Arbitration of Investment Disputes - A Turkish Perspective - Essay Example

Arbitration of Investment Disputes - A Turkish Perspective Introduction Arbitration is a faster and cheaper way of litigation. Arbitration basically implies a way in which disputes are resolved with the help of a knowledgeable and learned individuals or a panel known as “Arbitrator”. The arbitrator can even be a third reliable party between the two opponents. They make decision outside the court of law and predominantly decisions made by the arbitrator are final and binding. So, arbitration is an “Alternative Dispute Resolution” technique used by two conflicting parties to resolve their dispute without getting into legal (court) formalities. Before moving to Investment disputes and investment arbitration what is important to know is “What is investment? Why it is required to invest?” Investment is a way of investing for future gains. Investment can be done in both tangible as well as intangible goods. It is basically based on time value of money, rate of return and risk involved. In big investments where the government, big corporate and financial institutions deals within country or internationally, dispute arises because of company policies, changing economy, conditions of countries, policies of both parties countries dealing with, political environment, etc. Arbitrators play a major part in this part of solving disputes. ‘Investment Arbitration’ is a policy for economic development and prosperity supported and backed by economic policies by setting up independent disciplines for the development and civilization of institution by enforcing good governance with effective, efficient and disciplined economic reforms which ultimately results in better investment conditions and environment and development of policies for investors protection. 1 So, arbitration of investment dispute is a perfect path of resolving an international dispute among two opponent parties with the help of an arbitrator for quick decision, it may be between two individuals or individual with government, financial institutions, corporate or any two party. Investment Arbitration Rules Primary source for information for investment arbitration is regional and bilateral investment treaties which are according to United Nation Conference on Trade and development (UNCTAD). Till now there are 2,500 treaties and it is increasing by 50 to 100 in numbers every year. This is primarily because of the growing number of law firms. IISD is an authorized institution for reviewing and revising the main rules of arbitration. These rules are generated by ICSID and UNCITRAL and decisions made under NAFTA that takes public interest into account. UNCITRAL (UN Commission on International Trade Law) is a commission that formulates, process, controls and regulates the international trade in corporation with the WTO (World Trade Organization). UNCITRAL rules is been used as the second most important rule in investor state arbitration although these rules have been drafted 30 years ago keeping private commercial disputes in mind and it does not address public interest which is now compulsory to be addressed. Now, the rules are approved to be revised for considering public interest. Currently these rules are the leading rules for commercial arbitration but are not satiable for investor – state arbitration where dispute lies among public interest and private interest. According to the website of ICSID (International Centre for Settlement of Investment Dispute), it is “an autonomous international institution with one hundred and forty members”. It is established for the Conventions of Settlement of Investment Disputes between states and nationals of other states. The convention of ICSID was formulated by the executive directors of the International Bank of Reconstruction and Development (The World Bank) and it is a multilateral treaty. 2 For the settlement of investment dispute and facilitating investors, a system has been introduced by ICSID convention in which direct initiation of arbitration proceedings is possible with the World Bank’s International Centre before ICSID, avoiding the backup from national court and local government. 3 NAFTA (North American Free Trade Agreement), founded on 1994, is one of the largest free trade zones in Canada, Unite States and Mexico which resulted into strong economic growth. In these countries goods and services are produced worth of $17 trillion and are successfully networked to 444 million citizens. 4 For all administration disputes, the NAFTA Secretariat is responsible for the settlement process.5 “Arbitration without privities” acts as evidence to both bilateral investment treaties and multilateral arrangements.6 Apart from this, according to Arbitration (International Investment Dispute) Act, rules can be made by one of the Chief Justice among the 3 judges of the Supreme Court.7 Turkish View on International Investment The Government of Turkey’s (GOT) perceives Foreign Direct Investment to “play a vital part in economic development and prosperity of country”. Turkey follows one of the most liberal legal regimes for FDA in the OECD except in some of the sectors. In Turkey all investors, of all nationality, face numerous obstacles like that of excessive bureaucracy, a slow judicial system, high taxes, weak structure in corporate governance, local government interference and unstable regulatory and legal environment. In Turkey, regulations governing foreign direct investment are generally transparent in nature. Turkey provides national treatment in process of acquisition of investment instrument “Real Estate Sector” owned by foreign corporate entities registered under Urines Law. Most sectors of investment do not even have an investment screening system in Turkey and only notification of the process is required. Participation of foreign investors on ownership share is restricted apart from broadcasting (12%) and aviation (49%) and maritime transportation sectors. For investments in financial service sector (Banking and Insurance sectors) and petroleum sectors investors of all origin, either internal or external, requires special consent from GOT. In 2005 and in 2006, number of foreign investment and acquisitions got an approval from Government of Turkey in the financial and petroleum sectors. One of major problems that investors face in Turkey is that of “Bureaucracy”. Bureaucratic red tapism have proved to be the significant barrier for both internal and external investors. To rectify and help investors, GOT has simplified policies in many areas. It has rectified establishment process for foreign companies, permit requirements are reduced to certain limit, registration forms have been reduced to single form, and local commercial registry office of Turkey Union of Chambers and Commodity Exchange has been authorized for registration of companies. Turkey’s government also implemented “climate reform program “from 2001, in which both public and private sectors participated. It acted as a national platform too. In this, the technical guidance has been provided by the Coordination Council. This is done as a mission for the improvement of investment environment (YOIKK). This step is taken to accumulate all investment procedures and attract foreign investment in greater pace in country through FDI. The Investment Advisory Council of Turkey (IAC), created on 2004 served guidelines for YOIKK platform. This IAC is chaired by Prime Minister and other members and executives from various multinational companies and representatives of the reputed international institutions (IMF, World Bank, EIB and the head of Turkish NGO’s). GOT also started “National Judiciary Network Project”, which was an integration and automation project and was overseen by Minister of Justice for speed processing of all commercial cases and online transactions of all legal documents and cases. It improved foreign investors’ reach to justice included all sorts of legal supports and Alternative Dispute Resolution mechanisms. US, the EU and the World Bank have been Turkey’s supporters in this regard. In addition, to this, it also runs the Investment Promotion Agency (IPA) for supporting new investors in establishment process and to resolve all the problems arising after establishment. Taxation, one of the major problems, has also been improved by GOT as they made it more investor friendly. For this, GOT has reduced basic corporate tax rate by 30 percent to 20 percent in 2006. Government cancelled all the withholding taxes of foreign investors’ holdings on bonds, bills and stocks. Government also initiated measures to reduce the Employment Tax and enhance the VAT on leasing activities from 1 percent to 18 percent in the year of 2007. Special Consumption Tax on beverages was calculated at 275.6 percent on market price basis. Profit, royalties, repatriation of capital and fees are freely transferable under Conversion and Transfer Policies Turkish Law under Turkey’s 1990 Bilateral Investment Treaty (BIT). In Turkey, there are no foreign exchange restrictions. Full repatriation has been clogged-up by GOT on the investments by the oil companies. This helps foreign investors form Lira depreciation. BIT also ensured the full access of US investors to the local court system and also provided them the authority so that they can directly take the host government to the Arbitration Investment Process where third party plays a role to resolve the dispute. GOT also has a facility or provision for state – to – state settlement of investment dispute. If we look at the dispute settlement cases and process in Turkey, we can see some of the outstanding investment dispute cases lying between U.S companies and Turkish governmental bodies. One of the most prioritized one is that of the “Investment Dispute in the Energy Sector”. For this a treaty is been signed between U.S and Turkey government known as Energy Charter Treaty (ECT). ECT arbitration treaty is not yet active, but it has its remarkable prints of its step of Progress. It is been signed in 1994 and got initiation and effectiveness in 1998. ECT resolves the less litigious European context dispute cases. One of the cases it solved is “AES Vs Hungary”. 8 It is based on EU politics and energy policies and is mainly integrated to communist countries. ECT goes beyond BIT practices. Turkey adopted incentive system for attracting more foreign investment in manufacturing sector and energy sector and also to encourage export related activities. WTO agreement on Trade Related Investment Measures (TRIMS) Turkey is too a part. This general incentive policies provide many benefits to the investors like that of exemption in tax rate, debt facilities, exemptions in custom duties and fund levied and also in some cases VAT exemptions for all locally purchased and imported equipments. All this facilities is based on location, scale and subject of the investment. For “prioritized development provinces”, on fulfilling of certain conditions, Turkey law also provides free land and other incentives based on formulation of the law. With respect to investment in research and development, Turkey’s Scientific and Technological Research Council (TUBITAK) and the Turkish Technology Development Foundation (TTGV) both reimburse on all research and development related capital and revenue expenses and long term loan. Support has also been provided to Technology Development Zones (TDZs). In TDZs, support provided are exempted from income and corporate taxes till December 31,2013, majorly for profit earned by industries in software and R&D activities, wages of researchers, software developers and R&D personnel employed in TDZs and many other exemptions based on the accounting period it is dealing with. The GOT only requires publically available information for part of regulatory approval process. It has no binding towards investors’ disclosure of proprietary information for any purpose.9 All this exceptions, incentives and facilities are provided on the basis of most – favoured - nation. In this, America and other foreign firms can participate on national treaty basis. With all exceptions, foreign investors can have 100 percent participation on private ownership in Turkey. Most importantly, all investment facilities and process are transparent, which Turkish government promises but foreign companies do not agree with it in many of the sectors. Turkish legislation adopts competitive bidding procedures in the public sector, for this they have Public Procurement Board to look after public tenders. The fact is that Turkey has already initiated cooperation and signed bilateral investment treaties with 80 different nations and has commenced negotiation with eight countries. Because Turkey steps toward “creating more transparent and appropriate legalities for investment”, six arbitration cases were highlighted before ICSID since 2002. For investment dispute cases against Turkey, foreign investors can initiate case using two alternative processes: Arbitration Rules (ARB Procedures) or ICSID Additional Facility Rules (AFR procedures). In ARB process, which is been the most preferred among the two conditions require both the parties to be registered to Washington Convention [home and investor’s state (home state)] and secondly, ICSID arbitration should be provided with the consent from both the parties. Investors not eligible for ARB would go for AFR. 10 Conclusion Investment arbitration is a process of resolving dispute among two parties following the treaty signed between two countries with the help of third party known as an arbitrator. Investment and bilateral treaties are the primary sources of information. IISD is an authorised institution for reviewing and revising the main rules with corporation of ICSID, UNCITRAL and NAFTA. UNICITRAL is for formulation and regulation of international trade in cooperation with WTO. These rules are the leading rules for commercial arbitration but are not suitable for investor – state arbitration where dispute is between public and private interest, whereas ICSID is an institution that is international and autonomous, established for Convention of Settlement of Investment disputes Between States and Nationals of Other States. NAFTA is a free trade zone in Canada, Unite State and Mexico administered by NAFTA Secretariat. According to Arbitration (International Investment Dispute) Act, rules may be made by the chief justice among the three Supreme Court judges. GOT has implied many norms for the transparency of all legal formalities and to attract more Foreign Direct Investment for the development and prosperity of the nation. For this they, have come up with many incentives plan and exceptions. Due to the same reasons, six cases are also registered in ICSID. References EU Business, ‘Turkey Investment Climate 2009’ [No Date] EU Business accessed 09 June 2010 Graduate Institute of International and Development Studies, ‘ICSID Arbitration’ [NO Date] ASKEDU accessed 09 June 2010 ICSID, ‘About ICSID’ [No Date] World Bank accessed 09 June 2010 IISD 2010, ‘Investment Arbitration Rules’ [No Date] IISD < http://www.iisd.org/investment/arbitration/> accessed 09 June 2010 Office of the United State Trade Representative, ‘North America Free Trade Agreement (NAFTA)’ [No Date] US Trade Representative accessed 09 June 2101 Government of Singapore, ‘Arbitration (International Investment Dispute) Act Chapter 11’ [10 September 1968] Statutes accessed 09 June 2010 The NAFTA Secretaries, ‘Home’ [No date] NAFTA accessed 09 June 2110 Tiryakioglu Law Office, ‘ICSID Arbitration in Turkey’ [2009] Hg mobile.org < http://m.hg.org/law-articles/area-antitrust-and-trade-regulation/7045/ICSID_Arbitration_in_Turkey> accessed 09 June 2010 T .W. Walde, ‘Investment Arbitration under the Energy Charter Treaty: An Overview of Key Issues’ [2004] Transnational Dispute Management accessed 09 June 2010 Bibliography G. Delaume, ‘ICSID Arbitration Proceedings: Practical Aspects’ [1985] pace Law Review. accessed 09 June 2010 Read More