Commercial Arbitration in Turkey

 

Commercial arbitration, as an alternative dispute resolution method, is a means of settling commercial disputes by referring them to a neutral person, an arbitration tribunal which might consist of a single arbitrator or several arbitrators.  The parties agree in advance that the decision or award will be accepted as final and binding.

In Turkey, the modern legal framework for commercial arbitration was laid down when the Law on International Arbitration number 4686 (the “Turkish Law on International Arbitration”) was enacted in 2001.  The Turkish Law on International Arbitration is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration, also known as the UNCITRAL Model Law.  Moreover, Turkey is a contracting party to the 1958 New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), the European Convention on International Commercial Arbitration and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention”).  Another Turkish law which governs commercial arbitration in Turkey is the Civil Procedure Law number 6100 (the “Turkish Civil Procedure Law”) that is also based on the UNCITRAL Model Law.  Several other Turkish laws which contain provisions pertaining to arbitration exist.

Benefits of Commercial Arbitration:

Arbitration can offer several advantages as an alternative to litigation:

  • Flexibility – The form and type of arbitration can be tailored to suit the parties.
  • Speed – The process can be started and resolved quickly, without waiting for court dates. Discoveries and preliminary processes are kept to a minimum.
  • Efficiency – Although the parties must pay the costs of the arbitration, it is often more efficient than litigation in the courts.
  • Confidentiality – With few exceptions, proceedings take place in private and awards are not published without the consent of the parties.
  • Voluntary – Arbitration takes place only by the parties’ mutual consent.  This consent may be given when the parties enter a contract, or later when the dispute arises.
  • Final – The arbitrator’s decision is final and binding, and court appeals are rare.

Types of Arbitration:

Institutional Arbitration:

An institutional arbitration is one where a specialized institution is appointed and takes on the role of administering the arbitration process and case management.  In institutional arbitration, the arbitrators follow the arbitration rules and procedures of that particular arbitration institution when carrying out the arbitration process.  Each institution has its own set of rules which provides a framework (such as timelines

 

for the filing of documents or procedures for making applications etc.) for the arbitration and its own form of administration to assist in the process.

Common international arbitration institutions include the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), the American Arbitration Association, the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) and the International Centre for Settlement of Investment Disputes (ICSID).

The most prominent Turkish arbitration institutions are the Istanbul Arbitration Centre (İSTAC), the Istanbul Chamber of Commerce Arbitration and Mediation Center (İTOTAM) and the arbitration institution of the Union of Chambers and Commodity Exchanges of Turkey (TOBB).

Ad Hoc Arbitration:

In the case of ad hoc (or non-institutional) arbitration, the rules and procedures that are to be followed in an arbitration process are not determined by an arbitration institution, but by the parties themselves.  Ad hoc arbitration means that the arbitration should not be conducted according to the rules of an arbitral institution.  Since, parties do not have an obligation to submit their arbitration to the rules of an arbitral institution; they are free to state their own rules of procedure.

Domestic Arbitration:

In a Turkish context, domestic (or national) arbitration is an arbitration process where all the parties to an arbitration process are Turkish nationals and the place/seat of arbitration is in Turkey, i.e. arbitration processes which do not contain a so-called “foreign element” are deemed as domestic arbitration processes.  In Turkey, domestic arbitration is usually carried out in accordance with the Turkish Civil Procedure Law.

Pursuant to Article 407 of the Turkish Civil Procedure Law, the provisions of the arbitration section (Articles 407 – 444) of the Turkish Civil Procedure Law are applicable to legal disputes which do not contain a “foreign element” as defined in the Turkish Law on International Arbitration and where the specified seat of arbitration is located in Turkey.

International Arbitration:

Again in a Turkish context, international arbitration is an arbitration process which contains a “foreign element”, as defined by Turkish law and where the seat of arbitration is located in Turkey.  In Turkey, international arbitration is governed by the Turkish Law on International Arbitration

According to Article 1 of the Turkish Law on International Arbitration, “[t]his Law shall be applicable where a dispute has a foreign element and the place of arbitration is determined to be in Turkey or where this Law is chosen as the governing law [of arbitration] by arbitrating parties or their sole arbitrator or arbitral tribunal.

Article 2 of the Turkish Law on International Arbitration defines the term “foreign element” as follows:

The existence of any of the following circumstances demonstrates that the dispute has a foreign element and, under such circumstances, arbitration is considered as international:

  1. where the parties to the arbitration agreement have their domiciles or habitual residences or places of business in different States;
  2. where one of the following is situated outside the State in which the parties have their domiciles or habitual residences or places of business;
  3. the place of arbitration, which is determined in, or pursuant to, the arbitration agreement; [or]
  4. a place where a substantial part of the obligations arising from the underlying contract is performed or a place where the dispute has the closest connection;
  5. where a shareholder of the company which is a party to the underlying contract that constitutes the basis for the arbitration agreement has brought foreign capital [into Turkey] in accordance with the laws concerning the encouragement of foreign capital or where a loan and/or guarantee agreement needs to be signed for the execution of the underlying contract;
  6. where, in accordance with the underlying contract or with the underlying legal relationship, the movement of capital or of goods shall be made from one country to another.

Legal Disputes Which Cannot Be Arbitrated:

Pursuant to Article 408 of the Turkish Civil Procedure Law, disputes which arise from real rights (rights in rem) pertaining to immovables (immovable property, i.e. real estate) or which arise from matters/affairs/businesses that are not at the parties’ disposal cannot be subject to arbitration.

Article 1 of the Turkish Law on International Arbitration defines the same subject in a very similar manner and states that the Turkish Law on International Arbitration “shall not be applicable to disputes related to real rights concerning immovables and to disputes that are not within the parties’ disposal.[1]

Arbitration Agreement/Clause:

An arbitration agreement is a written contract in which two or more parties agree to settle a dispute outside of court and by means of arbitration.  The arbitration agreement is ordinarily a clause in a larger contract, in which case, it is referred to as an arbitration clause.

An arbitration agreement or clause must be in written form.  Both the Turkish Civil Procedure Law in (Article 412) and the Turkish Law on International Arbitration (in Article 4) specify that an arbitration agreement or clause must always be in writing.  A written arbitration agreement or clause is a legal requirement for the validity of such arbitration clause/agreement.

Recognition Enforcement of Foreign Arbitral Awards in Turkey:

In Turkey, the recognition and enforcement of foreign arbitral awards is subject to the relevant provisions of the Act on International Private Law and Procedure Law number 5718 (the “MÖHUK”) (Article 1 and Articles 60 – 63) and to the New York Convention.  Moreover, Turkey has also signed various bilateral and multilateral agreements pertaining to the recognition and enforcement of foreign arbitral awards.

As a rule of thumb, in Turkish legal practice, the recognition and enforcement of a foreign arbitral award shall be carried out in accordance with the New York Convention if the country where the relevant arbitral award originates from has ratified the New York Convention.  However, if the country where the relevant arbitral award originates from has not ratified the New York Convention, the recognition and enforcement of a foreign arbitral award in Turkey should be carried out in accordance with the MÖHUK.

In both cases, the recognition and enforcement of a foreign arbitral award in Turkey requires a ruling by the Turkish court with jurisdiction in the relevant matter.

[1] Legal proceedings which require a ruling by a state court, such as criminal proceedings or divorce proceedings or bankruptcy proceedings can be named as examples of matters that are not subject to the parties’ disposal.

Recent Regulations on Unlicensed Electric Power Generation and Novelties in Renewable Energy Sector

Introduction

In May and June 2019, a number of novelties and developments were introduced for renewable energy sector. Consecutive changes by Energy Market Regulatory Authority (the “Regulatory Authority”) have modified the electric power generation investment projects of the consumers and investors who intend to engage in unlicensed electric power generation.

Exemption Upper Limit and Support Mechanism

The first change modifying the structure of electric power generation based on renewable energy resources was introduced in the Presidential Decree numbered 1044, dated May 10th, 2019.  Pursuant to the Presidential Decree numbered 1044, published in the Official Gazette numbered 30770 and dated May 10th, 2019, the Article 1 of the Decree of the Council of Ministers[1] dated November 18th, 2013 was amended as follows: (i) purchasing guarantee is granted for the surplus electric power produced by the residential, commercial and illumination subscribers under certain conditions by the retail price of monochronic active energy of its own subscriber groups for a period of 10 years, as of the operation date of the power production plants subject to YEKDEM (Renewable Energy Resources Support Mechanism) and (ii) the upper limit of the installed power of the production plants, which are based on renewable energy resources and exempt from obtaining a license and/or incorporating a company, has been increased from 1 MW to 5 MW.

Recent Regulations on Unlicensed Electric Power Generation

Following this development, the long-awaited recent “Regulation on Unlicensed Electric Power Generation in Electricity Market” (the “Regulation”) was published in the Official Gazette numbered 30772, dated May 12th, 2019 and entered into force. The Regulation combined the previous regulation and the communique on the implementation of these regulations and annulled these former regulations thereof.

Although one of the most significant developments introduced by the Regulation is the monthly settlement concept, the Regulation also include some other developments crucial for the sector. The Regulatory Authority introduced certain regulations -restrictions- to ensure that the unlicensed electric power generation based on renewable energy resources is to be made for the sole purpose of meeting the consumer’s own consumption needs, save for certain exceptions.

So, what does settlement mean? Settlement is defined in the Regulation as “the determination of net production or net consumption in kWh by deduction of production from consumption or vice versa, whichever is higher, within a specific period of time[2].

As a result of such settlement, provided that it is within the same month, a production plant shall deduct the surplus electric power supplied by the production plant to the network from the electric power consumed within the same month and based on whether the production or consumption is higher, the production plant shall either (i) receive payment for the surplus electric power supplied to the network as a result of such settlement by issuing an invoice to the assigned supplier company or (ii) the assigned supplier company shall issue an invoice to the production plant for surplus electric power consumption determined as a result of such settlement thereof[3].

Article 26 of the aforesaid Regulation stipulates in detail that the calculations in monthly settlement practice shall be determined based on the operations to be carried out by the operator of the relevant network on the 6th day of each month and it was stipulated in the same provision that the electric power[4] to be supplied to the network as a result of such settlement shall be purchased by the assigned supplier company for a period of 10 years.

Some fundamental developments and/or novelties introduced by the aforesaid Regulation can be listed as follows:

  • It was stipulated that the installed power of power production plants based on renewable energy resources (Article 5.1 (c)) shall not be more than the contract capacity stipulated in the electric connection agreement of the consumption plant to be associated with the relevant production plant. This rate was determined to be 30 times more than the contract capacity in the annulled regulations.
  • As per the Regulation, the generation plants based on solar energy may only be installed as roof-top and façade applications. Such restriction shall not be applicable for the production plants subject to Article 5.1 (ç) and those to be established for consumption needs of public institutions and organizations as per the Presidential Decree.
  • The settlement shall be carried out on a monthly basis rather than on an hourly basis for the generation plants, which are based on renewable energy resources, eligible for receiving call letter to the electric connection agreement as a result of applications to be submitted as of the effective date of the Regulation and of which production and consumption are connected to the same measurement point.
  • One of the concepts requested by the sector was allowing for the sales of the surplus electric power to another consumer by bilateral agreements. However, the Regulation explicitly prohibits merchandizing of such electric power to be generated within the scope of the Regulations. Any surplus electric power shall be purchased by the appointed supplier company to be handled within YEKDEM.
  • The electric power which began to be supplied to the network prior to the effective date of the Regulations and the electric power supplied to the network after the effective date of the Regulations shall be evaluated differently. Regarding the determination of the surplus electric power as per Article 5.1/c prior to the effective date of the Regulations, the data on production-consumption shall continue to be settled on an hourly basis and the buying rate of exchange of the TCMB (Central Bank of the Republic of Turkey) on the date of production shall be applicable to calculate the payment for the daily surplus electric power amount.
  • System use contract must be signed within 1 month as of the date of provisional acceptance in order for the production plant to supply electric power to the electric network and the date of system use contract is the date on which the electric power is supplied to the system and the purchasing guarantee period of 10 years of the appointed supplier company begins as of the date of this contract.
  • The applications for electric power generation as per the Regulation shall not be evaluated based on the capacities to be announced by Turkish Electricity Transmission Company (“TEİAŞ”) and TEİAŞ shall only provide its opinion on fault current limit to be concluded within a definitive period of 15 days for the evaluation of the applications for unlicensed electric power production plants as of the effective date of the Regulations.
  • The documents required to be submitted during application by the investors and/or production plant operators who intend to engage in electric power generation were concluded to be determined by the resolution of the Board and this resolution was published in the Official Gazette numbered 30780 and dated May 21st, 2019.
  • Document evaluation and technical evaluation for the application for electric power generation are explicitly sorted out and the procedures to be carried out during each step were defined in detail as per the Regulation. The application period within the scope of the recent Regulation is estimated to be approximately up to four months.
  • Contrary to the previous regulations, the recent Regulation deem it sufficient to only notify the operator of the electric network in order for the natural and legal persons who act as the owner of the emergency groups and isolated production plants.
  • (i) Commission is required to be within 1 year as of the date of signature of the electric connection contract for all production plants to be connected from Low Voltage level and (ii) commission is required to be within 2 years as of the date of signature for production plants to be connected from Medium Voltage such as solar and wind power production plants.
  • In case the owners of the unlicensed production plants fail to pay system use charges until the due date specified in the relevant invoices, such production plants shall be disconnected from the electric network by the operator of the relevant electric network, without necessity for any notification, until the conditions of the said production plants become satisfactory again and the reason for disconnection shall be notified in writing to the owner of the production plant within 3 (three) business days. In addition, general debt follow-up procedures shall be applicable to such kinds of debts.
  • All agreements and contracts signed regarding the consumption of the production plants for which subscription was established for the internal consumption amounts arising due to operation of any kinds of structures and equipment located in the premises of the production facility prior to the effective date of the recent regulations are required to be terminated within 6 months as of the effective date of this article. Unless the production plants whose agreements and contracts signed regarding the internal consumption terminate such agreements and contracts within 6 months, they shall be disconnected from the electric network by the operator of the relevant electric network without notification thereof.
  • Law on Renewable Energy Resources, appendix, Table I was amended by the Presidential Decree numbered 1044 and it was decreed that the surplus electric power produced within the scope of the Regulations shall be purchased by the appointed supplier company by the retail price of monochronic active energy of its own subscriber groups for a period of 10 years as of the operation date of the power production plants. However, the Decree also states the following: “The production plants eligible for receiving a letter of invitation to electric connection contract as of the effective date of this article (different article)….”. Therefore, the previous prices contained in Law on Renewable Energy Resources, appendix, Table I shall be applicable in case the production plants eligible for receiving a letter of invitation within the scope of the repealed regulations are commissioned until 2020.
  • Regarding the production plants commissioned following completion of the provisional acceptance, in case there is no electric power consumption in the consumption facility or facilities associated with a production plant, the electric power produced during the relevant month is deemed to have been produced by the appointed supplier company and supplied to the system and no payment for such electric power shall be made by the market operator and/or the appointed supplier company and the electric power supplied to the system within this scope shall be considered as a contribution to YEKDEM free of charge.

Decree of the Council of Ministers on Distribution Fees

The Regulatory Authority determined the distribution tariffs to be applicable for the electric power supplied to the network or received from the network by the distribution companies as a result of settlement as per the Decree of the Council of the Ministers numbered 8666, published in the Official Gazette numbered 30813, dated June 26th, 2019.

The aforesaid Decree determined the distribution tariffs only for the production plants subject to Article 5 (c) of the Regulations and for the electric power generated in these production plants and for consumption plants associated with these production plants, the following discounts shall be applicable:

  • 50% discount in consumer distribution tariff exclusive to the subscriber group of the consumption plant for the production amount providing for the need of the consumption plant regarding the electric power consumed; and
  • without discount (distribution fee subject to invoice amount) for consumer distribution tariff for the relevant subscriber group for the surplus production amount out of the consumption amount thereof;
  • 100% discount shall be applicable to the distribution fee in the direction from the supply for a period of 10 years as of the commencement date of the production plant provided that the consumption is equal to the production or the consumption is more or less than the production

e.g. If Consumption >=< Production, then the distribution fee in the direction from the supply shall be 0; and

If Consumption > Production, then 50% discount shall be applicable to the distribution fee for the portion of the production amount in the direction of the receiver and 100% of the distribution fee shall be applicable for the remaining consumption.

Evaluation

The aforesaid Regulation combined the previous regulations and the relevant communique under single text to provide for a more clarified and simpler context by inclusion of bureaucratic procedure documents such as application documents to be determined in a separate decree.

The Regulatory Authority provided a framework to support self-consumption as well as preventing unlicensed electric power production to be used for commercial purposes.

It is evident that providing a legal infrastructure for energy sales agreements (especially Corporate PPA) applicable around the world would be an opportunity for production plant operators and investors alike, thus leading to a long-term revival in the energy sector.

The aforesaid Regulation introduced the long-awaited settlement concept in the form of a monthly settlement for the sector, however, the prevailing view is that the yearly settlement instead of monthly settlement would offer inactive roofs used in certain months of the year for the use of the energy market. In particular, seasonal enterprises such as agricultural and tourism businesses would not be affected from differences in seasonal production and consumption within a year if yearly settlement would be accepted.

Finally, taking into account the recent distribution tariffs to be applicable as a result of such settlement in particular, we recommend the operators and investors who intend to install Solar Energy System on their roofs to carry out feasibility studies with qualified companies.

 

Özlem Ege Polat

Attorney at Law

For detailed info: info@ege-law.com

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[1] Decree of the Council of Ministers on the prices and time periods applicable for plants engaged in electric power generation activities based on renewable energy resources.

[2] Regulations, Article 4: Definitions and Abbreviations.

[3] If production > consumption, then the surplus electric power shall be purchased by the assigned supplier company. If production < consumption, then the assigned supplier company shall issue an electricity invoice by the surplus amount.

[4] The electric power generated and supplied to the network in production plants subject to Article 5 (c) and those subject to Article 5 (ç) is evaluated differently. Whereas the surplus electric power generated in production plants established within the scope of Article 5 (c) and supplied to the network is purchased by the assigned supplier company for a period of 10 years, the surplus electric power generated in production plants established within the scope of Article 5 (ç) and supplied to the network is evaluated within the scope of YEKDEM (Renewable Energy Resources Support Mechanism) but it is deemed as free contribution.