The International Centre for Settlement of Investment Disputes (“ICSID” or “Centre”), located in Washington, was established in 1965 by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (“ICSID Convention”) to provide a forum for conflict resolution in a framework that balances the interests and requirements of the parties involved. The rationale behind providing such a forum was, to introduce a special conciliation and arbitration system for investment disputes, especially after nationalization and compensation threats against the investment flows in the 1960s.(2)
The ICSID Convention considers international cooperation for economic development and the role of private international investments.(3) Further, it recognizes international methods of settlement which may be more appropriate in international investment disputes. (4)
As an investor-welcoming country and as a party to various multilateral(5) and bilateral investment treaties (“BITs”), Turkey signed(6) and ratified(7) the ICSID Convention, which permits investment disputes between Turkey and foreign investors to be submitted to ICSID. Accordingly, ICSID Convention has particular importance for Turkey’s investments, in particular, the public-private partnership investment projects (“PPP Projects”) to be developed by foreign private investors in Turkey.
In this article, firstly, we set the basic characteristics of the ICSID system. Secondly, we discuss the enforceability of the ICSID awards in Turkey and share our final remarks and practical concerns on the matter.
1. Scope of Implementation and Requirements
Under Article 25/1 of the ICSID Convention, the jurisdiction of the Centre may extend to any legal dispute arising directly out of an investment between the parties who consent in writing to submit their disputes to the Centre. In light of Article 25/1, for a dispute to be settled before ICSID, certain requirements must be met.
First, the dispute to be settled under the ICSID system must be in relation to “an investment”. There is no definition of “investment” under the ICSID Convention, therefore, this lack of definition enables ICSID arbitration to cover all types of investments, including untraditional ones such as services agreements or technology transfers.(8) The definition covers concession agreements as well. For instance, in Lanco International v. Argentina, the ICSID Arbitral Tribunal concluded that it has jurisdiction over the dispute arising from a concession agreement, as the rights under the concession agreement constitute an investment according to Argentina – U.S. Investment Treaty.(9)
Secondly, both the host State (i.e., the state where the investment is made) and the State in which the private investor is a national must be among the contracting States. Therefore, it can be said that the ICSID Convention requires two parties from two different contracting States. However, the investor may be legally required to act with a local company established in the host-State. Under Article 25/2, the ICSID Convention envisages that the local companies under foreign control can also be considered nationals of another contracting State if the parties have agreed that they should be treated as nationals of another contracting State for the purposes of the ICSID Convention.
Thirdly, both the host contracting State and the investor of another contracting State must consent to the ICSID’s jurisdiction. Article 25/1 of the ICSID Convention limits the ICSID jurisdiction to cases where both parties have explicitly consented to submit their relevant dispute to the Centre. However, such consent does not need to be expressed in a single instrument and can be given at any time. The obligation to refer a dispute to ICSID can arise only after both parties (the foreign or national company and the relevant State or its agency) have agreed to submit to ICSID in a particular case or it is enacted in a State’s national investment legislation or is envisaged under a BIT(10) that investment disputes arising with foreign investors will be referred to ICSID.
2. Voluntary Character and Flexibility of the ICSID System
The ICSID system has a voluntary character. A state’s ratification of the ICSID Convention does not create any obligation by the state party to refer to the relevant dispute before the ICSID conciliation or arbitration.
In addition, the rules applicable to the ICSID proceedings are flexible in the sense that the parties may derogate from them to accommodate their particular needs. Most of the provisions of the ICSID Convention apply only in the absence of an agreement between the parties. Although the ICSID rules are highly flexible, they are specific enough to ensure that a party cannot frustrate the proceedings.
3. Exclusivity of the ICSID System
ICSID arbitration has an exclusive nature. In other words, once parties have consented to submit disputes to the ICSID arbitration, the local courts are no longer authorized to settle such disputes. Besides, Article 25/1 of the ICSID Convention assures that once parties have consented to submit disputes to the ICSID arbitration, neither party can unilaterally revoke its consent, even though the parties are free to decide to make use of the ICSID mechanism. Further, under Article 26 of the ICSID Convention, consent of the parties to the ICSID arbitration is deemed to be exclusive of any other remedy, unless the parties agree otherwise. As a consequence of this rule, ICSID arbitrations can proceed free from any judicial intervention or control.
4. Exhaustion of Local Remedies
The ICSID Convention gives investors direct access to an international forum and protects them against the refusal or abstention of the State party to a dispute after it has given its consent.
However, Article 26 of the ICSID Convention permits a State-party to require prior exhaustion of local remedies as a condition of its consent to ICSID. This condition may be specified in various ways. For instance, it may be stipulated in the investment agreement or in a BIT between the State concerned and the State of the foreign investors or it may be asserted by a declaration made by a State-party at the time of signature or ratification of the ICSID Convention. Turkey has not made such a declaration.
5. Governing Law and Application of Domestic Law
Article 42/1 of the ICSID Convention enables the dispute parties to agree on the governing law of the disputes. In the absence of a specific agreement on this matter by the Parties, according to Article 42/1, the tribunal shall apply the law of the contracting State-party (including its rules on the conflict of laws) together with such rules of international law as may be applicable.
6. Diplomatic Protection
Article 27 of the ICSID Convention prohibits a State-party from giving diplomatic protection or bringing an international claim, in respect of a dispute in which, one of its nationals or another contracting State has consented to submit to ICSID unless other contracting state has failed to comply with the award rendered in the relevant dispute. In other words, the ICSID Convention prohibits the investor’s State from espousing its national’s claim and, therefore, from exercising its right of diplomatic protection, as long as the matter may be considered by an ICSID tribunal.
7. Finality of the ICSID Award and the Annulment Procedure
ICSID awards are not subject to any appeal. The only review mechanism is the annulment procedure as outlined in Article 52 of the ICSID Convention. Therefore, even if it becomes necessary to call upon a judicial authority to enforce an ICSID award, the court would not be competent to review the award on any grounds whatsoever. Under the ICSID Convention, unlike other international systems of arbitration, there is no exception, even on the ground of public policy, to the binding nature of ICSID awards.
Article 52/1 of the ICSID Convention defines the annulment procedure for ICSID awards and provides that either party may request the annulment of the award on one or more of five specified grounds. Those grounds are as follows: (a) the tribunal was not properly constituted; (b) the tribunal has manifestly exceeded its powers; (c) there was corruption on the part of a member of the tribunal; (d) there has been a serious departure from a fundamental rule of procedure, or (e) the award has failed to state the reasons on which it is based.
The application for annulment may be made within 120 days after the date on which the award was rendered on the above ground(s) except for the corruption. If the annulment is requested on the ground of corruption, the annulment application may be made within 120 days after the discovery of the corruption and in any case, within 3 years after the date on which the award was rendered. An ICSID award may be annulled only by the ad hoc committee established according to the ICSID Convention. Pursuant to Article 52/6 of the ICSID Convention, if an award is annulled, the concerned dispute may be referred to a new tribunal, at the request of either party. It must be noted that the new tribunal, will review the dispute independent from the ad hoc committee’s findings and conclusions in the annulment decision.
8. Recognition and Enforcement of ICSID Awards
Article 53/1 of the ICSID Convention provides that an ICSID award is binding on the parties and as explained above, it is not subject to any appeal or any other remedy except for the annulment procedure.
Pursuant to Article 54/1 the State-party shall recognize the ICSID award as binding and enforce the pecuniary obligations imposed by that award within its borders as if the award was a final judgment of its national court. Article 54/2 provides that a party may obtain recognition and enforcement of the award simply by furnishing a certified copy thereof to a competent court or other authority designated for the purpose of each State party to the ICSID Convention. This simple procedure eliminates the obstacles to the recognition and enforcement of foreign commercial arbitral awards that may exist under most domestic legal regimes.
Under the ICSID Convention, there is no exception to the binding character of ICSID awards and the role of the courts of State-parties is purely to assist in the recognition of ICSID awards. As per Article 54/3 of the ICSID Convention, however, execution of an ICSID award, i.e., attachment of assets in favor of enforcement, is governed by local law.
Finally, as per Article 55 the procedure set forth under Article 54 for the recognition and enforcement of ICSID awards, is not considered as derogating from the States’ laws related to the immunity of that state.
The ICSID Convention is amended from time to time upon proposals of the contracting States. The most comprehensive amendments to ICSID Convention have recently entered into force on 1 July 2022.(11) The amendments introduce, among others, a more time-efficient and cost-saving process and more transparency in the proceedings.
1. Historical Background
Since the early 2000s, Turkey has been one of the leading countries in the development of PPP projects, in which one or more private sector investors undertake to develop a public project based on a PPP agreement executed with a public party. The PPP projects involve the expertise of the private sector in public infrastructure projects and are commonly used in the transportation, healthcare, energy and waste management sectors in Turkey.
Before 1999, PPP agreements were considered traditional concession agreements(12) and were subject to administrative law and approval of the Administrative Court of Appeal (Danıştay). Such administrative law nature of the PPP Agreements, the Administrative Court of Appeal’s approval process, and the lack of neutrality in dispute settlements were making the foreign investors reluctant to be involved in the PPP projects in Turkey. Considering the reluctance of the investors and with the aim to facilitate the flow of foreign investments and financing, the Turkish Constitution has been amended to permit private law agreement options for public services.(13) With the amendment to Article 47 titled “Nationalization and Privatization” a new paragraph was added, enabling certain public services which could be performed by or delegated to persons or corporate bodies, to be developed under private law contracts. Further, a new paragraph was added under Article 125 titled “Judicial Review” enabling the disputes arising from concession agreements concerning the public services to be settled through national or international (if the dispute involves an element of foreignness) arbitration. Following this amendment, the private law nature of the PPP Agreements and arbitration mechanisms are also envisaged under the PPP legislation.(14)
The adoption of the aforementioned provisions paved the way for the choice of arbitration for the resolution of disputes arising from private-law investment agreements, as an encouragement for foreign investors to invest in Turkey. In relation to international arbitration, Turkey signed and ratified the ICSID Convention and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards(15) (“New York Convention”) respectively. Moreover, Turkey is a party to 132 BITs with 98 countries (76 of which are currently in force),(16) which include measures to protect foreign investors and enable the submission of investment disputes arising from investment agreements (including PPP agreements), to international arbitration under certain conditions, even if the relevant PPP agreement does not include an arbitration clause.
2. Status of the ICSID Convention Under the Turkish Legal System
Upon ratification process, the ICSID Convention has been transposed into Turkish law. Pursuant to Article 90 of the Turkish Constitution “… International agreements that are duly put into effect shall have the force of law. Such agreements cannot be challenged in the Constitutional Court on the grounds of unconstitutionality.” As, the ICSID Convention has been duly put into effect in Turkey and has been transposed into Turkish Law, from the domestic law point of view, it has the same binding effect as a law. Therefore, for the settlement of disputes arising from the PPP projects in Turkey, foreign investors can apply to the ICSID arbitration, against the State for the risks and actions attributable to the relevant State authority.
ICSID arbitration is often described as being a “self-contained” system, intended to be entirely removed from national legal systems and national courts. With regard to enforcement, State-parties of the ICSID Convention agree in Article 54/1 that: “Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State.” Thus, Turkey, as a State-party to the ICSID Convention, must recognize and enforce any such resulting award. For instance, in PSEG v. Turkey, which is also known as the first ICSID case against Turkey, Turkey was found in breach of its obligation to accord the investor the fair and equitable treatment guaranteed under the U.S.A. – Turkey BIT and therefore, was required to pay PSEG Global compensation in the amount of USD 9,061,479,34 and to pay 65% of the total costs of the arbitration, including legal costs and fees.(17) Turkey regarded the ICSID award as a final judgment of a Turkish court and paid the required amount.(18)
To sum, it could be said that the Turkish legal regime for the settlement of disputes involving PPP investments is investor-friendly, as it enables the choice of ICSID arbitration mechanism for dispute resolution. Nevertheless, despite the clear wording of Article 54/1 of the ICSID Convention, the question arises whether Turkey could still resist the enforcement of an award issued by an ICSID tribunal. Turkish courts have been reluctant to accept arbitration as an alternative to their jurisdiction and have rendered some unfortunate decisions in relation to the enforcement of arbitral awards, in the context of the New York Convention, in 1994 and the ICSID Convention, in 2021.
In 1994, the General Assembly of the Turkish Civil Court of Appeal (Yargıtay) in its Unification Decision No. 1994/1, dated 28 January 1994(19) affirmed that it is entitled to review the merits of an arbitral award issued outside the Republic of Turkey and within the territory of a State that is a party to the New York Convention to the extent that the governing law of the contract underlying the dispute is Turkish law and the arbitration award misapplied Turkish law in a case where the New York Convention was applicable. This decision in our opinion conflicted with Article 533 of the Abrogated Turkish Civil Procedure Law No. 1086,(20) which did not envisage such a ground for review, as well as with the obligations of the Republic of Turkey pursuant to the New York Convention.
In another case in 2021, with respect to the cancellation request of the enforcement order initiated by Turkmenistan based on İçkale v. Turkmenistan ICSID Case(21) award under which the Turkish company was required to pay compensation, the 12th Chamber of Civil Court of Appeal interpreted Article 54 of the ICSID Convention and analyzed whether the national courts are allowed to examine the ICSID awards before enforcement of such awards in Turkey.(22) In its decision, the Civil Court of Appeal stated that it would be contrary to both Turkish law and the ICSID Convention, to directly recognize and enforce ICSID awards without any prior examination (or approval) by the national authorities. The Civil Court of Appeal ruled that since there is no designated authority in Turkey for the recognition and enforcement of the arbitral awards as stipulated under Article 54/2 (which is considered in the ruling as a pre-condition of recognition and enforcement of the ICSID Tribunal’s awards), arbitral awards cannot be directly enforced in Turkey as set forth in Article 54/1. Thus, according to the Court, such awards must be initially enforced in accordance with the recognition and enforcement rules of Law No. 5718 regarding International Private Law and Procedure Law,(23) which requires the Turkish courts’ separate enforcement decisions. It must be noted that, although the Civil Court of Appeal’s reasoning was based on “Turkey’s non-designation of a competent court or authority to enforce the awards” as stated in the expert opinion provided in the case, the Court missed the fact that, on 1 December 2017 Turkey appointed commercial courts of the first instance, and civil courts of the first instance (in the absence of commercial courts in the relevant place).(24)
In light of the above explanations, Turkey has provided the legal regime for the choice of ICSID arbitration for PPP investments, and it is our opinion that Turkey could not lawfully resist the enforcement of an ICSID arbitral award due to its binding effect as explained above, although, as exemplified above, the courts might follow different interpretations in terms of the recognition and enforceability of the arbitral awards.
Tiryakioğlu, p. 148.
.Lanco International Inc. v. The Argentine Republic, ICSID Case No. ARB/97/6, https://www.italaw.com/cases/608, accessed on 7 July 2022.
For instance, see the Agreement Between the Government of the Republic of Uzbekistan and the Republic of Turkey Concerning the Reciprocal Promotion and Protection of Investments, Article 10/4(c), https://www.lexpera.com.tr/mevzuat/uluslararasi-antlasmalar/turkiye-cumhuriyeti-hukumeti-ile-ozbekistan-cumhuriyeti-hukumeti-arasinda-yatirimlarin-karsilikli-2, accessed on 19 July 2022 and the Agreement Between the Slovak Republic Concerning Reciprocal Promotion and Protection of Investments, Article 9/2(c), https://www.lexpera.com.tr/mevzuat/uluslararasi-antlasmalar/turkiye-cumhuriyeti-ve-slovakya-cumhuriyeti-arasinda-yatirimlarin-karsilikli-tesviki-ve-korunmasina-1, accessed on 19 July 2022.
Presidency of the Republic of Turkey Investment Office, “Public Private Partnerships Q&A and Legislation in Turkey”, https://www.invest.gov.tr/en/library/publications/lists/investpublications/public-private-partnerships-qa-and-legislation-in-turkey.pdf, accessed on 19 July 2022, p. 25.
Presidency of the Republic of Turkey Investment Office, p. 25.
Please see Article 5 of the Build-Operate-Transfer (BOT) Law No. 3996, published in the Official Gazette No. 21959, dated 13 June 1994, Article 32/2 of the Decree on the Implementation of the BOT Law, published in the Official Gazette No. 27961 (Duplicate), dated 11 June 2011, and Articles 1 and 4 of the Healthcare PPP Law No. 6428, published in the Official Gazette No. 28582, dated 9 March 2013.
Law No. 3731 Regarding the Ratification of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Official Gazette, No. 20877, dated 21 May 1992.
The full list of the BITs that Turkey is a party to can be accessed from: https://investmentpolicy.unctad.org/international-investment-agreements/countries/214/turkey, accessed on 19 July 2022.
See PSEG Global Inc. and Konya Ilgın Elektrik Üretim ve Ticaret Limited Şirketi v. Republic of Turkey (PSEG v. Turkey), ICSID Case No. ARB/02/05, Award, 19 January 2007, http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C212/DC630_En.pdf, accessed on 20 July 2022, p. 90.
Ekşi, Nuray: “Yargıtay Kararları Işığında ICC Hakem Kararlarının Türkiye’de Tanınması ve Tenfizi” (Tebliğ), Ankara Barosu Dergisi, 67(1), 2009, http://www.ankarabarosu.org.tr/siteler/ankarabarosu/tekmakale/2009-1/5.pdf, accessed on 20 July 2022, p. 56, fn. 22.
Yargıtay, İBHGK, E. 1993/4, K. 1994/1 published in Official Gazette, No. 21904, dated 13 April 1994.
Official Gazette, No. 622, 623, and 624, dated 2, 3 and 4 July 1927.
See İçkale İnşaat Limited Şirketi v. Turkmenistan (İçkale v. Turkmenistan), ICSID Case No. ARB/10/20, Award, 8 March 2016, http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C1300/DC7672_En.pdf, accessed on 20 July 2022.
Yargıtay, 12. HD., E. 2021/875, K. 2021/4586, dated 28 April 2021, https://lib.kazanci.com.tr/kho3/ibb/files/dsp.php?fn=12hd-2021-875.htm&kw=ICSID&cr=yargitay#fm, accessed on 19 July 2022.
Official Gazette, No. 26728, dated 12 December 2007.
ICSID, “Contracting States and Measures Taken by Them For the Purpose of the Convention”, ICSID/8-E, “Designations of Courts or Other Authorities Competent For the Recognition and Enforcement of Awards Rendered Pursuant to the Convention”, https://icsid.worldbank.org/sites/default/files/ICSID%208-Contracting%20States%20and%20Measures%20Taken%20by%20Them%20for%20the%20Purpose%20of%20the%20Convention.pdf, accessed on 19 July 2022, p. 6-7.