Drafting arbitration clauses
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.
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.
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 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.
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.