Arbitration Case between Turkey and Iraq and International Direct Investment Arbitration

It was recently reported in the national press at the end of March that "Turkey will pay approximately 1.5 billion dollars to Iraq after Iraq won the arbitration (1) case against Turkey". In a statement made by the Ministry of Energy and Natural Resources in response to the news, the Ministry of Energy and Natural Resources briefly stated that "the arbitration case between Turkey and Iraq before the International Chamber of Commerce Arbitration Center (ICC) is actually a reflection of the oil management rights dispute that has been going on for years between the Iraqi Central Government and the Kurdish Regional Government of Iraq, which is also a constitutional unit of Iraq, and that the ICC arbitral tribunal rejected four of Iraq's five claims, while the majority of Turkey's claims were accepted, and Iraq was ordered to pay compensation to Turkey." 

In order to determine the amount of compensation to be paid to Turkey and the amount to be paid by Turkey, the parties to the dispute and the subject matter of the dispute, it is necessary to examine the arbitral tribunal award. In order to clarify these issues and to explain the meaning of arbitration, it is useful to briefly examine the issues of arbitration and international direct investment below. The recent Libenanco arbitration between Uzanlar and the Republic of Turkey is a similar type of arbitration arising from an investment dispute. In this case, the claims of Uzanlar were rejected by the arbitral tribunal due to the lack of jurisdiction of the arbitral tribunal. 

1. What is Arbitration?

Arbitration is an alternative dispute resolution method such as mediation and amicable settlement where the dispute is resolved outside of the courts.  In mediation, the parties find the solution themselves as a result of negotiations conducted under the supervision of an expert mediator, while in arbitration, the dispute is resolved by the decision of the arbitrator or arbitral tribunal, just like a court, and the parties declare that they will comply with the decision of the arbitral tribunal at the beginning. Today, arbitration is resorted to due to the increase in the workload of the courts and the long duration of the proceedings, and the need to resolve the dispute in the international arena in a short time by the arbitrator or arbitral tribunal selected by the parties, who are independent and impartial experts. Arbitration is briefly defined as "the agreement of the parties to settle a dispute by arbitrators other than the state judiciary". There is also a judicial activity in arbitration and this is called arbitral jurisdiction.  As a result of the increase in international commercial relations, it has become widespread that disputes between the parties are resolved by arbitrators or arbitrators chosen by the parties instead of the state courts. Unlike court cases, arbitration is a judicial system with its own rules.  The aim of arbitration is to resolve the dispute in a short period of time and by arbitrators who are experts in the subject matter chosen by the parties. The parties bring the dispute before the arbitral tribunal before the dispute arises, either through an arbitration agreement or clause to be included in their contract or by voluntarily declaring that they will arbitrate after the dispute. Unlike courts, arbitration is conducted behind closed doors and the decisions rendered by the arbitral tribunal are not published without the express consent of the parties. In the above-mentioned dispute between Iraq and Turkey, it is possible to make a clear and precise assessment of the resolution of the dispute after the decision is published. When the case in question is first analyzed, it is evaluated that the dispute may have arisen from an international foreign investment dispute. 

2. Foreign Investments and Arbitration 

There is no agreed definition of the concept of "foreign investment". In international conventions, such a definition is deliberately avoided by taking into account the possibility that it may not cover all types of investments (2) It is possible to find definitions of foreign investment in the works on the subject. According to M. Sornarajah, "foreign investment is the transfer of tangible or intangible assets to another country to produce wealth and the partial or total utilization of these assets (3)." It is possible to classify foreign investment by considering the type and function of the assets transferred. If the transferred asset is money and this money is used to purchase stocks in the country to which the asset is transferred, such investments are considered "portfolio investments". If tangible or intangible assets, especially production equipment and physical materials, are transferred from one country to another country and factories and other production facilities are established in the receiving country, such investments are considered "direct investments". Today, in order to attract foreign direct investment, especially developing countries make regulations in their domestic laws to encourage foreign investors and sign bilateral investment treaties (BITs) (4) or multilateral investment treaties (MITs) (5) with other countries. 

The content of these agreements usually includes provisions on how to resolve disputes between investors of other countries and the state receiving the investment.  These arrangements include that the dispute will initially be resolved through mediation and amicable settlement, and if this is not possible, the dispute will usually be resolved through arbitration. In the statement made by the Ministry, it is understood that efforts were made to resolve the dispute through amicable settlement at first, but arbitration was resorted to due to the failure to reach a solution. 

3. Institutional Arbitration Centers for Foreign Direct Investment 

As mentioned above, international direct investments are the area where the arbitration mechanism is most commonly applied. Considering international practice, international commercial arbitration may be institutional (institutional arbitration) or ad hoc (ad hoc). In institutional arbitration, just like in national courts, the institution where the arbitration will take place has pre-prepared rules. Matters not regulated by the will of the parties will be governed by the rules of this institution (6). Institutional arbitration is generally used in international direct investments and there are international institutional arbitration mechanisms that resolve disputes in this context. ICSID Arbitration (International Center for the Settlement of Investment Dispute) established by the World Bank, ICC Arbitration (International Chamber of Commerce), LCIA Arbitration (London Court of International Arbitration) and AAA Arbitration (American Arbitration Association) are the most common arbitration institutions used by the parties in institutional arbitration (7). Today, the need for institutional arbitration and the provision of services for a fee have led to the establishment of new arbitration centers. In Turkey, Istanbul Arbitration Center (ISTAC) and Istanbul Chamber of Commerce Arbitration Center (ITOTAM) are among the recently established arbitration centers. 

Among the above-mentioned arbitration mechanisms, the arbitral award reached in ICSID arbitration is a directly enforceable final judgment and conclusive evidence, just like a judgment rendered by a local court. Within the scope of ICSID arbitral awards, even the property of a state abroad can be seized. However, in the above case, since it is an ICC arbitration, such an application is not possible. The Ministry has already declared that the debt will be paid. Other arbitral tribunal awards are also awards that must be enforced by domestic courts after being subjected to recognition and enforcement procedures. Therefore, when ICSID arbitration is compared to other institutional arbitration mechanisms, ICSID arbitral awards are more advantageous for investors, ICSID arbitral awards are easy to enforce and ICSID is a center established solely for the settlement of disputes arising out of investments.(8) In the case between Turkey and Iraq, going to ICC Arbitration requires the courts to recognize and enforce the arbitral tribunal award.  

4. Turkish Investors or Investment Disputes to which Turkey is a Party

A total of thirty-three ICSID arbitration cases brought by foreign international investors against the Republic of Turkey or Turkish international investors investing abroad against other states have been concluded. Ten cases are pending in ICSID arbitration to which the Republic of Turkey or Turkish Investors are parties. Among the concluded cases is the Libananco case brought by the Uzans against the Republic of Turkey, which is considered to be the highest economic value case in Turkish history. The subject of dispute in the lawsuits are generally construction projects arising from energy law, mineral exploration licenses, contracts for the construction of works such as highway construction, construction of electricity generation facilities, etc. In disputes to which Turkish investors are a party, states such as Uzbekistan, Turkmenistan and Pakistan are usually the defendants. As of March 2023, there are two lawsuits filed by international foreign investment companies against the Turkish state. These cases are the dispute between Alamos Gold Holdings Coöperatief U.A. (Dutch), Alamos Gold Holdings B.V. (Dutch) and Turkey over the operation of a gold and silver mine and the dispute between Enel, S.p.A. (Italian) and Turkey over the construction of a renewable energy generation facility. On the other hand, there are a total of eight cases pending in ICSID arbitration between Turkish Investors and foreign states accepting the investment.

Note: For more information on international investment and arbitration, please visit www.torunhukukburosu.com

Footnotes

(1) Torun, International Center for Settlement of Investment Disputes (ICSID) Arbitral Awards, Ankara, 2011, p.18-19  

(2) There is no definition of investment in the ICSID Convention.

(3) Sornarajah, M.:The International Law On Foreign Investment, Cambridge University Press, London 2004, p.11.

(4) According to Article 2 of the Convention between the Republic of Turkey and South Africa on the Reciprocal Promotion and Protection of Investments, "Investment includes, in accordance with the domestic law of the host Party, all kinds of assets, in particular but not limited to

(a) shares, capital stock or other forms of participation in companies;

(b) reinvested income, money receivables or other rights of financial value in relation to an investment;

(c) movable and immovable property, as well as other rights such as mortgages, injunctions, pledges and other similar rights, as defined in accordance with the laws and regulations of the Party in whose territory the property in question is located

(d) industrial and intellectual property rights such as patents, industrial designs, technical processes, as well as trademarks, trade dress, know-how and other similar rights

(e) business concessions granted by law or contract, including concessions relating to the exploration, processing, extraction or exploitation of natural resources;

The term includes all direct investments made in accordance with the domestic law of the Party in which the investment is made.

A change in the form in which assets are invested shall not affect their characterization as investments."

(Law No: 5299, Adoption Date: 03.02.2005, R.G: 08.02.2005/25721)

(5) There is no definition of investment in the ICSID Convention.

(6) Akıncı, Z.: International Arbitration, Ankara 2003, p. 23.

(7) Torun, age, p.19 

(8) Tiryakioğlu,B.: The Relationship between Investments and International Arbitration; ICSID Arbitration, Uluslararası Ekonomi ve Dış Ticaret Politikaları 2007, pp.169-184.