice” and the ICC award in question was annulled for a violation of the right of access to justice. [Cour d’appel [CA] [regional court of appeal] Paris, 1e ch., Nov. 17, 2011, n° 09/24158].
The decisions given by national courts and the arbitral awards indicate that the scope of the right to access to justice includes arbitration. Impecunious parties which do not possess the opportunity to finance arbitration process get a chance to defend their meritorious claims by the help of third party financing. Hence, third party funding deserves to be analysed through this perspective and its access to justice should not be disregarded.
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Time Limits under the ISTAC Rules
Leyla Orak Çelikboya, LLM.
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Introduction
Istanbul Arbitration Centre (“ISTAC”) is an independent arbitration institution that has been established in 2015 as part of the Istanbul International Finance Centre. Located in Istanbul, a prominent and increasingly dominant headquarters in the region for cross-border financial transactions, ISTAC is envisaged as the hub for arbitration and mediation of domestic and international disputes.
To this end, the ISTAC Arbitration and Mediation Rules[1] have been prepared by taking into account the well-established institution rules as well as the needs emerging in the practice of international arbitration. Therefore, these rules ensure that the generally accepted and reliable practices of international arbitration are safeguarded, while the pressing needs and concerns of practitioners are satisfied. Granting the parties the mobility to resolve their disputes in an arbitration model tailor made to their needs, ensuring cost effectiveness, foreseeing fast track and emergency arbitration possibilities, these rules enable ISTAC to become a reliable, practical and arbitration friendly institute[2].
One of the main aims of ISTAC is to ensure that disputes brought before an arbitral tribunal[3] are resolved efficiently and swiftly. In order to serve this purpose, in addition to mechanisms such as fast track arbitration[4], ISTAC Arbitration Rules (“ISTAC Rules”) regulate the time limit for the award. This article aims to introduce these provisions governing time limits.
Importance of Rapidity in International Arbitration
The parties to a dispute may choose to opt for an accelerated arbitration procedure, in order to obtain an arbitral award for their straightforward claims in as short a period as possible. Numerous institutions, including ISTAC, provide the possibility of a fast track arbitration to serve the purpose of an expedited resolution of a given dispute[5].
Nonetheless, rapidity is a key motivation for parties to any dispute, regardless of not having chosen to resolve their disputes under fast track arbitration. One of the key concerns of parties to a dispute before arbitration is the length of the period between the commencement of an arbitral proceeding until the final award. Taking into consideration commercial concerns, cash flow and liquidity considerations, which increase especially during recessions; the sooner an award is rendered, the more preferable the situation becomes for the parties to a dispute. Moreover, having ongoing disputes for long periods of time between parties, who are co-traders party to an agreement from which the dispute arose, is not desirable[6]. In fact, the risk of a lengthy litigation procedure before national courts is one of the reasons why merchants prefer to bring their disputes before arbitration, which is more able to adapt to the speed that commercial transactions require[7].
Moreover, swiftness of a proceeding is inseparable from the cost-effectiveness of arbitration as a dispute resolution mechanism. The longer a dispute remains unresolved, the less cost-effective it becomes for the parties involved. The ability to shape the costs of this method of dispute resolution is amongst the advantages and the motivation factors for the parties who wish to arbitrate[8]. This is the reason why, increasing delays in the practice of international arbitration proceedings have become critical, raising concern amongst parties wishing to arbitrate. This resulted in an increasing need to ensure a swift dispute resolution, without sacrificing from the fairness of the proceedings[9].
To this end, parties sometimes choose to specify time limits in their arbitration agreements[10]. Nonetheless, including such time limitations in the arbitration agreement may bear numerous risks and should be approached with caution. These risks include difficulties for parties to find arbitrators willing to render their awards in this period if the pre-determined time limits are too short, or making it impossible for the dispute to be resolved in the designated period, resulting in a delayed award being prone to the risk of invalidity or non-enforceability[11].
On the other hand, certain institution rules, including the ISTAC Rules (art.33) and the Rules of Arbitration of the International Chamber of Commerce (“ICC Rules”) (art. 30), regulate time limits in which an arbitral award needs to be rendered. However, unlike time limits imposed by the parties’ arbitration agreement, which may only be amended again by the agreement of the parties, the institutional rules enable the arbitration court or board to extend these time limits; either upon request from the parties, the arbitral tribunal, or on their own initiative (see ISTAC Rules art. 33/2, ICC Rules art. 30/2).
The swiftness of arbitration proceedings depends not only on the time limits imposed under institutional arbitration rules, or the diligence of the arbitral tribunal in establishing the procedural timetable, but also on the actions of the parties involved. In this regard, the cooperation of the parties in the appointment of arbitrators that are best fit to resolve the dispute and manage the proceedings, establishing a dynamic and realistic timetable and hearing schedule, and complying with the deadlines is key. Nonetheless, as they express the desire to conclude arbitration proceedings in a short time, and provide a benchmark for the arbitrators in drawing the procedural timetable, institutional rules envisaging such time limitations promote a time-efficient arbitration.
Time Limits under ISTAC Rules
ISTAC Rules provide numerous provisions governing time limits concerned in an arbitration proceeding. These include, among others, the time limits granted to the parties in their answer to the request for arbitration (art. 8), the appointment of arbitrators (art. 14), and the challenge of arbitrators (art. 16)[12]. As the purpose of this newsletter article is to assess time allocated for completing an arbitration proceeding with a final award, the focus will be on provisions governing the rendering of the award.
For arbitration proceedings that are not subject to the fast track arbitration procedure, the total time limit envisaged for the rendering of an award is six months pursuant to art. 33 of the ISTAC Rules[13]. This six-month period shall start from the date of the signing of the terms of reference by the parties and the arbitral tribunal, or the date of notification of the ISTAC Board’s approval of the terms of reference to the arbitral tribunal pursuant to art. 26/4 of the ISTAC Rules. In the event the parties to the dispute agree to not draw up a terms of reference, this six-month time period shall commence from the date of submission of the procedural timetable to the Secretariat.
Hence, the aim of the ISTAC Rules is to ensure that disputes brought before ISTAC are resolved within six months once the arbitral tribunal is constituted, and the main components of the proceedings are ascertained under the terms of reference. In other words, once the procedural matters are finalized and the focus is on the merits of the dispute, the aim is to conclude the proceedings with a final award within six months.
ISTAC Rules art. 27 regulate that the arbitral tribunal prepares a timetable together with the drawing of the terms of reference. Unlike the terms of reference, the drawing up of the procedural timetable is mandatory under the ISTAC Rules. In an arbitration proceeding, the arbitral tribunal shall establish the procedural timetable after consulting with the parties. This timetable shall determine the dates of submission for steps including the pleadings and the hearing. The tribunal, in consultation with the parties, has the authority to modify the time limits in an agreed procedural timetable when necessary. Without a doubt, in establishing this timetable, the arbitrators will take into account the above-mentioned six-month time limit and aim to render the award within this period.
Nevertheless, the complexity of a given dispute, the needs of the parties involved, matters, such as national holidays coinciding with arbitration proceedings that affect the parties, their counsel or the arbitrators may necessitate a longer period. Therefore, the ISTAC Rules art. 33/2 enable the ISTAC Board to extend this six-month time limit, either upon the agreement of the parties to the dispute; the arbitral tribunal’s request, or on its own initiative.
Once a final award is rendered, another procedure may be necessary for the correction or interpretation of an award, or an additional award. This procedure is governed by art. 37 of the ISTAC Rules. Parties to a dispute may ask for an interpretation of an award, the correction of computational or typographical errors in an award; or request an additional award for reliefs sought that have been omitted in the final award. Such a request needs to be made within 30 days of notification of the final award. In such an event, the Secretariat shall notify the arbitral tribunal of this application. The arbitral tribunal shall grant the other party a period of 30 days for them to submit their comments. After the expiration of this time limit, the arbitral tribunal shall submit its decision on the request within 30 days, or a longer period granted by the Board which cannot exceed 60 days. In short, if a correction, an interpretation, or an additional award is necessary, the ISTAC Rules aim for this procedure to be completed in at most 150 days from the date of the notification of the award.
ISTAC Rules art. 43 enables the parties to change the time limits foreseen under the ISTAC Rules. In such an event, if necessary for the completion of the duties and mandates of the arbitral tribunal or the Board, the Board may also extent the modified time limits.
The global review of the ISTAC Rules governing time limits on arbitral awards reveals ISTAC’s aim to ensure a time-efficient dispute resolution through arbitration. The ISTAC Rules also enable an adjustment to these periods in order not to prejudice the fairness of the arbitration proceedings.
Conclusion
It is without a doubt that the rapidity of arbitration is crucial for parties wishing to arbitrate. The speed of resolving disputes is one of the determining factors in the cost-effectiveness of arbitration as a dispute resolution mechanism. Without sacrificing fairness and the right of the parties to have full opportunity to present their case, it is important to ensure that disputes are swiftly resolved. Mechanisms such as fast track arbitration provide a practical solution for minor or straightforward disputes. However, speed is an important factor for all parties concerned, even if a dispute is not referred to fast track arbitration.
ISTAC Rules govern time limits both for rendering a final award in a dispute, and for a correction, implementation or additional award, when necessary. These time limits, which may be extended under certain conditions, aim for a time-efficient resolution of disputes, without sacrificing the fairness of proceedings.
Through these provisions, ISTAC Rules aim to overcome the concerns for increasing delays in the practice of international arbitration. Nevertheless, it is without doubt that the cooperation of the parties involved in an arbitration dispute is essential to attain the cost and time-effectiveness of any given proceeding, through determining the procedural timetable, and complying with the prescribed time-limits.
[2] For an overall introduction on ISTAC, please see Prof. Dr. Ziya Akıncı, “Istanbul Arbitration Centre” GAR Guide to Regional Arbitration 2017, p. 37.
[3] In this article, arbitral tribunal or tribunal will refer to both the sole arbitrators and the tribunal formed by three or more arbitrators.
[5] See Candan Yasan, “İstanbul Tahkim Merkezi (ISTAC) Tahkim Kuralları Uyarınca Seri Tahkim Yargılaması (Fast Track Arbitration)”, Milletlerarası Özel Hukukta Güncel Konular Sempozyumu, Anadolu Ünversitesi Hukuk Fakültesi, Eskişehir 21-22 Nisan 2016, s. 355-373; and Yanık (supra note 4) for further information on fast track arbitration before ISTAC.
[6] Alan Redfern and Martin Hunter with Nigel Blackaby and Constantine Partasides, Law and Practice of International Commercial Arbitration, Thomson Sweet&Maxwell, 4 th Edition, 2004, para. 6-43.
[7] Akıncı, Milletlerarası Tahkim, 3 rd Edition, İstanbul, 2013, p. 9.
[8] Ralph H. Folsom, Principles of International Litigation and Arbitration, West Academic Publishing, 2015, p. 66.
[9] Redfern/Hunter et. al. (supra note 6), p. 288.
[11] Michael McIlwrath and John Savage, International Arbitration and Mediation a Practical Guide, Kluwer Law International, 2010, para. 1-189.
[12] ISTAC Rules also regulate the method of calculating time limits which applies to both the normal arbitration proceedings as well as the fast track arbitration proceedings (see art. 9/2 of the ISTAC Fast Track Arbitration Rules). Pursuant to Art. 6 of the ISTAC Rules, time limits will commence the following day of a notification that is made or deemed to have been made. Official holidays or non-business days shall not affect or extend the total time in a given time limit. Nonetheless if the first day following a notification or the last day of a given time limit coincides with such an official holiday or a non-business day, this time limit shall begin or expire on the first following business day.
[13] This period is three months for fast track arbitration under art. 7 of the ISTAC Fast Track Arbitration Rules.
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TIAL Issues and ISTAC Fixes: There is Only So Much You Can Do!
Müge Erdoğmuş, LL.B. (Istanbul), LL.M. (Berlin)
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Introduction
The law at the place of the arbitration – the lex loci arbitri – governs the validity of the arbitration agreement [1], the procedure before the arbitral tribunal [2], and setting-aside proceedings before the state courts. [3] When the parties agree to resolve their dispute in accordance with the ISTAC Rules, then, unless otherwise stipulated by the parties, the default seat of the arbitration is Istanbul pursuant to Article 23 of the ISTAC Rules. Agreeing on the ISTAC Rules will thus lead to the applicability of the Turkish International Arbitration Law ( "TIAL") [4], enacted in 2001, to these issues – at least its mandatory provisions for disputes concerning a foreign element. While many of the provisions of the ISTAC Rules are substantively similar to the corresponding provisions of modern arbitration rules, for example the ICC Rules of Arbitration [5], the provisions of the TIAL still play an essential role in any arbitration to be conducted in Turkey.
TIAL is based on the UNCITRAL Model Law 1985 ( "Model Law") [6], the text of which has largely been adopted by many other countries as well, including Germany and Belgium. That being said, TIAL also contains certain unusual features that do not originate from the Model Law. Although TIAL is in principle arbitration-friendly, some specific features of the TIAL can give rise to issues, especially in an international context, and in particular as far as the validity of the arbitration agreement, the procedure before the Arbitral Tribunal, or enforcement prospects are concerned. This article will elaborate on examples which show that selecting the ISTAC Rules as an institutional set of arbitration rules can help fix some of these issues.
1. Constitution of the Arbitral Tribunal
The parties are free to agree on the number of the arbitrators under both, Article 7 of TIAL and Article 13 of ISTAC Rules. Both provide for a limitation to parties' freedom of choice concerning the number of the arbitrators, by establishing a rule that in cases where the parties agree on a tribunal of more than one arbitrator, they cannot refer their dispute to an arbitral tribunal consisting of even numbers of arbitrators.
When a dispute is referred to a sole arbitrator, the default rule under Article 7 of the TIAL stipulates that the parties shall choose the sole arbitrator jointly. Article 14 of ISTAC Rules is in line with this rule. When the dispute is referred to a tribunal of three arbitrators, each of the parties appoint an arbitrator, and then these two arbitrators jointly appoint the third arbitrator. In the event that the parties have not agreed on the number of arbitrators, the dispute is referred to a tribunal of three arbitrators under TIAL. This might lead to unreasonably high costs in relatively small and simple cases. Article 13 of ISTAC Rules, on the other hand, takes a more flexible approach and provides that the ISTAC Board of Arbitration [7] shall decide on the number of arbitrators, by taking all relevant circumstances and facts into consideration. [8]
In cases where the parties fail to jointly choose an arbitrator, the Turkish courts, pursuant to Article 7 of TIAL, or the Board of Arbitration, under Article 14 of ISTAC Rules, appoint the arbitrator. Under TIAL, the Turkish courts appoint the sole arbitrator on whom the parties; or the third arbitrator on whom the other two arbitrators could not agree, upon request of a party. ISTAC does not have a national committee system for arbitrator appointments as has the ICC [9]
. But pursuant to ISTAC Rules, it is ISTAC Board of Arbitration consisting of qualified members of the arbitration community who are more likely to appoint competent arbitrators in an international setup than Turkish courts which is responsible for appointment of arbitrators .
2. Time Limits
Under both, TIAL and ISTAC Rules, arbitration is designed to be an expeditious dispute resolution mechanism. Pursuant to Article 10 of TIAL, an arbitration proceeding in Turkey shall be concluded within one year following the appointment of the sole arbitrator, or the issuance of the first meeting minutes [10] of the arbitral tribunal in a case where there is a panel of more than one arbitrator. The ISTAC Rules shorten this time period by way of Article 33 of the ISTAC Rules which provides for a time limit of 6 months from the date on which the signatures on the Terms of Reference are completed or, the date of notification to the tribunal by the Secretariat of the approval of the Terms of Reference, in order for an arbitral tribunal to render its final award. The ISTAC Rules' fast track arbitration provisions foresee an even shorter time limit of three months instead of six months.
These time limits may be advantageous since they may have the effect of accelerating the proceedings. Yet, the consequences of non-compliance are severe: An arbitral award that is not rendered within the applicable time limits may be annulled under the express wording of Article 15 of TIAL. Article 10 of TIAL provides that the parties may agree on extensions of the time limit for the award. Although this provision does give the parties the opportunity to agree to an extension and to waive the corresponding ground for annulment, in the event that the parties cannot agree on extension, the Turkish Courts decide on the extension upon the application of a party. [11] Pursuant to the same subsection, in the case of refusal of time extension, the time limit for the award is terminated upon the elapse of initial time period. The Court's decision refusing the extension is final. Bearing in mind that the parties tend to disagree on many procedural details in practice, the possibility of annulment of an award is a very severe sanction for not being able to agree on a time extension. Yet in such cases, the jurisdiction of the arbitral tribunal elapses and the dispute will have to be resolved by the state courts.
Article 33 of ISTAC Rules, which supersedes Article 10 of TIAL when the ISTAC Rules have been agreed on, adopts a more flexible approach, and provides that the time limit for the award may be extended either upon the agreement of the parties or by decision of the Board of Arbitration, whether upon the request of the Arbitral Tribunal, or on the Board's own initiative [12] . In practice, the Board of Arbitration is expected to take the risk of annulment into consideration and to extend the time limit in cases where it is highly likely that the time limit will not be reached.
3. TIAL Issues the ISTAC Rules Cannot Fix
Although TIAL is based on the Model Law, TIAL and the arbitration-related provisions of the Turkish Code of Civil Procedure ( "CCP") still exhibit certain problematic features. One example is the narrow notion of the writing requirement under the earlier version of the Model Law, as reflected in Article 4 of TIAL. [13] Another issue with having Turkey as the place of the arbitration – and thus the TIAL as the lex loci arbitri – that cannot be fixed by the ISTAC Rules is the fact that any arbitral tribunal in Turkey would face a narrow notion of arbitrability. [14] Finally, Turkish courts' broad interpretation of public policy that affects the enforcement of awards [15], is also an issue that is often addressed and criticized in Turkish international arbitration practice. [16]
Conclusion
The Turkish legislator still needs to take the initiative to revise and clarify certain provisions of TIAL and CCP to be able to meet the internationally accepted modern standards of international arbitration, and compete with other arbitration jurisdictions, such as Switzerland, France, or Germany. Steadiness in the quality that ISTAC and its rules promise, and the fixes ISTAC Rules already provide, combined with desirable future revisions to Turkish arbitration legislation, and an arbitration-friendlier approach of the Turkish courts may well clear the issues still standing in the way of Turkey becoming a more frequently visited, international arbitration destination.
[1] Born, International Arbitration: Law and Practice, 2nd ed. 2015, pp. 47 - 72; Article 5(1)(a) of the New York Convention; and Articles 1 of the TIAL.
[2] Born, International Arbitration: Law and Practice, 2nd ed. 2015, pp. 111 - 128; Article 5(1)(d) of the New York Convention; and Article 1 of the TIAL.
[3] Born, International Arbitration: Law and Practice, 2nd ed. 2015, pp. 311 - 374; Article 5(1)(e) of the New York Convention; and Article 15 of the TIAL.
[4] Law No. 4686, published in the Official Gazette dated 7 July 2001, numbered 24453.
[5] Some of the unique features of the ICC Rules have, however, not been adopted by the ISTAC Rules, such as scrutiny process under Article 33 of the ICC Rules, or the case management conference under Article 24 of the ICC Rules.
[6] Without the amendments adopted in 2006.
[7] The Board of Arbitration is, under Article 1 of the ISTAC Rules, responsible for the administration of both the application of the ISTAC Rules, and the resolution of disputes in accordance with the Rules. The Board of Arbitration is comprised of a national and an international divisions.
[8] Similar to Article 13 of the ISTAC Rules, Article 12(2) of the 2012 ICC Rules of Arbitration empowers the ICC International Court of Arbitration to decide on the number of arbitrators where the clause is silent on the issue. On the criteria applied by the ICC Court in this regard, see Herzberg, Selecting ICC Arbitrators: What's New Under the Revised Rules?, in: Mealey's International Arbitration Report 2012, p. 1 et seq.
[9] In an ICC Arbitration, national committees, taking into consideration of parties’ nationalities and applicable law to the merits of the dispute, are responsible for the appointment of the arbitrators. Thereby, it is aimed that arbitrators which are closely related to the dispute are appointed.
[10] The TIAL assumes that the arbitrators gather, issue "preliminary meeting" minutes, and thus set in motion the proceedings before the arbitral tribunal; which is often the case in domestic arbitration cases in Turkey. It is suggested in practice that in cases where the arbitrators do not issue meeting minutes, the time period of one year shall start counting on the date of arbitrators' very first procedural activity ( Akıncı, Milletlerarası Tahkim, 2003, pp. 214 - 215), e.g., following the issuance of the first procedural order.
[11] In practice, it is sometimes the arbitrators who mistakenly submit applications for time extensions with the state courts ( Akıncı, Arbitration Law of Turkey: Practice and Procedure, 2011, p. 161).
[12] Pursuant to Article 31 of the ICC Arbitration Rules, which is in line with Article 33 of the ISTAC Rules, ICC Court of Arbitration Board may extend the time limit for the award upon a reasoned request of the arbitrators or on its own initiative if deemed necessary.
[13] With the amendments to the Model Law in 2006, the formal requirements for arbitration agreements under the Model Law are now more flexible even than the formal requirements under Article II of the New York Convention. Pursuant to the new Article 7(3) of the Model Law, an arbitration agreement may even be concluded orally as long as its contents are recorded.
[14] According to Article 408 of the CCP and Article 1(4) of the TIAL which goes in the same direction, any dispute arising in relation to rights in rem over immovable properties or that are out of the scope of parties' free disposition are non-arbitrable. While similar restrictions are not uncommon in other jurisdictions, the way the restrictions are handled in practice in Turkey sometimes give rise to uncertainties.
[15] In Turkey, the competent court for arbitration related court proceedings is the first instance courts. On the appellate level, there is no specific chamber at the Court of Appeals to decide on such issues. Both circumstances create a major lack of foreseeability as far as the enforcement or setting aside proceedings are concerned.
[16] Ekşi, Yargıtay Kararları Işığında ICC Hakem Kararlarının Türkiye’de Tanınması ve Tenfizi, 2008, p. 1 et seq.
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ISTANBUL ARBITRATION CENTRE
TOBB Plaza Harman Sok. No: 10 K: 6
Esentepe Şişli İstanbul / Turkey
Phone: +90 850 622 50 30
Fax: +90 850 622 50 33
info@istac.org.tr
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