The Turkish legal system is based on a codified civil law system. Under Turkish law, courts are either categorized as judicial courts or administrative courts. Within these two categories, sub-categories exist. For instance, the judicial courts, which constitute the broadest part of the Turkish judicial system, are sub-divided into 2 branches consisting of the civil courts and the criminal courts, whereas the administrative courts are sub-divided into administrative courts and tax courts.
Turkey’s judicial system has a multipartite structure. Consequently, within each of the sub-divisions described above, different levels exist. Turkey has recently abandoned its two-tier system by introducing a three-tier system. As a result, all courts consist of 3 levels as follows: first instance courts, district courts and supreme courts. The supreme courts of Turkey consist of the Constitutional Court, the Court of Appeals, the Council of State and the Court of Jurisdictional Disputes.
Since Turkey is a civil law country, legislation is the primary source of law. There is a certain order of priority for the implementation of the applicable legislation in which the Constitution prevails over international treaties followed by the codes and regulations, statutory decrees, and by-laws. As a candidate country for accession to the European Union, Turkey is harmonizing its legislation with the European Union legislation under the supervision of the Ministry of Foreign Affairs. To that end, Turkey has, among others, introduced the Competition Law and the Consumer Protection Law, and repealed its civil code, code of obligations and commercial code and replaced them with the new Turkish Civil Code, the new Code of Obligations and the new Turkish Commercial Code. These laws are based on the Swiss Civil Code and Swiss Code of Obligations and follow the principles of European Union laws and regulations and the principles set out in Turkish and Swiss courts’ decisions.
The Repealed Turkish Civil Code was introduced in 1926 right after the proclamation of the Republic and remained in force until its replacement by the Turkish Civil Code in 2002. As in other civil law countries, the Turkish Civil Code governs the law of persons (e.g. birth, capacity and similar matters), family law, property law and the law of inheritance. The law of contracts and torts are the subject of the Code of Obligations. Finally, the Turkish Commercial Code regulates matters relating to merchants, trade, business entities (especially companies), commercial contracts and other matters such as negotiable instruments and insurance. In addition, customary law is also considered as a complementary source of law and guidance, especially if written sources are silent on a particular matter.
The Turkish administrative system and law is highly influenced by the French administrative system and law. Public administration in Turkey consists of the central administration and local administrations. Within the central administration, there are (i) the executive branch and its regional divisions, (ii) autonomous bodies (i.e. regulatory authorities); (iii) 81 provinces (il) and (iv) 1,000 districts (ilçe), being sub-divisions of provinces. In each province and district, there is a governor (vali) and a district governor (kaymakam), respectively, appointed by the central administration. The governor and the district governor act as the representatives of the central administration within the province and district, respectively.
DOMESTIC LEGISLATION ON FOREIGN INVESTMENTS
International treaties, the FDI Law and the Regulation on the Implementation of the FDI Law are the main legal sources governing foreign direct investment in Turkey. The FDI Law, which entered into force on 17 July 2003, has brought extensive changes in favour of foreign investors and liberated the foreign investment climate by, in particular, abolishing the approval system and introducing a more liberal system based on the principles of equal treatment and the free expatriation of proceeds. Prior to the FDI Law, investors were required to obtain the prior written consent of the Undersecreteriat of Treasury to establish a company, acquire shares in an existing company and/or open a branch or liaison office. Increase of share capital and change in the scope of activity or shareholding structures were also subject to the prior written consent of the Undersecreteriat of Treasury.
Under the FDI Law, investors are only required to notify the Ministry of Treasury and Finance of their investment (e.g. greenfield investment, share transfer or otherwise) and the amount of foreign capital brought to Turkey, except for opening a liaison office which is still subject to the prior written consent of the Ministry of Industry and Technology. On June 1, 2018, new requirements have been introduced regarding the notification to the Ministry. Accordingly, companies with foreign shareholders are now required to register certain information (such as shareholding structure, share transfers and/or increase or decrease of the share capital) on an online platform, namely the Electronic Incentive Application and Foreign Investment Information System.
The FDI Law also introduced some other principles which are vital for fostering a successful foreign investment environment such as the freedom to invest, valuation of non-cash capital and the employment of foreign personnel. Foreign investors can freely establish an entity, open a branch and/or acquire shares of an existing company and conclude know-how/technical assistance agreements with domestic companies.
Under the FDI Law, companies with foreign shareholding which are established in line with the Turkish Commercial Code are treated equally to companies with local shareholding. In line with this principle, foreign investors may establish a company with 100% foreign shareholding or acquire all of the shares of an existing Turkish company. However, exceptions to this equal treatment principle exist, including for acquisitions by companies with a foreign shareholding of real property in Turkey. There are also restrictions on investment in certain strategic sectors such as TV broadcasting, maritime and civil aviation by companies with foreign shareholding.
INTERNATIONAL TREATIES REGARDING FOREIGN INVESTMENTS
Turkey attributes great importance to foreign investment and aims to improve its foreign investment climate while defining “foreign investment”, “investor” and related terms in line with international standards. To that end, Turkey has become a party to several bilateral and multilateral investment treaties. Importantly, Turkey has also concluded double-taxation treaties with over 80 countries.
BILATERAL INVESTMENT TREATIES
Bilateral treaties are considered highly important as they aim to promote and enrich the investment environment, leading to stronger economic cooperation between the contracting states. Turkey has been active in concluding bilateral treaties for the promotion and protection of investments since its first bilateral investment treaty was signed with Germany in 1962. As of August 2016, Turkey has signed bilateral treaties with 98 countries. 81 out of those 98 bilateral investment treaties have been ratified and entered into force so far.
MULTILATERAL INVESTMENT TREATIES
In addition to domestic legislation and bilateral investment treaties, Turkey is also interested in several multilateral investment treaties for the purpose of reinforcing economic collaboration with other countries. In this regard, Turkey is a party to the World Trade Organization’s Agreement on Trade-Related Investment Measures, the United Nations Convention on Contracts for the International Sale of Goods and the Energy Charter Treaty.
INTERNATIONAL DISPUTE RESOLUTION
Foreign investors may benefit from domestic arbitration or international arbitration to the extent there is an arbitration clause in their investment agreement. Domestic arbitration is governed by the Code of Civil Procedure, whereas for international arbitration, the parties may freely choose any institutional rules of arbitration, including without limitation the rules under the Turkish International Arbitration Law or the rules of the recently-established Istanbul Arbitration Centre. If the seat of arbitration is in Turkey but the parties have not agreed on the applicability of any institutional rules of arbitration, the rules and principles set out in the Turkish International Arbitration Law shall apply, to the extent that there is a foreign element2 involved in the dispute. Istanbul Arbitration Centre was established in 1 January 2015, as a part of the wider project to transform Istanbul into a global financial hub. Its rules and tariffs were published on its website on February 2016, and the centre has become fully operational with its specialized arbitrators, to serve its clients in Turkish, English, French and German languages. It is important to note that the arbitration rules of the Istanbul Arbitration Centre have introduced new concepts to Turkish law, such as fast-track arbitration, procedural timetable and emergency arbitrator. Accordingly, where the economic value of the claims and the counterclaims does not exceed TRY 300,000, the dispute shall, unless otherwise agreed by the parties, be subject to the fasttrack procedure. In this case, the dispute shall be settled by a sole arbitrator within three (3) months. However, parties can also explicitly agree to the fast-track arbitration even in cases where the amount in dispute is above the threshold. Further, in parallel with the rules of leading international arbitration institutions, the arbitration rules of the Istanbul Arbitration Centre provide a right to request the appointment of an emergency arbitrator. In this respect, unless the parties have agreed otherwise, they may, in cases of emergency, request to obtain an interim measure from the emergency arbitrator, before the transmission of the case to the sole arbitrator or arbitral tribunal. Since Istanbul Arbitration Centre’s arbitral awards are final, binding and enforceable just like court decisions, and Turkey is a party to the New York Convention, Istanbul Arbitration Centre’s arbitral awards are enforceable not only in Turkey, but also in other countries that are party to the New York Convention.
Recognition and enforcement of foreign arbitral awards are subject to the provisions of Turkish International Arbitration Law and the New York Convention. Turkey has ratified the New York Convention with two reservations: (i) any award which is granted must be given in a state which is a member of the New York Convention; and (ii) the dispute must be commercial in nature as per Turkish law. As arbitration is becoming more popular in Turkey, national courts are becoming increasingly familiar with the recognition and enforcement of arbitral awards in Turkey, however an award can only be recognised and enforced in Turkey if certain conditions which are allowed and typical under the New York Convention are met. In short, for the recognition and enforcement of a foreign arbitral award, there must be (i) reciprocity between Turkey and the country where the award was granted, (ii) no jurisdictional exclusivity under Turkish law due to the nature of the matter, and (iii) no violation of “public order”.
In addition, Turkey is also a contracting state to the ICSID Convention. Consequently, for disputes arising out of or relating to an investment, between the Turkish State and a national of another contracting state, the parties may also opt in for arbitration under ICSID. In such case, issues of recognition, enforcement and annulment of the ICSID award will be subject to the provisions of the ICSID Convention instead of the New York Convention.
Turkey ratified the United Nations Convention on International Settlement Agreements Resulting from Mediation (Singapore Convention) on 11 March 2021. The Singapore Convention establishes a harmonized framework for the right to invoke settlement agreements as well as for their enforcement. It allows the commercial international mediation settlement agreements to be enforced in member states without the need of a full court proceeding, limiting time and costs required in court proceedings. It also promotes mediation as an alternative dispute resolution mechanism for international commercial disputes and fills in the void for international mediation within the international trade law. Additionally, certain fields of law foresee mandatory mediation with the principle reasoning of reducing the amount of disputes brought before courts as well as encouraging parties to choose mediation as their means of dispute settlement, the legislator being of the opinion that, mediation procedures offer a rather more time and cost efficient means to resolve the disputes in question.
Pursuant to the Law on Labour Courts, it is mandatory to initiate mediation procedures before filing a lawsuit on grounds of compensation and other receivable claims made either by the employer or by the employee. In this respect, all customary employment claims such as those related to severance and notice payment or the payment of amounts corresponding to unused annual leave, indemnification and re-employment claims also fall in the scope of the Law on Labour Courts and parties will need to first apply to mediation regarding these claims.
Further, the mediation application has been made mandatory for commercial disputes which are related to monetary claims before filing commercial lawsuits. Accordingly, if the parties do not come to an agreement through the mediation, the claimants shall submit the minutes of the last mediation meeting to the related commercial court attached to their petitions at the time of initiation of a commercial lawsuit. In case the parties do not submit the mentioned meeting minutes to the related commercial court, then one (1) week peremptory term would be granted by the court for submission of the mentioned meeting minutes; if it is not submitted within the granted time period, the commercial lawsuit shall be rejected based on procedural grounds.
Also, on 28 July 2020, Turkey enacted the Law Amending the Civil Procedure Law and Certain Laws, which introduces Article 73/A on “Mediation as a precondition for lawsuit” to the Consumer Protection Law (No.6502). Accordingly, parties to consumer disputes with a dispute value exceeding TRY 11,330 must seek mediation before filing a lawsuit. Disputes falling within the scope of the consumer arbitration committee’s duties (i.e. disputes with a value of less than TRY 11,330) will continue to be resolved directly by consumer arbitration committees, without any obligation to seek mediation first. It should also be noted that in addition to mandatory mediation, voluntary mediation is also regulated under Turkish law system, which offers a fast-paced and economically advantageous dispute resolution for contractual disputes or other private law conflicts of any type. The Law on Mediation on Civil Disputes regulates the mediation system of Turkey and determines the principles of the mediation procedure, acknowledging the legal significance of mediation and its outcomes.