• Resolution of Disputes through Arbitration in Agreements Concluded under the Public Procurement Contracts Law
  • February 4, 2018
  • Important steps have been taken in the resolution of disputes through arbitration in Turkey, in order to incentivize parties to include arbitration clauses into their agreements. Especially with the establishment of the Istanbul Arbitration Centre ("ISTAC"), parties have been informed on the resolution of disputes through arbitration, and have been encouraged to include arbitration clauses into the agreements they conclude. Within this context, new laws and regulations have been adopted in order to facilitate the inclusion of arbitration clauses by public authorities and institutions.

    A current development in arbitration, pertaining to the possibility to include an arbitration clause in agreements concluded under Public Procurement Contracts Law numbered 47351, is analyzed in this article.

    Resolution of Disputes of Public Authorities and Institutions through Arbitration

    Arbitration is an exception to the general rule stating that disputes should be resolved through the state courts. Accordingly, arbitration may only be stipulated under the condition that the parties to the dispute agree thereto, as an alternative dispute resolution mechanism.

    Especially, and subsequent to the establishment of the ISTAC, important steps have been taken to ensure that public authorities and institutions may select this mechanism. A very important example is the Prime Ministry Circular numbered 2016/25. This circular sets forth that "in order to provide that disputes would be resolved in an efficient, impartial, flexible and confidential manner, in accordance with international standards, by saving time and monetary sources, it should be ensured that public authorities and institutions are informed of arbitration as a dispute resolution mechanism, and further action to be taken, through considering arbitration as a dispute resolution mechanism in the agreements to which public authorities and institutions are parties2.

    Following this initiative, through implementation of the regulations published in the Official Gazette dated December 30, 2017 and numbered 30286 (reiterated), pertaining to the amendment of the regulations on the agreements to be concluded pursuant to the Public Procurement Contracts Law, important regulations have been adopted in the matter of arbitration selected in public procurement contracts.

    These regulations pave the way for the selection of arbitration as a dispute resolution mechanism, and especially using ISTAC arbitration, in standard contracts to be found in the attachment of implementation regulations pertaining to framework agreement tenders, consultancy service procurement tenders, goods procurement tenders, and construction work tenders.

    Review of the New Regulations

    With regard to each one of the services mentioned, above, dispute resolution clauses to be agreed upon in the agreements to be concluded pertaining to public tenders have been drafted, similarly.

    For the resolution of disputes that may arise during a contractual relationship, there is a choice to be made between Turkish courts and arbitration. If Turkish courts are chosen, competent courts and execution offices are those located at the seat of the relevant administrative authority. In the event that Turkish courts are selected, only courts that are located in the seat of the administrative authority may be agreed upon.

    Another decision that may be taken with regard to the resolution of disputes is arbitration as a dispute resolution mechanism. This mechanism is analyzed, below, in more detail.

    Resolution of Disputes through Arbitration in Light of the New Regulations

    The new regulations provide detailed provisions on the selection of arbitration as a dispute resolution mechanism. Different provisions are to be applied, depending on whether the case at hand is within the scope of Article 2/1/1 of International Arbitration Act numbered 46863 ("IAA"). The relevant provision is to be found under the Article in the IAA regulating foreign element, and sets forth that there is foreign element if the legal seat, habitual residence, or place of business of the parties to the arbitration agreement, are in different states.

    In line with the explanations, above, the provisions that provide for the resolution of disputes through arbitration set forth the selection of ISTAC arbitration for the cases outside of the scope of Article 2/1/1 of the IAA. In these cases, it is possible to select the seat of the relevant administrative authority or Istanbul as place of arbitration. Other provisions pertaining to the arbitration clause are the selection of the Turkish language as the language of the arbitration proceedings, arbitral tribunal of three arbitrators, and Turkish law as the law to be applied as substantive law.

    Another possibility if the parties select arbitration as the dispute resolution mechanism is whether the case at hand is within the scope of Article 2/1/1 of the IAA. In such case, the parties have discretion in light of the new regulations. Accordingly, it is possible to select ISTAC arbitration, or arbitration within the provisions of the IAA, as the dispute resolution mechanism.

    If it is selected to resolve the dispute under ISTAC rules, it is possible to select the seat of the relevant administrative authority or Istanbul as place of arbitration. These disputes with a foreign element are regulated differently other than our explanations, above, and it is possible to agree freely on the language of arbitration and substantive law to be applied in the arbitration proceedings. The arbitral tribunal shall be composed of three arbitrators.

    On the other hand, if it is agreed that the dispute shall be resolved within the IAA, the provisions to be included in the relevant agreements differ. In such case, as there is no institutional arbitration, more detailed provisions may be found concerning the selection of arbitrators.

    In disputes to be resolved within the provisions of the IAA, the arbitral tribunal shall be composed of three arbitrators. Each one of the parties shall select one arbitrator, and these two arbitrators shall select the third arbitrator within thirty days. In the event that one of the parties does not appoint its arbitrator within thirty days upon receipt of the request of appointment from the other party via notary public, or if the two arbitrators appointed by the parties do not appoint the third arbitrator within thirty days upon their appointment, the arbitrators shall be appointed by the civil court of first instance located at the seat of the relevant administrative authority, upon request of one of the parties. In this case, the third arbitrator appointed by the court shall act as chairman.

    In arbitrations to be conducted in accordance with the IAA, it is possible to select the applicable substantive law in conformity with the preference of the parties. Similarly, the language of arbitration may also be selected accordingly. As place of arbitration, the seat of the relevant administrative authority, or Istanbul, may be selected. Pursuant to the IAA, the competent court for the matters that are within the authority of state courts is the civil court of first instance located at the seat of the relevant administrative authority.

    Conclusion

    With the regulations analyzed, above, the will pertaining to the use of arbitration and especially, ISTAC arbitration, by state authorities has been solidified. Accordingly, important discretion has been granted in favor of Turkish and foreign investors who enter into public procurement contracts. Another advantage that the parties may benefit from, provided by ISTAC arbitration, is the possibility to file the lawsuit for amounts lower than the proportional fees charged by Turkish courts, with the requirement that the arbitral award shall be given within a very short period of time. It is certain that these developments will contribute the development of arbitration as a dispute resolution mechanism in Turkey.

    (First published on the website of Erdem&Erdem in January 2018)


    1 Public Procurement Contracts Law numbered 4734, published in the Official Gazette dated 22.01.2002 and numbered 24648.
    2 Prime Ministry Circular numbered 2016/25 titled Istanbul Arbitration Centre (ISTAC), published in the Official Gazette dated November 19, 2016 and numbered 29893.

    3 International Arbitration Act dated 21.06.2001 and numbered 4686, published in the Official Gazette dated 05.07.2001 and numbered 24453.