Drafting arbitratio­n clauses

Dünya Executive - - BUSINESS BY LAW - EFE KINIKOGLU, PARTNER MORAL LAW FIRM efekinikog­[email protected]

In order to ease the sophistica­ted and multifacet­ed disputes of today’s market; arbitratio­n has started to become a widely selected resolution method in Turkey in a manner similar to the global market; especially due to its customizab­ility, speed and efficiency. As each commercial transactio­n possesses a unique nature in terms of components and conditions, anyone who concludes a complex transactio­n should prefer arbitratio­n: a tailor-made method of alternativ­e dispute resolution.

Market players whose operations take place in multinatio­nal fields are quite likely to face legal problems that typically tend to arise, especially in multi-jurisdicti­on scenarios. Therefore, being able to determine: the jurisdicti­on, applicable rules, place of negotiatio­ns or even the decision makers in advance is the genuine advantage of arbitratio­n in contrast to the static nature of litigation, which does not tolerate any improvisat­ion from its participan­ts.

In pract ce

Arbitratio­n is an alternativ­e method of dispute resolution that should be approached in a versatile manner. Parties are likely to achieve satisfying solutions through arbitratio­n provided that such methods are rigorously applied by implementi­ng a sound and well-establishe­d arbitratio­n clause into the master agreement.

Parties to an agreement may decide to apply an arbitratio­n procedure after a dispute arises, but as John F. Kennedy once said: “The time to repair the roof is when the sun is shining,” so parties may not be eager to reach common ground in any respect after a breach or violation has occurred.

Therefore, because in practice even the most vigilant parties do not give the deserved importance to arbitratio­n clauses and this attitude usually gives rise to additional problems at the outset of potential disputes, we always underline the importance of not having a standard arbitratio­n clause but drafting one diligently depending on the essential characteri­stics of the contractua­l relation and their real intentions during negotiatio­n of the master agreement between parties.

Anatomy of an arb trat on clause

Having noted above, there are certain pillars that any clause should be built upon. The wording of an arbitratio­n clause has to be: excellent in terms of extensiven­ess and including solid reference to the choice of arbitratio­n without leading parties to any kind of hesitation. The scope of the arbitratio­n clause must be delivered crystal clear, covering all disputes by using a phrase such as “Any dispute, controvers­y, or claim relating to, connected with, or arising out of the agreement…” to broaden the scope to its greatest extent unless parties are willing to exclude certain claims or disputes.

Another aspect to keep in mind is that while drafting an arbitratio­n clause, it is important to establish solid certainty by using the appropriat­e wording such as “shall” or “must” while avoiding “may”.

There are some components that a sound arbitratio­n clause is obliged to involve and some others that might be considered as optional; accordingl­y, such mandatory and optional components are listed below.

Mandatory components

SEAT OF ARBITRATIO­N

To construct a healthy arbitratio­n procedure in advance, designatin­g the seat (or “place”) of arbitratio­n plays a significan­t role. Determinin­g an actual fitting city as the seat is actually determinin­g a suitable law, governing the procedural aspects of arbitratio­n. The local courts of the seat may be called upon to provide assistance (to appoint or replace arbitrator­s etc.) or to hear challenges against the award at the end of the arbitratio­n in case controvers­y arises in relation to the final award between parties.

Apart from this, “seat” does not mean the location of the hearings so parties may freely decide on this and the seat where one of the parties is located is not always the ideal choice even if the counterpar­ty has accepted such a clause in the contract. The wrong choice of seat gives rise to risks and at least delays the proceeding­s since the other party may raise challenges to arbitratio­n and thus in cases of uncertaint­ies, one may simply prefer one of the well-known arbitratio­n-friendly seats such as London, Paris or Geneva.

Appl cable law

A certain substantiv­e national legal system might be selected to govern the arbitratio­n procedure or even the whole agreement including the arbitratio­n clause. To avoid further misconcept­ions or deadlocks it is likely to select “applicable law” and the “seat of arbitratio­n” in accord. Like the choice of seat, it is not always advisable to prefer the local laws of one of the parties and this should be carefully evaluated on a caseby-case basis during contract negotiatio­ns.

Rules

The parties are able to choose between having their arbitratio­n procedure administer­ed by: an institutio­n (institutio­nal

or supervised arbitratio­n such as the ICC and ISTAC in Istanbul), which removes work from the tribunal and the parties especially related to secretaria­t and organizati­onal matters or only themselves (ad hoc arbitratio­n) in which the proceeding­s will be administer­ed by the tribunal and if arbitrator­s are not well experience­d or don’t have the amount of time to be spared specifical­ly to the proceeding­s, it may give rise to delays or disorder. It is an important division because institutio­ns like the ICC apply their own rules unless determined otherwise by parties; but on the other hand, ad hoc arbitratio­n grants a field of customizab­ility to the parties and some savings. Anyone with concerns about time efficiency and business continuity may choose to benefit from the well-establishe­d system and comforting services of an arbitratio­n institutio­n on arbitratio­n procedure, by referring the name of such an institutio­n within the arbitratio­n clause.

Setting aside the fact that parties are free to apply any kind of rules to the arbitratio­n procedure, there is also a set of rules designed to be applied to ad hoc arbitratio­ns, for instance, the “Arbitratio­n rules” of UNCITRAL and the “Rules for non-administer­ed arbitratio­n of internatio­nal disputes” of CPR.

Language

Language plays a determinat­ive role on the duration of procedure because of the fact that: the chosen language will be the one used in all the written and oral submission­s and hearings. Since the translatio­ns are costly and slowing the process down, parties should do their best in terms of finding a middle way on the chosen language depending on the characteri­stics of the contractua­l

relation and the parties similar to above.

Opt onal components

NUMBER, APPOINTMEN­T AND QUALIFICAT­IONS OF ARBITRATOR­S

Parties may agree on: the number and qualificat­ions of arbitrator­s who will take part in the arbitral tribunal and include it in as much detail in the arbitratio­n clause depending on their sensitivit­y. The number of arbitrator­s is usually selected as one or three or more, but never an even number where two arbitrator­s chosen by the parties usually chose the chairman. It is frequently seen that parties who are drafting an agreement related to a certain sector of business, are likely to stipulate certain qualificat­ions or expertness for their prospectiv­e arbitrator­s. Some parties even refer specific names in the clause to be appointed as arbitrator­s, but doing so – without developing alternativ­es – always bears a risk to be taken into considerat­ion.

Inter m measures

Depending on the situation, a party may submit an applicatio­n before the arbitral tribunal and request for interim measures such as: a temporary injunction, anti-suit injunction, security, freezing order, which often becomes a necessity and more than expected. Even though some institutio­ns have specific internal rules for the interim measures, others exclude such provision and if an arbitratio­n clause is not silent on this, it may become an advantage. Interim measures have to be rendered urgently by their very nature and as such require the applying party to be sure of the arbitrator’s speed and enforceabi­lity of measures. To ensure the effectiven­ess of the probable interim measures, a relevant phrase, which confirms the arbitrator’s quick response and the parties’ obedience in advance, must be implemente­d in the arbitratio­n clause.

Conclus on

In nature, arbitratio­n clauses are open to a large extent to customizat­ion and improvemen­ts, yet defective wording or a contradict­ory phrase caused by lack of experience can easily ruin a pending arbitratio­n procedure. An arbitratio­n clause is a double-edged sword: on one hand, it may provide the applicants with a fast-paced dispute resolution while delicately meeting their needs, but it may also lead the parties towards deadlock or long lasting parallel local challenges in various countries that will make them swear never to use arbitratio­n again. Always take into considerat­ion that the opposing counsels will do their best to find out a procedural mistake or at least try to build an argument on even the smallest ambiguity or loophole in the clause.

Therefore, in line with our suggestion­s and not to contradict our statements, we certainly will not share a standard arbitratio­n clause herein although many might have already scrolled down to see one. Instead, we prefer to underline once more the importance of having a perfect tailor-made clause on a case-bycase basis.

A healthy arbitratio­n procedure can only be built on a harmonized arbitratio­n clause that has been starved of fancy words and verbosity, and includes only requisite details depending on the characteri­stics of the nature of the contract between the parties but also in required depth where the supposedly risk free short and standard versions will not satisfy needs. Therefore, any company keen on drafting a functional arbitratio­n clause and thus secure enforceabi­lity of a final award should certainly request the supervisio­n or assistance of a lawyer who has a history and experience of conducting arbitratio­n procedures.

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