Our article addresses the action to set aside arbitral awards under Turkish law, explaining the exhaustive nature of the grounds, the differences between the Code of Civil Procedure and the International Arbitration Law, the time limits, the competent court, the stay of enforcement, public policy review and the consequences of setting aside.
Parties choose arbitration so that their disputes are resolved swiftly, by experts and definitively. The finality of the arbitral award is arbitration's most important advantage; avoiding the years of appellate review found in state courts is often the very reason arbitration is preferred. Yet this finality does not mean that there is no review at all. Where serious procedural violations have occurred in the arbitral proceedings, where the tribunal has decided without jurisdiction, or where the award has become irreconcilable with the fundamental values of the legal order, the law cannot remain indifferent. The institution that comes into play at this point is the action to set aside the arbitral award. The setting-aside action represents a balance carefully struck between the finality of arbitration and the minimum guarantees of the rule of law; review exists, but it has been kept exceedingly narrow. This article comprehensively examines the action to set aside arbitral awards, the exhaustive nature of the grounds, the principle that the merits cannot be reviewed, the differences between the Code of Civil Procedure and the International Arbitration Law, the time limits, the competent court, public policy review and the consequences of setting aside.
1. The Nature and Function of the Setting-Aside Action
The action to set aside an arbitral award is the action brought for the purpose of annulling the award on account of unlawfulness that may have occurred in the arbitral proceedings. The function of this action within the legal order is twofold. On the one hand it preserves the finality the parties sought in choosing arbitration; since review is possible only on limited grounds, the arbitral award remains final as a rule. On the other hand it ensures that arbitral proceedings are conducted within legal safeguards; where the parties' right to be heard has been violated, where the tribunal has been improperly constituted or where the award has become contrary to public policy, that award should not produce effect in the legal order. That the court is able to exercise a review over the arbitral award through the setting-aside action paradoxically increases confidence in arbitration; for a system in which there is no review at all might deter parties from turning to arbitration. Both the Code of Civil Procedure and the International Arbitration Law expressly provide that only an action to set aside may be brought against an arbitral award; that is, ordinary avenues of recourse such as appeal, cassation or retrial are closed.
2. Which Law Applies
Under Turkish law the setting aside of arbitral awards is conducted within the framework of two different statutes according to the nature of the dispute, and drawing this distinction correctly is of vital importance. In disputes containing no foreign element where the seat of arbitration is determined as Türkiye, the arbitration provisions of the Code of Civil Procedure, in particular its article regulating the setting-aside action, apply. By contrast, in disputes carrying a foreign element where the seat is Türkiye, or where the parties or the tribunal have chosen the application of that law, the article of the International Arbitration Law regulating the setting-aside action comes into play. These two regulations largely overlap as regards the grounds for setting aside; both essentially reflect the settled standards of international arbitration law. However, there are important differences between them on procedural matters such as the time limit, the competent court and the stay of enforcement. Determining incorrectly which law applies may lead to the action not being brought within time or to an application to a court lacking jurisdiction; and this means a loss of rights without the merits being reached. For this reason the first step for a party receiving an arbitral award is to establish which statutory regime applies.
3. The Exhaustive Nature of the Grounds
The most decisive feature of the setting-aside action is that the grounds are regulated in the law individually and in limited number. These grounds are listed exhaustively; setting aside cannot be requested on a ground not contained in the law, and the court cannot annul an award by relying on a ground not so listed. The direct consequence of this exhaustive structure is that whether the award is lawful and sound as to its merits cannot be reviewed. The case law of the Court of Cassation is exceedingly clear on this point; matters such as whether the substance of the tribunal's award is sound and whether the arbitrators applied the law correctly cannot be made the subject of examination in a setting-aside action. This principle is frequently misunderstood in practice. The setting-aside action is not an appellate review giving the losing party an opportunity to re-argue the merits. Assertions that the tribunal assessed the evidence wrongly, interpreted the law erroneously or reached an unjust result do not, of themselves, constitute grounds for setting aside. The setting-aside action reviews only the structural and procedural legitimacy of the arbitral proceedings. This restrictive approach is the fundamental safeguard protecting the finality of arbitration.
4. Grounds the Party Must Assert
The grounds for setting aside fall into two categories as regards the burden of proof. The first category comprises the grounds the claimant must assert and prove. The typical grounds in this category are as follows. That one of the parties to the arbitration agreement lacked capacity, or that the arbitration agreement is invalid under the law chosen by the parties or, absent such a choice, under Turkish law. That the procedure determined in the parties' agreement or provided for in the law was not complied with in the selection of the arbitrator or arbitral tribunal. That the award was not rendered within the arbitral time limit. That the tribunal unlawfully decided that it had or lacked jurisdiction. That the tribunal decided on a matter falling outside the arbitration agreement, failed to decide on the whole of the claim or exceeded its authority. That the arbitral proceedings were not conducted, as to procedure, in conformity with the parties' agreement or with the law, and that this irregularity affected the substance of the award. That the principle of equality of the parties was not observed and the right to be heard was violated. The common feature of these grounds is that they concern the procedural legitimacy of the arbitral proceedings; none questions the correctness of the merits of the award.
5. Grounds Reviewed of the Court's Own Motion
The second category of grounds comprises those the court must review of its own motion, that is, even where they are not asserted by the parties. Two grounds fall into this category. The first is that the dispute forming the subject of the arbitral award is not arbitrable under Turkish law. The second is that the arbitral award is contrary to public policy. That these two grounds are reviewed of the court's own motion is not accidental; both are provisions outside the parties' field of disposition, protecting the legal order itself. Where a dispute relating to rights in rem over immovable property has been taken to arbitration, or where the award is irreconcilable with the fundamental values of the legal order, whether or not the parties assert this does not change the outcome; the court takes the irregularity into account of its own motion. This distinction has an exceedingly important practical consequence. It is accepted in doctrine that, after an arbitral award has been rendered, the parties may waive grounds for setting aside other than non-arbitrability and contrariety to public policy. That is, while the parties may waive grounds of a procedural nature, no such possibility exists as regards these two; they are the inalienable minimum guarantees of the legal order.
6. Public Policy Review and Its Limits
Among the grounds for setting aside, the one most debated and most frequently the object of attempted abuse in practice is contrariety to public policy. The concept of public policy expresses contrariety to the fundamental principles of Turkish law, to its mandatory provisions and to universal principles of law. However, a broad interpretation of this concept carries the risk of turning the setting-aside action in fact into a review of the merits; the losing party may attempt to present every legal error as a breach of public policy. Against this danger, both doctrine and judicial practice agree that public policy review must be interpreted narrowly. That an arbitral award is contrary to a provision of Turkish law does not, of itself, constitute contrariety to public policy; the irregularity must be of a gravity capable of shaking the fundamental values of the legal order. Among the typical situations in which public policy review operates in practice may be counted the award being unreasoned, the independence and impartiality of the arbitrators having been seriously impaired, the award being the product of fraud or bribery, the violation of the essence of the right of defence, and awards producing results manifestly contrary to morality. Keeping this review narrow is essential to preserving the functionality of arbitration.
7. The Time Limit for Bringing the Action
The setting-aside action is subject to a strict time limit, and there is a difference between the two statutes on this matter. Under the Code of Civil Procedure the action may be brought within one month. Under the International Arbitration Law this period is determined as thirty days. As regards the commencement of the period both statutes adopt the same principle; the period begins to run from the date on which the arbitral award, or a decision on interpretation, correction or completion, is notified to the parties. This regulation offers an important possibility; where one of the parties has requested interpretation, correction or completion of the award, the setting-aside period does not begin until that further decision is notified. Although the difference between one month and thirty days appears small, it may create a deviation of one or two days depending on the length of the month, and this deviation may lead to a loss of rights. Indeed this period is a prescriptive one; failure to comply with it results in the right to bring a setting-aside action being extinguished entirely, and the judge takes this into account of his own motion. For this reason, calculating the period and entering it in the diary the moment the award is served is the first task to be performed in practice.
8. The Competent Court
Before which court the setting-aside action is to be brought is another matter differing between the two statutes, and determining it incorrectly causes serious delay. The Code of Civil Procedure provides that the setting-aside action is brought before the regional court of appeal of the seat of arbitration and is heard as a priority and with urgency; where the seat has not been determined, the regional court of appeal of the defendant's domicile, residence or place of business in Türkiye has jurisdiction. Under the International Arbitration Law, by contrast, the competent court is tied to a different criterion; the regional court of appeal to which the place of the defendant's domicile, habitual residence or place of business is attached has jurisdiction in the first place, and where none of these is located in Türkiye the Istanbul Regional Court of Appeal has jurisdiction. The practical consequence of this difference is that, in the same dispute, different courts become competent depending on which law applies. An action brought before a court lacking jurisdiction ends in a decision of lack of jurisdiction and the transmission of the file; and this means the loss of valuable time. For this reason, before the action is brought, the applicable law and the competent court determined accordingly must be established with care.
9. The Procedure and the Form of Review
The procedure of the setting-aside action has been designed so as to ensure that the process is completed swiftly. The law expressly provides that the setting-aside action is heard as a priority and with urgency; this regulation aims to prevent the fate of the arbitral award from remaining uncertain for a long period. An accelerating rule has been adopted as regards the form of review as well; the setting-aside request is decided on the basis of the file, unless the regional court of appeal hearing the case decides otherwise. That is, as a rule no hearing is held and the action is concluded on the documents in the file; but the court may hold a hearing where it considers it necessary. This structure shows once again that the setting-aside action is not a review of the merits; the court is not required to hear witnesses, to order an expert examination or to reassess the evidence, but reviews on the file only whether the limited grounds for setting aside have materialised. For this reason the quality of the statement of claim in a setting-aside action is of critical importance; the grounds must be stated clearly, each ground must be supported by concrete documents from the arbitration file, and arguments on the merits must be avoided.
10. The Question of the Stay of Enforcement
The effect of bringing a setting-aside action on the enforcement of the arbitral award constitutes the most striking difference between the two statutes. Under the Code of Civil Procedure, bringing a setting-aside action against an arbitral award does not stay its enforcement; however, upon the request of one of the parties, enforcement may be stayed on condition that security covering the value of the money or property awarded is provided. That is, in domestic arbitration the stay of enforcement is conditional upon a request and upon security. Under the International Arbitration Law the position is different; bringing a setting-aside action against an arbitral award automatically stays its enforcement. The rationale for this difference is practical; where an arbitral award that has been enforced in international arbitration is subsequently set aside, the restitution of the sum collected may turn into a far more burdensome and uncertain process than in domestic arbitration. This difference produces strategic consequences for the parties. In international arbitration the party in whose favour the award was made must plan the process knowing that a setting-aside action will automatically stay enforcement; in domestic arbitration the party against whom the award was made must take into account from the outset the need to provide security in order to stay enforcement.
11. Recourse Against the Setting-Aside Decision
The decision given by the regional court of appeal on the setting-aside action is likewise not final; recourse to cassation may be had against such decisions. However, the cassation review is also limited; the review is decided, as a priority and with urgency, limited to the grounds for setting aside listed in the law. That is, the merits of the dispute cannot be argued at the cassation stage either; review remains limited to whether the grounds for setting aside were correctly assessed. Another important rule relating to cassation is that cassation does not stay the enforcement of the award. Moreover, no recourse to rectification of the decision may be had against decisions given in setting-aside actions. Where no application for cassation is made, the decision of the regional court of appeal becomes final and binding. This two-stage structure, narrow at every stage, reflects the fundamental balance of arbitration law; a route is kept open for the correction of unlawfulness, but at no stage does that route turn into a review of the merits. In practice the cassation petition too must be structured around the grounds for setting aside, and arguments on the merits must be avoided.
12. The Consequences of Setting Aside
Where the setting-aside action is granted, the arbitral award is annulled and loses its quality of producing legal effect. What follows depends on the ground for setting aside. Where the setting aside rests on a ground relating to the conduct of the arbitral proceedings, such as an irregularity in the constitution of the tribunal, an excess of authority or a breach of procedural rules, the parties may as a rule take the same dispute to arbitration again; for the arbitration agreement retains its validity and what has been vitiated is only those proceedings. By contrast, where the setting aside rests on a ground relating to the arbitration route itself, such as the invalidity of the arbitration agreement or the non-arbitrability of the dispute, the possibility of going to arbitration no longer remains and the dispute must be heard by the state courts. This distinction is decisive in the strategic assessment of a setting-aside action; the ground relied upon directly affects what the picture will be after setting aside. The law further contains provisions as to the course to be followed where the setting-aside action is granted, provided the parties have not agreed otherwise. For this reason, when requesting setting aside, not only the obtaining of the annulment but also how the process will proceed thereafter must be considered from the outset.
13. The Relationship Between Setting Aside and Refusal of Enforcement
The relationship between the setting-aside action and the enforcement of foreign arbitral awards is a matter confused in practice. The setting-aside action is brought before the courts of the country of the seat of arbitration and aims to eliminate the legal existence of the award; where it succeeds, the award is annulled universally. Enforcement, on the other hand, is a separate process enabling the award to be enforced in a particular country, and a refusal of enforcement produces effect only in that country; the award retains its enforceability elsewhere. The grounds of the two institutions largely overlap; the invalidity of the arbitration agreement, the violation of the right to be heard, excess of authority, non-arbitrability and contrariety to public policy are grounds both for setting aside and for the refusal of enforcement. This overlap is important as regards defence strategy; the party against whom the award was made has the possibility both of bringing a setting-aside action at the seat and of opposing enforcement in the country where enforcement is sought. However, pursuing these two routes together or separately has different effects as regards cost, timing and outcome, and this choice must be planned from the outset.
14. Mistakes Frequently Made in Practice
Certain mistakes are frequently repeated in setting-aside actions. The first and gravest is missing the time limit; since the period is prescriptive, even a single day's delay leads to the dismissal of the action without the merits being reached. The second is determining the applicable law incorrectly and, consequently, applying to the wrong court. The third and most widespread is filling the statement of claim with arguments on the merits; assertions that the arbitrators assessed the evidence wrongly or applied the law erroneously do not constitute grounds for setting aside and, by shifting the centre of gravity of the pleading, prevent the genuine grounds from being seen. The fourth is attempting to present every legal irregularity under the heading of public policy; this approach weakens credibility before the court. The fifth is the failure to support the grounds with concrete evidence; since the review is conducted on the file, the relevant documents from the arbitration file must be submitted in full. The sixth is the failure to raise a procedural objection in time during the arbitral proceedings and the raising of that objection for the first time in the setting-aside action; this may result in the objection being deemed impliedly waived.
15. Conclusion and Practical Recommendations
The action to set aside arbitral awards is a narrow and technical institution establishing the balance between the finality of arbitration and the need for legal safeguards. The basic considerations in this field may be summarised as follows. Only an action to set aside may be brought against an arbitral award; ordinary avenues of recourse are closed. The grounds are listed exhaustively and the merits of the award cannot be reviewed at any stage; whether the arbitrators applied the law correctly is not the subject of the setting-aside action. The applicable law must be determined correctly from the outset; the period is one month under the Code of Civil Procedure and thirty days under the International Arbitration Law, and both are prescriptive. The competent court is tied to different criteria in the two statutes; the wrong court causes serious loss of time. There is a difference as regards the stay of enforcement as well; whereas security is required in domestic arbitration, in international arbitration the setting-aside action stays enforcement automatically. Public policy review is interpreted narrowly and not every legal error can be presented under this heading. Non-arbitrability and contrariety to public policy are reviewed of the court's own motion and cannot be waived. Finally, procedural objections must be raised in time during the arbitral proceedings and entered in the minutes; otherwise it may not be possible to rely on them at the setting-aside stage.
The setting aside of arbitral awards is closely connected with the other fields of arbitration law. Our article on the validity of the arbitration agreement and pathological arbitration clauses, which addresses the agreement forming the basis of the arbitration route, and our analysis of the enforcement of foreign arbitral awards in Türkiye and the 1958 New York Convention, which examines the enforceability of awards in Türkiye, address the matters connected with the setting-aside action.
For advisory services on the conduct of actions to set aside arbitral awards, the assessment of grounds for setting aside, opposition to enforcement and representation in international arbitration proceedings, you may contact us at info@guzeloglu.legal.