Sponsored briefing: Recent arbitration developments in Turkey

Turkey has been experiencing an upward trend in both international and domestic arbitration especially in the last decade as the practitioners have become more experienced, scholars have been more active in addressing controversial issues and most importantly the case law was significantly developed in the arbitration-related matters.

Pro-arbitration stance of Turkish courts

Barring a few controversial decisions, it would be fair to say that in recent years, the arbitration-related matters dealt by the Turkish courts have become much more sophisticated and the courts have solidified their stance regarding the essential matters of arbitration by rendering arbitration-friendly decisions. There have been several decisions where the courts have applied the principles of separability and prohibition of révision au fond more strictly and without hesitation.

In a promising decision in relation to an annulment claim, the Court of Appeal dwelled on the infamous public policy challenge. Contrary to a few ‘old’ decisions raising eyebrows with wide interpretations of the public policy, the Court of Appeal underlined that the public policy should be interpreted in a narrow manner and a breach, misapplication or disregard of a provision of law per se does not require annulment of an award.

The Regional Court of Appeal in a recent decision has also displayed a quite liberal and pro-arbitration approach where it has ruled that an arbitration agreement not signed but agreed upon is binding given that the parties performed their obligations under the relevant contract without any objection thereto for years.

Institutional arbitration

This pro-arbitration environment is clearly reflected in the parties’ growing interest towards the institutional arbitration. As per the most recent ICC statistics, Turkey remained the most represented nationality within Central and Eastern Europe and the popularity of local arbitration institutions as ISTAC and ITOTAM is also growing day by day, whereas LCIA is mostly preferred in finance contracts. Other prominent institutions as SCC, VIAC, HKIAC and SIAC are also encountered in disputes involving Turkish parties.

Turkey as a seat of arbitration or place of enforcement?

Selection of the seat of arbitration is perhaps the most crucial step for the ultimate enforcement of an award. Bearing in mind that an award debtor may not show voluntary compliance with the award, the location of debtor’s assets plays an important role in choosing the seat among other perspectives.

If target assets are in Turkey, choosing Turkey as the seat could be considered. In case of a foreign arbitral award, the award creditor has to file a lawsuit for the recognition and enforcement, which is subject to a three-tiered adjudication as (i) commercial court of first instance, (ii) Regional Court of Appeal and (iii) the Court of Appeal. On the other hand, if the award rendered in Turkey, the only thing that the award creditor has to do would be to wait and see whether the award will be challenged within the prescribed 30 days’ term. Even if an annulment claim is filed, it shall only be subject to instances (ii) and (iii) above. In parallel to the increase in the arbitration-friendly decisions of the Turkish court, we observe an increase in determination of a Turkish city as the seat of arbitration in many contracts with a foreign element.

The Turkish International Arbitration Law No. 4648, which governs annulment proceedings involving a foreign element, provides a familiar legal framework to foreign parties as it is based on the Model Law and its annulment grounds are almost identical to those of recognition and enforcement under the 1958 New York Convention.

Boom in third-party funding arrangements

Turkish parties have been resorting to third-party funding more than ever in the last few years. It is more visible in cases where insolvent or close-to-insolvency Turkish parties benefit from third-party funding. The majority of commercial parties would weigh less advantageous and need financial assistance in prolonged legal battles up against all-powerful sovereign parties, entities, or giant corporations. Turkish legislation does not explicitly regulate third-party funding nor does it prohibit arrangements in this respect. This allows and attracts especially Turkish parties to be courageous in many aspects to bring claims with the support of third-party funders.