Litigation and Alternative Dispute Resolution

Contact: Prof. Dr. H. Ercument Erdem; Erdem & Erdem (Turkey)

Introduction

In accordance with International Arbitration Act numbered 4686 (“IAA”), the only legal remedy for arbitral awards is the action to set aside. One of the most significant aspects of selecting arbitration as a dispute resolution method is that most of the legal systems lack regulations regarding the legal remedy to appeal arbitral awards. By means of its article 15, the IAA solely enables actions to set aside arbitral awards. As a consequence of such, examination of the merits of arbitral awards in courts is precluded. There are also Courts of Cassation resolutions in this regard[1].

Reasons for Filing an Action to Set Aside

Reasons to set aside listed under article 15 (A) of the IAA are limited. An action to set aside for reasons not covered under this article is not permissible. For instance, an action to set aside shall not be filed on grounds of the arbitral award being incorrect in terms of merits.[2] The reasons to set aside may be examined under two headings – court ex officio and reasons asserted by the parties.

Reasons Examined Ex Officio

The reasons that shall be regarded ex officio by the courts are arbitrability, and breach of public order.

Arbitrability

In accordance with Art. 15 (A)(2)(a) of the IAA, the courts examine the arbitrability of disputes in accordance with Turkish law, as a reason to set aside. IAA Art. 1 is comprised of another regulation on arbitrability[3]. Within this context, disputes regarding the real rights of immovable properties located in Turkey, and disputes that are not subject to the will of both parties are not arbitrable. Due to the fact that there will be no concerns regarding Turkish public order in cases in which the dispute concerns a real right regarding an immovable property that is not located in Turkey, the IAA may be applied, for cases where the dispute at hand is considered arbitrable in the law of the state in which the immovable property is located. Other disputes that are precluded by the Court of Cassation to be resolved by arbitration are cancellation of title deeds and registrations. The Court of Cassation also decided that lease-related disputes, such as disputes arising out of evacuation or rent shall not be resolved by arbitration[4]. The Court of Cassation has also rendered decisions stating that disputes regarding labor law are not arbitrable.[5] Within this context, Article 20 of the Labor Law enables disputes regarding termination of employment agreements to be resolved through arbitration upon the agreement of the parties. It is accepted that the disputes regarding trademarks and patents shall be resolved through arbitration. In addition, disputes that fall within the competence of administrative procedure shall not be resolved via arbitration. The only exclusion thereof are disputes arising out of concession agreements regarding public services[6].

Breach of the Public Order

Another reason that can be ex officio assessed by the courts, as governed under Art. 15 (A) (2) (b) of the IAA, is the breach of public order. The meaning of the term public order varies in terms of time and place. Therefore, the judges must be diligent in exercising their discretionary powers in this regard.

Reasons Asserted by the Parties

The reasons to set aside as per Art. 15 (A) (1) of the IAA are invalidity of the arbitration agreement due to incompetence as per the applied law, if there is no such law, Turkish law, breach of procedure in appointment of the arbitrators, no ruling within the duration of the arbitration, incorrect ruling of the arbitrators regarding their competence or incompetence, arbitrators ruling on matters falling outside of the scope of the arbitration agreement, not ruling for all matters set forth in the claims of the parties or exceeding their authority, and inconformity of the arbitral proceeding with the procedure and principle of the equality of the parties. However some of these reasons can be seen together therefore it is advised that such reasons should be more simply regulated through an amendment to the law.

Invalidity of the Arbitration Agreement Being Due to Incompetence, as per the Applied Law, and if there is no such Law, Turkish Law

In order for the arbitration agreement, which is the most significant and main element of arbitration, to be deemed valid, the parties should be capable. One of the significant issues here is the law to be applied to capacity. In a foreign dispute to which the IAA shall be applied, the court shall consider the International Private and Civil Procedural Law (“IPCPL”). According to Article 9 of the IPCPL, the national laws of the parties shall be considered to be the determinant law in the case at hand.

In accordance with the same paragraph, another reason is the arbitration agreement being rendered invalid as per the law to be applied to the validity of the arbitration agreement, which is determined by the parties. If the parties showed no will in this regard, and did not determine the law to be applied to the validity, the validity of the arbitration agreement shall be evaluated in accordance with the Turkish laws. The invalidity of an arbitration agreement shall be at stake in terms of form, defective intentions or signing of such agreement by an incompetent person. The issues regarding the form of the arbitration agreement and defective intentions shall be resolved as per Art. 4 of the IAA. The invalidity of an arbitration agreement by virtue of an incompetent representative may be eliminated by subsequent consent. Moreover, the authority to execute an arbitration agreement by proxy shall only be allowed given that the power of attorney constitutes a special authority thereof (TCO Art. 504).

Breach of Procedure in Appointment of the Arbitrators

In accordance with such provision, the procedure to be complied with, in terms of appointment of the arbitrators, shall be the procedure determined by the parties under the arbitration agreement or the procedure envisaged under the IAA. The IAA provisions enable the parties to determine the number of the arbitrators, such as many institutional arbitration institutions, or the UNCITRAL Model Law. The mandatory rule to which the parties must comply with is that the number of the arbitrators should be an odd number. As per the IAA, the claimant shall inform the respondent as soon as an arbitrator is appointed and the respondent shall appoint an arbitrator within 30 days. If the respondent does not appoint an arbitrator, the arbitrator shall be appointed by the civil court of first instance. Following the appointment of the two arbitrators, such arbitrators shall appoint the presiding arbitrator. In cases where the presiding arbitrator cannot be determined, the presiding arbitrator shall be appointed by the civil court of first instance. In order for this appointment to be considered as a reason to set aside, this procedure shall be considered to have been in violation.

Not Ruling within the Time Limit

In accordance with Art. 10 of the IAA, the duration of arbitration is 1 year. This duration commences as of the date of appointment of the arbitrator in proceedings with a single arbitrator, and as of the date of preparation of the first meeting minutes of the arbitral tribunal in proceedings with multiple arbitrators. The parties may agree otherwise regarding the commencement of the time limit. There are different opinions in the Doctrine regarding this reason. It is sometimes seen to create an unjust reason to set aside for the losing party.

Incorrect Ruling of the Arbitrators Regarding their Competence or Incompetence

In accordance with Art. (7)(h) of the IAA, the arbitrators may give rulings regarding their own competences (competence-competence). Accordingly, the objection asserted by the parties regarding the incompetence shall be examined as a preliminary question. Wrong /unlawful decisions rendered as a consequence of this examination shall also constitute a reason to set aside.

Arbitrators Ruling on a Matter Falling outside of the Scope of the Arbitration Agreement or not Ruling for All Matters Set Forth in The Claims of the Parties or Exceeding Their Authority

Arbitrators shall only decide on matters that fall within the scope of the arbitration agreement. If there is a restriction in the arbitration agreement in this regard, the arbitrators are obliged to comply. The part of the award incompetently ruled by the arbitrators shall be set aside to the degree that it can be separated from the award; the competently ruled part thereof shall be deemed valid.

The arbitrators are obliged to render an award in reference to the claims of both parties; thus, disregarding such claims shall also constitute a reason to set aside. If the arbitrators do not give a decision on certain claims, the parties may ask for a supplementary award.

In cases where the parties have determined the rules to be applied to the arbitration proceedings, the arbitrators are obliged to comply with such rules. Otherwise, it shall mean that the arbitrators have exceeded their authority. Within this context, the authority of the arbitrators shall be restricted by the arbitration agreement and the agreement between the parties.

Inconformity of the Arbitral Proceeding with the Procedure

In accordance with Art. 15(A)(1)(f) of the IAA, unless there is an agreement between the parties, in order for an arbitral award to be set aside, this will depend on the fact that the arbitral proceedings have been carried out inconsistently with the provisions of the IAA, and that this inconsistency affects the merits of the award. The parties are free to determine the rules to be applied to the procedure of the proceedings, so long as such rules are in conformity with the law of the place of arbitration. If the parties make a determination in this regard, the arbitral proceeding shall be carried out in accordance with such rules. The determination of the breaches which shall affect the merits of the award shall be made in accordance with the characteristics of the case at hand. For instance, it can be stated that the breaches made during the submission of evidence, and the breaches regarding the language and place of arbitration shall be deemed as breaches that affect the merits of the award. Arbitrators whom do not ground their decisions on certain justifications shall also be considered as a reason to set aside. In practice the question is the breach of right to due process.

The Principle of Equality of the Parties

The parties shall be treated equally throughout the arbitral proceedings with regard to procedural issues. A different perspective of the right to due process can be seen herein. The competence of the arbitrators appointed by the parties may give rise to arguments on the impartiality of the arbitrators. One of the significant points here is that the party appointed arbitrators shall not act as if they are the attorneys of the parties, and that they objectively observe the position of the party who appoints them.

Competent Jurisdiction

In accordance with Art. 15 of the IAA, the action to set aside shall be filed with the civil court of first instance. IAA Art. 3, on the other hand, govern the competent court jurisdiction. Pursuant to such article, the competent court and the court having jurisdiction is the civil court of first instance located in the same place as his/her settlement or the ordinary domicile or the workplace of the respondent; and in cases where the respondent does not have a settlement, ordinary domicile or workplace in Turkey, the competent court having jurisdiction shall be the Istanbul Civil Court of First Instance. Commercial lawsuits (TCC Art. 4) are filed with the commercial court of first instance (TCC Art. 5). In cases where the action to set aside has a commercial characteristic, the action should be filed with the commercial court of first instance[7].

The concerned party shall file the action to set aside within 30 days. In order for this period of 30 days to start, the parties shall be notified of the arbitral award, the decision regarding amendment, interpretation or completion.

Conclusion

Within the scope of the IAA, the action to set aside is the sole legal remedy to be pursued against arbitral awards, and it suspends the execution of the arbitral award at hand. In the Doctrine whether suspension of the arbitral award is an appropriate consequence for the action to set aside is disputed. The consequence expected to be obtained from the arbitral proceeding, which consists procedural vulnerabilities and extensively includes wills of the parties, shall be deemed void and shall not be enforced, if the reasons that are regulated under the IAA and mentioned, above, exist. Within this context, during the initiation and continuation processes of the arbitration, the attention to be shown by both the arbitrators and the parties on the procedural issues bear significance in terms of enforceability of the arbitral awards.