Turkey warms
The ?Arbitration Issue?
All the various Governments that have ruled Turkey since the mid-80s have shared one common declared policy ? privatisation.
But lack of efficiency and legal clarity have hindered the inflow of foreign investment. The primary obstacle has been the non-availability of a ?neutral? jurisdiction to resolve disputes arising from contracts signed between the project company and the Turkish Government.
To resolve this issue, commonly referred to as the ?arbitration issue?, the Turkish Parliament passed Law no 4446 ? on August 13, 1999 ? amending Articles 47, 125 and 155 of the Turkish Constitution. But what do these changes mean for the project finance market?
The Proposed Solution: The Constitutional Amendments
Amendment to Article 47 of the ConstitutionThe amendment introduces the concept of ?privatisation? in addition to the existing concept of ?nationalisation?. There has been a longstanding argument that ?privatisation? lacked legitimacy, being deprived of a clear base in the Turkish Constitution. But a Constitution does not need to provide a specific base for each law to be passed; it is sufficient that laws passed do not violate an express provision of the Constitution. And in the past Turkey has passed numerous privatisation laws, which are still valid.
However from a formalistic point of view, the introduction of the concept in the Constitution is welcome.
The amendment also provides that the Turkish Parliament is authorized to determine conditions and procedures applicable to the privatisation of state owned assets and services through passing legislation. The amendment confirms that through this authority, the Parliament can decide which state-run investments and services can be privatized through private law contracts (as opposed to administrative law contracts-of which ?concessions' are a sub-category).
It is arguable that an amendment of the Constitution was not required to set this simple principle. However, it is important to remember that Constitutional Court decisions have annulled provisions of the BOT Laws which stated that contracts signed under these laws were ?private law contracts?. The Constitutional Court had ruled that these could not be qualified as private law contracts by the legislator. They were deemed to be ?concessions? because they related to the performance of a public service and therefore had to be governed by Turkish administrative laws and had to undergo the jurisdiction of the Turkish Administrative Courts.
That is how the whole ?arbitration issue? was generated in the first place. Because the High Court authorized itself to determine which services constituted ?public services?, despite the view of the Parliament, and despite the fact that there was no definition for public services in the Constitution.
Therefore, amendment of the Constitution establishes to its rightful place the role of the Parliament in resolving such sociopolitical issues.
The amendment is extremely important. Once the Parliament defines an investment and related services as outside the scope of ?public services?, and to be privatized through private law contracts, the legal framework applicable to the concerned privatisation becomes one of private law. As a result, there is no involvement of the Council of State (Danistay) or administrative laws, or the need to submit to the jurisdiction of the Turkish Administrative Courts. Based on this amendment, the Parliament could amend existing BOT laws (3996, 3096) to ensure that contracts signed under these laws will be private law contracts.
Amendment to Article 125 of the Constitution
Article 125 relates to the judicial review of administrative acts. The amendment adds that disputes arising out of concession contracts relating to the performance of a public service can be subject to local or international arbitration. Further, the amendment foresees that international arbitration is only available for ?disputes carrying a foreign element?.
This amendment addresses the ?arbitration issue? from a different perspective. This is the perspective where no change is made to current BOT Laws and the contracts signed thereunder are still considered as concession contracts, rather than private law contracts.
Through this amendment the Government wants to ?secure? this situation as well and tries to bring a direct and immediate solution to contracts signed or awaiting signature under current laws.
This effort and the amendment of Article 125 constitute a positive improvement, however, it brings up new discussions on the qualification of ?foreign element? and ?local vs international arbitration?.
Qualification of a Foreign Element
The only Turkish piece of legislation referring to a ?foreign element? is Law no 2675 on Private International Law and Procedure Law. However, the law only uses the reference to ?private law relationships carrying a foreign element? to set its own scope of application; it does not define what a foreign element is.
Usually, the doctrine will accept the following as forming a foreign element; a foreign party, the execution of a contract in a foreign territory, (sometimes even the choice of foreign law ? which is probably an excessively liberal interpretation).
None of the above serves our case. BOT contracts for power or other infrastructure projects are signed between a Turkish project company and the Turkish Government and the contract is performed in Turkey. Indeed, even though the project company can be fully foreign owned, it has to be formed in accordance with the Foreign Investment Law no 6224 as a Turkish legal entity.
Considering that there is no piece of law or precedent determining the issue in a definite manner; the determination of what constitutes a foreign element is left to a large extent to the Courts. Given the conservative approach of the Turkish High Courts to these matters, it is doubtful whether the involvement of foreign capital (through investment and credits) will suffice to constitute the required foreign element of the dispute.
To prevent any risk of claim against a BOT contract comprising an international arbitration clause, the Government could propose legislation to clearly define ?foreign element? in Law no 2675. The definition would make a particular reference to the economic aspect of the relationship, especially the existence of foreign capital.
Qualification and Implications of Local vs International Arbitration
If we take the conservative interpretation and assume that there is no foreign element in disputes arising from BOT contracts, we understand that such disputes will need to be submitted to local arbitration. We therefore need to assess the implications of local arbitration and whether this format can be acceptable to foreign investors and lenders.
Qualification
There is no specific rule of law defining local vs international arbitration. Various criteria have been set by the Turkish Courts in the past, but two have prevailed with great force. The primary criteria is the nationality of the procedural rules applied to the arbitration, and the secondary criteria is the venue of arbitration. (Both criteria are also recognized by the New York Convention on enforcement of foreign arbitral awards).
It is our opinion that the location of the venue of the arbitration should not be a determinant factor for the investors and lenders. Therefore, what is more important is the need for local arbitration to be subject to Turkish rules of procedure.
Implications
What is sought by the investors and lenders insisting for ?international arbitration?;
?an impartial set of judges,
?rules of procedure to an international standard, and
?an impartial instance of appeal.
We need to understand if Turkish procedural rules for arbitration (Turkish Procedural Code, Articles 516-536) meet this challenge.
The Turkish procedural rules for arbitration are not detailed to a very large extent and therefore leave a lot of ground for the Parties' own arrangements. In this respect, for example, the Parties may freely designate ? a priori or a posteriori ? the arbitrators of the case. We do not believe that the appointment of a majority of foreign arbitrators would have the arbitration re-qualified as ?international? (indeed this criteria is not commonly used by the Courts, and is not seen as sufficient to change the qualification of the arbitration).
In other words, using the Turkish Procedural rules, the parties could freely set their own arrangements and; i) elect an impartial set of arbitrators, and ii) determine rules of procedure to conform to recognized standards.
The only outstanding issue is the appeal of the arbitral decision.
The arbitral decision rendered in this context can be appealed by any one of the Parties before the High Turkish Civil Court {Court of Private Law}. The Law only foresees a very limited number of grounds for the cassation of an arbitral award, and all of these relate to procedure, (i.e.; the award is rendered after the expiration of the arbitration period, one of the demands is left undecided) none to the merits of the case. Although, to be complete, we need to state that a decision of the High Civil Court of January 28, 1994 rendered on an appeal from a local arbitral award has introduced some more ground for ?manoeuvre? to the High Court with respect to an appealed arbitral award.
However, on this issue one needs to remember that;
?any international arbitral award, even final, will need to be enforced (obtain exequatur) in Turkey, by a Turkish Court to be enforced against the Turkish Government; and
?the grounds available to the Turkish Court to refuse the grant of the exequatur are at least as comprehensive as those set in the Turkish Procedural Code for the cassation of a local arbitral award.
In other words, we can say that on this issue, both type of arbitration (local and international) lead to a similar result.
We therefore believe that even in the most adverse scenario, where there would be a requirement for local arbitration, the Parties could agree on a detailed arbitration clause (or separate arbitration agreement), mainly reflecting the recognized international formats and setting an impartial panel of arbitrators.
On this issue, there is one other perspective to explore ? Arbitration under ICSID rules.
ICSID rules constitute a recognized and respected body of international arbitration rules. ICSID Rules, as one will know, are applicable to disputes arising from investment contracts signed between citizens of a Contracting State of the ICSID Convention and another Contracting State.
The ICSID Convention has been approved and ratified by Turkey on May 27, 1988, through Law no 3460 ? ICSID rules are now fully part of Turkish Law.
Further, the Turkish ICSID Law expressly provides that disputes arising in relation to foreign investment brought in Turkey in compliance with the Foreign Investment legislation (that is through the formation of a local company) can be subject to arbitration under the ICSID Law (Article 1). And further, that a company ?controlled by foreigners? can qualify as ?a citizen of the other Contracting State? (Article 25/2/b). These provisions not only could lead to a broader definition of the ?foreign element? (see previous section) but also imply that in any case, ICSID Law and its rules could be applied to disputes arising from concession contracts and possibly qualify as local arbitration.
Arbitration under ICSID presents the increased advantage of expedited enforcement. In this respect, the Turkish Government still needs to designate the Court which will be charged with ?executing? (as opposed to ?enforcing?) the ICSID decision.
We wish to underline however that the interpretation and implementation of the ICSID Convention in Turkey are still quite ?untested?. And therefore, our preliminary thoughts on the possibility to qualify ICSID rules as ?local? remain to be further explored and verified, in view, among other things, of the involvement of an international body, the Center (near the World Bank) on the whole procedure.
Amendment to Article 155 of the Constitution
Article 155 of the Constitution determines the duties of the Council of State. The amendment transforms the role of the Council of State regarding concession contracts, from ?reviewing? to ?proving an opinion'.
Without entering into legalistic discussions, we can say that the amendment basically aims to reduce the interference of the Council of State on the provisions of the concession contracts, while keeping it in the picture.
In practice, one will need to see what effect the non-binding ?opinions? of the Council of State will have on the civil servants of the various Government bodies negotiating the concession contracts with private parties. In any case, we still feel that the Government will have more flexibility to accept certain changes to the current draft concession contracts long requested by the international community. These would include; determination of Government default, direct assignment of rights to the benefit of lenders, etc.
Conclusion
Although certain discussions remain on the exact impact of the amendments, mainly on the local vs international arbitration issue, if properly used by the Government, the amendments will suffice to create the right legal environment for these projects.
And gathering the required quorum to pass a Constitutional Amendment is a proof in itself of the Country's determination to create a Turkish legal environment acceptable to the international community.
All the various Governments that have ruled Turkey since the mid-80s have shared one common declared policy ? privatisation.
But lack of efficiency and legal clarity have hindered the inflow of foreign investment. The primary obstacle has been the non-availability of a ?neutral? jurisdiction to resolve disputes arising from contracts signed between the project company and the Turkish Government.
To resolve this issue, commonly referred to as the ?arbitration issue?, the Turkish Parliament passed Law no 4446 ? on August 13, 1999 ? amending Articles 47, 125 and 155 of the Turkish Constitution. But what do these changes mean for the project finance market?
The Proposed Solution: The Constitutional Amendments
Amendment to Article 47 of the ConstitutionThe amendment introduces the concept of ?privatisation? in addition to the existing concept of ?nationalisation?. There has been a longstanding argument that ?privatisation? lacked legitimacy, being deprived of a clear base in the Turkish Constitution. But a Constitution does not need to provide a specific base for each law to be passed; it is sufficient that laws passed do not violate an express provision of the Constitution. And in the past Turkey has passed numerous privatisation laws, which are still valid.
However from a formalistic point of view, the introduction of the concept in the Constitution is welcome.
The amendment also provides that the Turkish Parliament is authorized to determine conditions and procedures applicable to the privatisation of state owned assets and services through passing legislation. The amendment confirms that through this authority, the Parliament can decide which state-run investments and services can be privatized through private law contracts (as opposed to administrative law contracts-of which ?concessions' are a sub-category).
It is arguable that an amendment of the Constitution was not required to set this simple principle. However, it is important to remember that Constitutional Court decisions have annulled provisions of the BOT Laws which stated that contracts signed under these laws were ?private law contracts?. The Constitutional Court had ruled that these could not be qualified as private law contracts by the legislator. They were deemed to be ?concessions? because they related to the performance of a public service and therefore had to be governed by Turkish administrative laws and had to undergo the jurisdiction of the Turkish Administrative Courts.
That is how the whole ?arbitration issue? was generated in the first place. Because the High Court authorized itself to determine which services constituted ?public services?, despite the view of the Parliament, and despite the fact that there was no definition for public services in the Constitution.
Therefore, amendment of the Constitution establishes to its rightful place the role of the Parliament in resolving such sociopolitical issues.
The amendment is extremely important. Once the Parliament defines an investment and related services as outside the scope of ?public services?, and to be privatized through private law contracts, the legal framework applicable to the concerned privatisation becomes one of private law. As a result, there is no involvement of the Council of State (Danistay) or administrative laws, or the need to submit to the jurisdiction of the Turkish Administrative Courts. Based on this amendment, the Parliament could amend existing BOT laws (3996, 3096) to ensure that contracts signed under these laws will be private law contracts.
Amendment to Article 125 of the Constitution
Article 125 relates to the judicial review of administrative acts. The amendment adds that disputes arising out of concession contracts relating to the performance of a public service can be subject to local or international arbitration. Further, the amendment foresees that international arbitration is only available for ?disputes carrying a foreign element?.
This amendment addresses the ?arbitration issue? from a different perspective. This is the perspective where no change is made to current BOT Laws and the contracts signed thereunder are still considered as concession contracts, rather than private law contracts.
Through this amendment the Government wants to ?secure? this situation as well and tries to bring a direct and immediate solution to contracts signed or awaiting signature under current laws.
This effort and the amendment of Article 125 constitute a positive improvement, however, it brings up new discussions on the qualification of ?foreign element? and ?local vs international arbitration?.
Qualification of a Foreign Element
The only Turkish piece of legislation referring to a ?foreign element? is Law no 2675 on Private International Law and Procedure Law. However, the law only uses the reference to ?private law relationships carrying a foreign element? to set its own scope of application; it does not define what a foreign element is.
Usually, the doctrine will accept the following as forming a foreign element; a foreign party, the execution of a contract in a foreign territory, (sometimes even the choice of foreign law ? which is probably an excessively liberal interpretation).
None of the above serves our case. BOT contracts for power or other infrastructure projects are signed between a Turkish project company and the Turkish Government and the contract is performed in Turkey. Indeed, even though the project company can be fully foreign owned, it has to be formed in accordance with the Foreign Investment Law no 6224 as a Turkish legal entity.
Considering that there is no piece of law or precedent determining the issue in a definite manner; the determination of what constitutes a foreign element is left to a large extent to the Courts. Given the conservative approach of the Turkish High Courts to these matters, it is doubtful whether the involvement of foreign capital (through investment and credits) will suffice to constitute the required foreign element of the dispute.
To prevent any risk of claim against a BOT contract comprising an international arbitration clause, the Government could propose legislation to clearly define ?foreign element? in Law no 2675. The definition would make a particular reference to the economic aspect of the relationship, especially the existence of foreign capital.
Qualification and Implications of Local vs International Arbitration
If we take the conservative interpretation and assume that there is no foreign element in disputes arising from BOT contracts, we understand that such disputes will need to be submitted to local arbitration. We therefore need to assess the implications of local arbitration and whether this format can be acceptable to foreign investors and lenders.
Qualification
There is no specific rule of law defining local vs international arbitration. Various criteria have been set by the Turkish Courts in the past, but two have prevailed with great force. The primary criteria is the nationality of the procedural rules applied to the arbitration, and the secondary criteria is the venue of arbitration. (Both criteria are also recognized by the New York Convention on enforcement of foreign arbitral awards).
It is our opinion that the location of the venue of the arbitration should not be a determinant factor for the investors and lenders. Therefore, what is more important is the need for local arbitration to be subject to Turkish rules of procedure.
Implications
What is sought by the investors and lenders insisting for ?international arbitration?;
?an impartial set of judges,
?rules of procedure to an international standard, and
?an impartial instance of appeal.
We need to understand if Turkish procedural rules for arbitration (Turkish Procedural Code, Articles 516-536) meet this challenge.
The Turkish procedural rules for arbitration are not detailed to a very large extent and therefore leave a lot of ground for the Parties' own arrangements. In this respect, for example, the Parties may freely designate ? a priori or a posteriori ? the arbitrators of the case. We do not believe that the appointment of a majority of foreign arbitrators would have the arbitration re-qualified as ?international? (indeed this criteria is not commonly used by the Courts, and is not seen as sufficient to change the qualification of the arbitration).
In other words, using the Turkish Procedural rules, the parties could freely set their own arrangements and; i) elect an impartial set of arbitrators, and ii) determine rules of procedure to conform to recognized standards.
The only outstanding issue is the appeal of the arbitral decision.
The arbitral decision rendered in this context can be appealed by any one of the Parties before the High Turkish Civil Court {Court of Private Law}. The Law only foresees a very limited number of grounds for the cassation of an arbitral award, and all of these relate to procedure, (i.e.; the award is rendered after the expiration of the arbitration period, one of the demands is left undecided) none to the merits of the case. Although, to be complete, we need to state that a decision of the High Civil Court of January 28, 1994 rendered on an appeal from a local arbitral award has introduced some more ground for ?manoeuvre? to the High Court with respect to an appealed arbitral award.
However, on this issue one needs to remember that;
?any international arbitral award, even final, will need to be enforced (obtain exequatur) in Turkey, by a Turkish Court to be enforced against the Turkish Government; and
?the grounds available to the Turkish Court to refuse the grant of the exequatur are at least as comprehensive as those set in the Turkish Procedural Code for the cassation of a local arbitral award.
In other words, we can say that on this issue, both type of arbitration (local and international) lead to a similar result.
We therefore believe that even in the most adverse scenario, where there would be a requirement for local arbitration, the Parties could agree on a detailed arbitration clause (or separate arbitration agreement), mainly reflecting the recognized international formats and setting an impartial panel of arbitrators.
On this issue, there is one other perspective to explore ? Arbitration under ICSID rules.
ICSID rules constitute a recognized and respected body of international arbitration rules. ICSID Rules, as one will know, are applicable to disputes arising from investment contracts signed between citizens of a Contracting State of the ICSID Convention and another Contracting State.
The ICSID Convention has been approved and ratified by Turkey on May 27, 1988, through Law no 3460 ? ICSID rules are now fully part of Turkish Law.
Further, the Turkish ICSID Law expressly provides that disputes arising in relation to foreign investment brought in Turkey in compliance with the Foreign Investment legislation (that is through the formation of a local company) can be subject to arbitration under the ICSID Law (Article 1). And further, that a company ?controlled by foreigners? can qualify as ?a citizen of the other Contracting State? (Article 25/2/b). These provisions not only could lead to a broader definition of the ?foreign element? (see previous section) but also imply that in any case, ICSID Law and its rules could be applied to disputes arising from concession contracts and possibly qualify as local arbitration.
Arbitration under ICSID presents the increased advantage of expedited enforcement. In this respect, the Turkish Government still needs to designate the Court which will be charged with ?executing? (as opposed to ?enforcing?) the ICSID decision.
We wish to underline however that the interpretation and implementation of the ICSID Convention in Turkey are still quite ?untested?. And therefore, our preliminary thoughts on the possibility to qualify ICSID rules as ?local? remain to be further explored and verified, in view, among other things, of the involvement of an international body, the Center (near the World Bank) on the whole procedure.
Amendment to Article 155 of the Constitution
Article 155 of the Constitution determines the duties of the Council of State. The amendment transforms the role of the Council of State regarding concession contracts, from ?reviewing? to ?proving an opinion'.
Without entering into legalistic discussions, we can say that the amendment basically aims to reduce the interference of the Council of State on the provisions of the concession contracts, while keeping it in the picture.
In practice, one will need to see what effect the non-binding ?opinions? of the Council of State will have on the civil servants of the various Government bodies negotiating the concession contracts with private parties. In any case, we still feel that the Government will have more flexibility to accept certain changes to the current draft concession contracts long requested by the international community. These would include; determination of Government default, direct assignment of rights to the benefit of lenders, etc.
Conclusion
Although certain discussions remain on the exact impact of the amendments, mainly on the local vs international arbitration issue, if properly used by the Government, the amendments will suffice to create the right legal environment for these projects.
And gathering the required quorum to pass a Constitutional Amendment is a proof in itself of the Country's determination to create a Turkish legal environment acceptable to the international community.
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