ABSTRACT
Public services have been carried out increasingly by way of a concession agreement concluded between the parties. Private legal entities are willing to carry out these services because the capital and the profits of the services will pertain to them for a long period, they benefit from privileges and other similar reasons. At this point, carrying out a mission which is qualified as a public service shall be in the form of an administrative agreement exercised in concession method by a private entrepreneur. In accordance with the nature of public service concession agreements, opportunity to apply ICSID arbitration that became available with the amendments and regulates the disputes arise during the execution of mentioned contracts, is important, as well as the authority of the Council of State to “examine” and “present an opinion”. Nevertheless, the arbitration to be applied for the resolution of administrative disputes may need to be evaluated out of the perspective of classical arbitration.
I. INTRODUCTION
Public services that are offered to the society to meet general and common needs and to provide public interest are the requirements of the social state concept. With the influence of neoliberal policies, funding problem of public services has increased the tendency of administrations to have public services exercised by private legal entities. In essence, public service is exercised by private legal entities, as a whole, for a certain period of time by an administrative agreement concluded indicates us the term “public service concession agreements”. In this article, we analyse the nature and scope of public service concession agreements, rights and obligations of the parties arising out of such agreements, the nature and the scope of the authority of the Council of State on concession contracts and ICSID Arbitration procedure to resolve disputes arising from these agreements.
II. PUBLIC SERVICE CONCESSION AGREEMENTS
A. General
Public service concession agreements are administrative contracts that lay out the establishment and operation of a public service or operation of a public service that has already been established for a certain period of time by a private entity. In these agreements, the administration is called “concession granter” and the other side is called “concession holder” or “concessionaire”. According to the classic definition, in such contracts, the concessionaire establishes and/or operates a certain public service, at his own expense, profit and loss by charging the beneficiaries of the service. The public service facility which is established and operated by the concessionaire is transferred to the administration as a whole and free of charge at the end of the agreement1.
The most important feature of the concession method is capital, profits, damages and losses pertain to the private entity and with the concession agreement, as can be gathered from the term of the contract, some privileges (concessions) are granted to the concessionaire. In particular, according to the classical definition and legal regulations available,2 the subject of concession agreements is the “monopoly” nature of public services3. However, there have been amendments in the definition of the concession as some elements in the classic definition have lost their importance over time. Hence, it is affirmable that the requirement of concessionaire operating the service by taking on all of the losses and risks has almost expired because of the income guarantee provided by the administration granting the concession4.
When the historical development of public service concession agreements is examined, it is seen that it had found a wide application area in the last era of the Ottoman Empire. That is to say, Ottoman Public Debt Administration (Düyun-u Umumiye) seized resources to guarantee the debts, also assisted foreign capital to set as concession. In that period, attention was paid to the advices of foreign entities regarding mining rights to be granted as concession. In the Ottoman Empire, the role of foundations cannot be denied in the field of public service. However, apart from the public works, Ottoman Empire concentrated especially on military and commercial priorities, rather than the public interest. In this respect, it was an opportunity for the European capital which had to find investment areas out of Europe to acquire concessions in the field of Ottoman public services5. The public service concession was given to foreign private entrepreneurs due to financial and technical shortcomings in the Ottoman Empire, and with the establishment of the Republican regime, it transformed into a system that those services were taken from private entrepreneurs by the purchase (rachat) method and exercised by public economic enterprises and later on, as a requirement of the liberal system, it started to be granted to private enterprises again6.
Pursuant to the provisions 1924 Constitution of Turkish Republic it is laid out that public service concessions shall be given to merely legal entities which have Turkish joint - stock company status, with decision of the Cabinet and approval of TBMM (Grand National Assembly of Turkey) after opinion of the Council of State is taken following article 26 of the 1924 Constitution of Turkish Republic, which regulates the duties and powers of TBMM, states that the approval of the concession agreements shall be counted among the duties and powers of the TBMM and article 55 which regulates the duties of the Council of State, states that opinion of the Council of State shall be taken7.
After the entry into force of 1961 Constitution of Turkish Republic, the authority of TBMM to approve the concession agreements was removed and the duty and authority of the Council of State on the concession agreements and the stipulation drafts have been transformed into “examination” by modifying from “expressing opinion”. The 1982 Constitution of Turkish Republic also used to have the same provisions as the 1961 Constitution of Turkish Republic, article 155th paragraph 2 of the constitution is amended by the law dated 13 August 1999 and numbered 4446, and the Council of State’s authority of examination on the concession agreements were modified merely as “expressing opinion”8.
It should be noted that no matter which term is given to the agreement, the Council of State deems itself to have the authority to examine agreements and therefore invalidity matter of the contracts which have not been examined by Council of State arises.
Although the conclusion of public service concession agreements has become more practical in practice with the recent changes in the 1982 Constitution over time, the concerns of foreign investors could not have been removed since these agreements are concluded for a longtime period and the parties allocate huge financial resources for execution of the agreement. Within this long period, the country may undergo many political changes and occasionally situations may arise to the detriment of the investors9. Therefore, nowadays, investors seek resolution of possible disputes between the parties of the agreement by an impartial tribunal, in order to avoid such risks and to avoid the slowness of national jurisdictions10.
B. Rights and Obligations of the Parties
1. Rights and Obligations of the Administration
As concession agreements have the nature of administrative contracts, the administration as a party of the concession agreement has a number of superior rights and authorities compared to the other party, the concessionaire. This rights and authorities are simply to supervise and impose sanctions, to amend the contract unilaterally (if required) and non-exhaustive rights such as to terminate contract unilaterally, add or remove or not execute the provisions that are not agreed by the parties when public good necessitates.
The Administration has the authority to inspect whether the service is operated constantly and regularly and whether the concessionaire carrying out its obligations, and to enforce sanctions when necessary. Even though it is not set out in the agreement, it is assumed that the administration has above-mentioned rights and authorities as the real possessor and responsible of the public service11.
The administration has the authority to inspect whether the concessionaire carries out its obligations and to enforce sanctions when necessary. The major sanctions of the administration are to ask for payment of a certain amount of money, temporary seizure of the establishment and termination of the agreement12.
Pursuant to the variability (adaptation) principle of public services, the administration has the authority to change the terms and conditions unilaterally regarding the operation of the public service concession agreement. The concessionaire also has to accept these changes that the administration makes. However, the ability to use this authority depends on the arising of new conditions and circumstances.
If obligations of the concessionaire may increase due to the unforeseen changes made unilaterally by the administration and/or if the financial balance of the agreement may collapse, compensation for the restoring the balance shall be brought to agenda13.
The administration has the authority to terminate the agreement unilaterally, in case that service and public interest require so, even if the concessionaire has no applicable fault. The administration does not have to pay compensation to the concessionaire in case the contract is terminated upon gross fault of the concessionaire, however, in the second case the administration has to fully compensate the loss of the concessionaire14.
2. Rights and Obligations of the Concessionaire
The concession agreement provides some financial rights to the concessionaire, as well as some kind of public privileges and opportunities that are not encountered in private law contracts.
The principle of “preserving the financial equilibrium”, which is also available in the Turkish Code of Obligation but which differs in meaning and scope in the administrative agreements, is in favor of the concessionaires in concession agreements. Namely, if the administration increases the area of obligations of the concessionaire by making a change in the contract by unilateral will, the concessionaire shall have the right to request a financial compensation for these increased obligations. That is to say that provisions regarding the financial rights of concessionaire are contractual and it is not possible to change these provisions regarding the financial rights unilaterally by the administration.
On the other hand, due to events that arise out of the will of the parties during the execution of the agreement, if obligations of the concessionaire increase as much as that may cause the destruction of the concessionaire, the concessionaire has the right to request the agreement to be adapted to the new conditions and the damages to be shared in accordance with the improvision theory (adopting the unforeseen developments and changing needs).
As it is known, “fait du prince” theory is another aspect which makes possible new conditions to affect the agreement. According to this theory, if the execution of the agreement is affected due to the decisions taken by the administration not as a party of the agreement but as an authority which uses its powers, the administration must compensate the damages of the contractor due to the decision it took15.
The concessionaire has to carry out the service in accordance with the governing principles of the public service and contractual provisions. It has to comply with these provisions as the principles of the benefiting conditions and price is laid out in the contract and in the agreement.
Besides, it has to accept unilateral changes made by the administration as essential owner of the public service according to the principle of improvision and it has to endure the supervision and inspection of the administration according to the principle of continuity and regularity.
Finally, the concessionaire has to carry out its obligations by itself. The concessionaire cannot carry out the service it has undertaken by contracting-out method and cannot transfer its obligations. As the concessionaire is preferred based on its technical knowledge, talent, experience and financial power, it is out of question that public services is carried out by others16.
C. The Nature and the Scope of the Authority of the Council of State on the Concession Agreements
As briefly mentioned above, the Council of State has ad ministrative duties as “expressing opinion” or “examination” on concession agreements. The legal nature of the tasks defined as “expressing opinion” or “examination” can be understood by examining the decisions of the Council of State. The task of examining the concession agreements of the Council of State is a task carried out within the “functional integrity and association” of the council as a consulting body.
A concession agreement signed without the examination of Council of State is formally unlawful. Besides, the administration, in principle, is free whether to comply with them or not after getting the opinion of the Council of State. After the Council of State expressed its opinion on the agreement draft, if the agreement is signed by the administration without making any amendment in accordance with the opinion of the Council of State, we do not think that this is an issue affecting the validity of the agreement.
The assessment of the Council of State on the concession agreements is not only in terms of compliance with law, but also a broad review of the agreement, including the rights that are required to be given to the parties of the agreement and even the correction of the parts of the agreement that can be problematic in the meaning of expression.
The last thing to be mentioned in this regard is; there is no difference within the scope of the Council of State’s evaluation between the period in which it had the task of “examining” the concession agreements before 1999 and the period in which it had the task of “expressing opinion” after 1999. The Council of State does not limit itself within judicial review in every period but it makes expediency review17. There is no doubt that, even though it is asserted in doctrinal studies that there is no difference in practice, this amendment includes “restrictive” approach to the authority of The Council of State on concession agreements. It is a fact that the authority of legislative body as to expediency considerations – even covering the content of the agreement – becomes more abstract examination only in the form of expressing opinion instead of a detailed examination.
III. ICSID ARBITRATION IN DISPUTES ARISING FROM PUBLIC SERVICE CONCESSION AGREEMENTS
A. General
Most of the time, the businesses which are subject to the agreements, such as public service concession agreements, build-operate-transfer agreements and public private partnership agreements has a high financial value. Moreover, since the administrative jurisdiction has duty and authority to resolve possible disputes between the parties during the execution of these agreements, the administration may often impose its claims on the counterparty of the agreement as a result of its mission of protecting the “public interest”. Especially when foreign investments are considered, such concerns require availability of the arbitration institution for the resolution of disputes18.
As a consequence of the rapid flow of capital towards developing countries right after the Second World War, the greatest drawback from the point of foreign investors has been the lack of an effective dispute resolution method for possible disputes between the host country and foreign investors. In other words, foreign investors’ concerns that domestic courts would decide in favor of the host state arose, as well as the long duration of the cases. Therefore, reason, foreign investors preferred to resolve disputes by international arbitration.
At the beginning of the 60’s, the host countries’ violation of the rights of foreign investors have been noticed and with the aim of stabilizing investments and capital inflows, within the framework of the “Convention on the Settlement of Investment Disputes Between States and Nationals of Other States” (“ICSID Convention”) that entered into force on 14 October 1966, International Centre for Settlement of Investment Disputes) (“ICSID Arbitration Center”) was founded. As of 25 January 2006, the ICSID Convention has been signed by 155 countries and has been ratified by 143 of them19.
The main purpose here is to remove obstacles in front of investments and to introduce a refined method of dispute resolution. When it is considered that the first application made to the ICSID Arbitration Center was made in 1987,20 it can be seen that that ICSID arbitration increased its international functionality due to bilateral investment agreements.
Turkish legislation on the promotion and protection of foreign investment does not contain any provision allowing the ICSID Arbitration Center to exercise its jurisdiction. In contrary, as mentioned above, Turkey gave its consent by bilateral investment agreements which have been signed with several countries to take the investment disputes to the ICSID Arbitration Center. When signing the ICSID Convention, Turkey put a notification to the article 25/4 as follows: “Only the disputes arising directly out of investment activities which have obtained necessary permission, in conformity with the relevant legislation of the Republic of Turkey on foreign capital, and that have effectively started shall be subject to the jurisdiction of the Center. However, the disputes, related to the property and real rights upon the real estates are totally under the jurisdiction of the Turkish courts and therefore shall not be submitted to jurisdiction of the Center.”
Today it is obvious that the ICSID arbitration have wide application area especially in the concession agreements of developing countries signed with foreign investor. The host country may have accepted ICSID arbitration in an investment agreement. Most of the bilateral investment agreements (BIT) include ICSID arbitration. Some bilateral investment contracts refer to ICSID arbitration as a solution of foreign investment disputes. Some agreements give the authority to foreign investors to initiate proceedings for the dispute to be heard before the ICSID arbitration board21.
B. Jurisdiction of the ICSID Center
There are three important conditions for the disputes between states and other states’ citizens to be resolved by ICSID arbitration. Firstly, the parties shall give their consent to bring the dispute between them before ICSID arbitration. The consent of the parties shall be in writing regarding a dispute which already exist or may arise in the future. A letter, fax or an electronic text is sufficient to meet the written form requirement. The consent of the member states and the foreign investors can be given by an arbitration clause which they may put in the main agreement between them or by a separate arbitration agreement. Pursuant to article 25/4 of the ICSID Convention, it is not possible, in terms of authorization of the ICSID Arbitration, to renege on these agreements and to assert the competence of the domestic courts after the agreement of the parties to bring the dispute between them to the ICSID Convention.
One of the parties of the dispute should be a host country of the ICSID Convention and the other party should be a citizen of another member state of the ICSID Convention. Another important issue that should be highlighted regarding the ICSID Convention is whether one of the sub-organizations of the state or its representative can take part in a case before the ICSID Arbitration Center. For this, the host government (i) shall explicitly express that the relevant organization or sub-unit may also be party to the agreement; and also (ii) shall explicitly approve the request for the relevant sub-unit to bring the dispute to the ICSID Convention. As a third condition, the dispute between the parties should be a legal dispute arising from an investment22.
C. The Arbitration Process According to ICSID Rules
1. Location and Language of the Arbitration
Pursuant to article 62 of the ICSID Convention, arbitration proceedings shall be carried out at the Center IC-SID Arbitration Center in Washington DC unless parties agreed otherwise. Pursuant to article 63 (a) of the ICSID Convention, only if reasons of necessity are presented, the parties may accept another location which is in connection with the ICSID Arbitration Center, as the location of arbitration.
Official languages of the ICSID Arbitration Center are: English, French and Spanish. The most common way in practice is to determine the arbitration language in the arbitration agreement by the parties.
2. Applicable Law
Pursuant to articles 25 and 26 of the ICSID Convention, the parties’ will in the arbitration agreement for taking the dispute between them to the ICSID Arbitration Center procures the validity of the ICSID Convention. For this reason, the parties are not obliged to determine the applicable law for the validity of the arbitration agreement between them.
If the dispute is made subject to ICSID rules of arbitration pursuant to article 44 of the ICSID Convention, the procedural rules laid out in articles 41-49 of the ICSID Convention shall be applied to the resolution of the dispute. It may be stated based on these provisions that after the Parties’ make dispute subject to the ICSID Convention, they will not be able to set their national procedural law or arbitration rules of any international organization or any other ad-hoc arbitration law as applicable procedural law.
If the parties fail to make a determination regarding the applicable substantive law to the merits of the dispute, the arbitral tribunal, pursuant to article 42/1 of the ICSID Arbitration Rules, shall determine the applicable substantive law. There is no time limit for determination of the law applicable by the parties. Especially for Turkish administrative law, foreign investors in the case of disputes arising from public service concession agreements prefer arbitration in order to avoid their concerns regarding that decisions are given in favor of the host state in disputes arising from long-term investment agreements23.
3. Bindingness of ICSID Decisions
Pursuant to article 53/1 of the ICSID Convention, after stating that the arbitration decisions are final and binding, it is laid out that the parties will not be able to apply for an appeal against the award, other than those provided for in the ICSID arbitration rules. However, one of the important points to be considered here is that the ICSID Arbitrator decisions are binding on the parties but not on the third parties24.
IV. CONCLUSION
Today, it is quite common for public services to be carried out by contracting-out method. Expanding area of public service along with the growing concept of the social state and in point of that it contributes to the strengthening of the developing economies, the administration prefers contracting-out method to carry out public services in numerous fields by considering the financing of the public services. In this respect, many large-scale and small-scale private enterprises have great opportunities in regard to their own development. Therefore, the settlement of disputes arising from the execution of these agreements with the administration which holds public power comes up as a significant matter.
In the event of dispute between the parties arising from foreign investments, the need to apply to the international arbitration derive from the concern that local court may decide in favor of the host state. However, on this matter, the tension arises from the fact that it is not a dispute of private law but an administrative one. In case that the administration, due to public interest, makes amendments by using rights and powers which do not fall within the agreement, it is unclear that what kind of solution ICSID will propose to the disputes arising from this. In this respect the transformative effect of good will come up and the arbitration also will experience changing problems due to common good. Even if investor’s preference of ICSID arbitration for the disputes arise from concession agreements is accurate for the balance of benefits, moreover for a foreseeable legal regime, it is probable and even certain that future of arbitration processes will be opened up for discussion regarding benefits to be balanced. Nowadays, it is stated that the arbitration dispute resolution method is extremely useful for the reason that it removes the concerns of foreign investors. On the other hand, the continuance of the administrative law to be applied for the resolution of the dispute will not completely remove the investors’ concerns who refrain from administrative jurisdiction. It is presented as a possible solution to foresee this question and accordingly make the agreement as “by leaving an area to government to regulate because of public interest.
BIBLIOGRAPHY
Metin Günday, İdare Hukuku, 11th Edition, Ankara 2017
A. Murat Yavaş, Kamu Hizmeti İmtiyaz Sözleşmeleri ve Tahkim Yüksek Lisans Tezi, Kocaeli Üniversitesi Sosyal Bilimler Enstitüsü, Kocaeli 2003
Zehreddin Aslan/Nilay Arat, Kamu Hizmeti İmtiyaz Sözleşmelerinden Kaynaklanan Uyuşmazlıklarda Tahkim Usulü, İstanbul Ticaret Üniversitesi Sosyal Bilimler Dergisi, 8th Edition Fall 2005/2
Cem Çağatay Orak, Kamu Hizmeti İmtiyaz Sözleşmelerinde Tahkim, Ankara 2006
Ergin Nomer/Nuray Ekşi/Günseli Gelgel Öztekin, Milletlerarası Tahkim Hukuku, Vol. 1, İstanbul 2008
Hayrettin Yıldız, Kamu Hukuku ile Özel Hukukun Kesiştiği Yer: Kamu Hizmeti İmtiyaz Sözleşmelerinde Tahkim Yolu, Türkiye Barolar Birliği Dergisi, 2014
Ayhan Beydoğan, Türk Hukukunda İmtiyaz Sözleşmelerinin Hukuki Niteliği: 406 ve 5809 sayılı Kanunlar Açısından Değerlendirilmesi, Ankara Barosu Dergisi, V.2011/4, Ankara 2011, http://www.ankarabarosu.org.tr/siteler/ankarabarosu/ tekmakale/2011-4/2011-4-5.pdf, (Last Access Date: 02.07.2018)
İsmail Kahreman, Danıştay’ın İmtiyaz Sözleşmeleri Üzerindeki İdari Görev ve Yetkileri Yüksek Lisans Tezi, İstanbul Üniversitesi Sosyal Bilimler Enstitüsü Kamu Hukuku Anabilim Dalı, İstanbul 2014
Murat Ersoy, Uluslararası Yatırım Anlaşmazlıklarının Çözüm Merkezi (International Centre for Settlement of Investment Disputes-ICSID), http://www.mfa.gov.tr/ uluslararasi-yatirim-anlasmazliklarinin-cozum-merkezi-_international-centre-forsettlement-of-investment-disputes-icsid_.tr.mfa, (Last Access Date: 03.07.2018)
FOOTNOTE
1 Metin Günday, İdare Hukuku, 11. Edition, Ankara 2017, p. 188-189.
2 4046 numbered Özelleştirme Uygulamaları Hakkında Kanun published in the Official Gazette dated 27.11.1994 and numbered 22124.
3 A. Murat Yavaş, Kamu Hizmeti İmtiyaz Sözleşmeleri ve Tahkim Yüksek Lisans Tezi, Kocaeli Üniversitesi Sosyal Bilimler Enstitüsü, Kocaeli 2003, p. 73.
4 Turgut Tan, İdare Hukuku, 6. Edition, Ankara 2017, p. 379.
5 Turgut Tan, Osmanlı İmparatorluğunda Yabancı Yatırımlara Verilmiş Kamu Hizmeti İmtiyazları, http://dergiler.ankara.edu.tr/dergiler/42/409/4496.pdf, (Last Access Date: 03.08.2018).
6 Zehreddin Aslan/Nilay Arat, Kamu Hizmeti İmtiyaz Sözleşmelerinden Kaynaklanan Uyuşmazlıklarda Tahkim Usulü, İstanbul Ticaret Üniversitesi Sosyal Bilimler Dergisi, Issue 8 Fall 2005/2, p. 8.
7 Günday, İdare Hukuku, p. 189-190.
8 Cem Çağatay Orak, Kamu Hizmeti İmtiyaz Sözleşmelerinde Tahkim, Ankara 2006, p. 37-38.
9 Ergin Nomer/Nuray Ekşi/Günseli Gelgel Öztekin, Milletlerarası Tahkim Hukuku, Vol. 1, İstanbul 2008, p. 154.
10 Hayrettin Yıldız, Kamu Hukuku ile Özel Hukukun Kesiştiği Yer: Kamu Hizmeti İmtiyaz Sözleşmelerinde Tahkim Yolu, Türkiye Barolar Birliği Dergisi, 2014, p. 280.
11 Ayhan Beydoğan, Türk Hukukunda İmtiyaz Sözleşmelerinin Hukuki Niteliği: 406 ve 5809 sayılı Kanunlar Açısından Değerlendirilmesi, Ankara Barosu Dergisi, I.2011/4, Ankara 2011, p.117, http://www.ankarabarosu.org.tr/siteler/ ankarabarosu/tekmakale/2011-4/2011-4-5.pdf, (Last Access Date: 02.07.2018)
12 Günday, İdare Hukuku, p.347.
13 Günday, İdare Hukuku, p.347-348.
14 Günday, İdare Hukuku, p.348.
15 Tan, İdare Hukuku, p. 337.
16 Günday, İdare Hukuku, p. 348-350.
17 İsmail Kahreman, Danıştay’ın İmtiyaz Sözleşmeleri Üzerindeki İdari Görev ve Yetkileri Yüksek Lisans Tezi, İstanbul Üniversitesi Sosyal Bilimler Enstitüsü Kamu Hukuku Anabilim Dalı, İstanbul 2014, p.12-17.
18 Hayrettin Yıldız, Kamu Hukuku ile Özel Hukukun Kesiştiği Yer: Kamu Hizmeti İmtiyaz Sözleşmelerinde Tahkim Yolu, p.280.
19 Murat Ersoy, Uluslararası Yatırım Anlaşmazlıklarının Çözüm Merkezi (International Centre for Settlement of Investment DisputesICSID), http://www.mfa.gov.tr/uluslararasi-yatirimanlasmazliklarinin-cozum-merkezi-_internationalcentre-for-settlement-of-investment-disputes-icsid_. tr.mfa, (Last Access Date: 03.07.2018).
20 Orak, Kamu Hizmeti İmtiyaz Sözleşmelerinde Tahkim, p.137, REED, L./PAULSSON, J./ BLACKABY, N., A Guide to ICSID Arbitration, Kluwer Law International, The Hague/London/New York, 2004, s. 4, BROCHES, A., Arbitration Under the ICSID Convention, Selected Essays, World Bank, ICSID and the other subjects of the Public and Private International Law, 1995, p.436.
21 Orak, Kamu Hizmeti İmtiyaz Sözleşmelerinde Tahkim, p.136-140.
22 Orak, Kamu Hizmeti İmtiyaz Sözleşmelerinde Tahkim, p.143-144.
23 Orak, Kamu Hizmeti İmtiyaz Sözleşmelerinde Tahkim, p. 145-146.
24 Orak, Kamu Hizmeti İmtiyaz Sözleşmelerinde Tahkim, p. 148-149.
