REUTERS | Umit Bektas

End of a long-lasting debate on the legal nature of arbitration agreements in Turkey?

In its recently published decision, numbered 2016/2 E and 2018/4 K and dated 13 April 2018, the General Assembly of Civil Chambers in Turkey decided that an arbitration agreement had a procedural nature. As a result, arbitration awards stemming from arbitration agreements signed before 1 October 2011, the date the new Civil Procedural Code (new CPC), numbered 6,100, came into force, are subject to the new CPC and subject to setting aside rather than an appeal.

Background

The Turkish Code of Civil Procedure, numbered 1086 (previous CPC), which governs domestic arbitration, was substantially amended in 2011 to bring the provisions on domestic arbitration into line with the UNCITRAL Model Law. Accordingly, the new CPC, which is based on the UNCITRAL Model Law, entered into force on 1 October 2011.

With the entry into force of the new CPC, the most important amendment was undoubtedly recourse to a legal remedy against an arbitration award. Under the previous CPC, the losing party was entitled to appeal the award and when the award was appealed, the Turkish Supreme Court was able to review the substance of the award. However, under the new CPC, the only recourse in domestic arbitration is the setting aside of the award, as is the case for international arbitration. This substantial change engendered much debate. There were divergent views as to which code should be applied to arbitration awards rendered after 1 October 2011, based on arbitration agreements that were signed between the parties before 1 October 2011. Court decisions were not consistent on this issue. For this very reason, the General Assembly of Civil Chambers felt it necessary to analyse the issue, so as to put an end to the discussions.

Decision

When determining which code should be applied to awards derived from arbitration agreements concluded before the entry into force of the new CPC, the General Assembly of Civil Chambers discussed the well known and long-standing debate concerning the legal nature of arbitration agreements. As in other national laws, this issue is still being debated in Turkey in both doctrine and practice. As there is no clarity in this respect, courts are deploying different views in determining the recourse applicable in relation to these arbitration awards.

The court, in its decision 2016/2 E and 2018/4 K, emphasised that there are a few theories in respect of the legal nature of arbitration agreements. If an arbitration agreement is contractual by nature, it must be interpreted to be within the framework of the parties’ intentions (contractual theory). In such cases, arbitration awards must be deemed as contracts instead of court decisions and, if they are not voluntarily complied with, this should be considered as a breach of contract.

However, the court further considered that an arbitration agreement is jurisdictional in nature (jurisdictional theory) if it affects the procedural law because the parties are changing the dispute resolution method by agreeing to arbitration.

The court also emphasised a third theory. According to those who opine that an arbitration agreement is both contractual and jurisdictional by nature, neither the jurisdictional theory nor the contractual theory alone adequately encapsulates the legal nature of the arbitration agreement (mix/hybrid theory). In accordance with this theory, arbitration agreements are formed by the parties; therefore, their formation should be subject to the provisions of contractual law, but the award stemming from the arbitration agreement should be deemed a court decision, showing its procedural character.

Following this, the court emphasised that if arbitration agreements have a contractual nature, the amendments to contractual rules will not be applied retroactively to a case. In other words, when there is a change in the contractual rules, this rule shall apply to cases that occurred after this change, whereas the amendments to the procedural laws will be applied immediately.

Subsequent to these explanations, the court accepted that the arbitration agreement bore the characteristics of procedural law; therefore, the new CPC was to be applied to arbitration agreements that were concluded prior to it as well. The importance of this judgment is that if we consider an arbitration agreement as a matter of procedural law, the “principle of immediate application” shall apply.

Therefore, since arbitration agreements are defined as a matter of procedural law, arbitration awards stemming from arbitration agreements concluded before entry into force of the new CPC will not be subject to appeal under the previous code. Instead, they will only be subject to the setting aside procedure as per the new CPC, by virtue of the principle of immediate application of rules of procedure.

The court also noted that the new CPC does not provide a special transnational provision in respect of arbitration agreements.

Comments

The General Assembly decision is important in many respects. The legal nature of arbitration agreements is controversial and has been the subject of numerous court decisions in the past. Similar to this decision, the General Assembly also concluded in its decision dated 6 December 1969 (numbered 1969/866 E and 1970/5 K) that arbitration agreements are procedural in nature with their main function being to solve a dispute. Nevertheless, there are other decisions of the Court of Appeal that took into account the contractual nature of the arbitration agreements. After almost 50 years, the General Assembly’s acceptance of arbitration agreements as a contract under procedural law limits the debate on the Turkish courts’ view on the legal nature of arbitration agreements.

Another important aspect of this General Assembly decision is that, prior to this case, there was inconsistency as to which law applied to awards derived from arbitration agreements concluded before the entry into force the new CPC. Following its assessment of the procedural nature of arbitration agreements, the General Assembly clarified that they should be subject to the immediate application of provisions of the new CPC, which is in line with the modern arbitration rules.

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