Drafting Arbitration Clauses

Market players whose operations takes place in multinational fields are quite likely to face with legal problems 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 by contrast with the static nature of litigation that does not tolerate any improvisation from participants.

IN PRACTICE

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

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

Therefore, since in practice even most of the vigilant parties do not give the deserved importance to arbitration clauses and this attitude usually gives rise to additional problems at the very beginning 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 the parties. 

ANATOMY OF AN ARBITRATION CLAUSE

Having noted above, there are certain pillars of course that the 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. 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 a 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 a controversy arises on the final award between parties. 

Apart from this, “Seat” does not mean the location of the hearings so parties may freely decide and the seat where one of the parties is located at is not always the ideal choice although the counterparty accepted such clause in the contract. 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 can simply prefer one of the well-known arbitration friendly seats such as London, Paris or Geneva.

• Applicable 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. Likewise the seat, it is not always advisable to prefer the local laws of one of the parties and this should be carefully evaluated on a case by 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 ICC and ISTAC in Istanbul) which removes a workload 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 not have that 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 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 saving of course. One who has concerns about time efficiency and business continuity may desire to benefit from the well-established system and the comforting services of an arbitration institution on arbitration procedure, by referring the name of such institution within the arbitration clause. Putting aside the fact that parties are free to apply any kind of rules to the arbitration procedure; there are also set of rules designed to be applied on ad hoc arbitrations; for instance, the “Arbitration Rules” of UNCITRAL and “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.

OPTIONAL COMPONENTS

• Number, Appointment and Qualification of Arbitrators

Parties may agree on; the number and qualifications of arbitrators who will take part in the arbitral tribunal and include it as much as in detail in the arbitration clause depending on their sensitivity. Number is usually selected as one or three or more, but never an even number where two arbitrators chosen by the parties chose the chairman usually. It is frequently viewed 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 appoint as arbitrators, but doing so -without developing alternatives- always bears a risk to be taken into consideration.

• Interim Measures

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

CONCLUSION

In nature, arbitration clauses are open for customization and improvements to a great extent, yet a defective wording or a contradictory phrase caused by lack of experience can easily ruin the upcoming 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 at the other hand it may lead the parties to a deadlock or long lasting parallel local challenges in various countries that will make them swear not to prefer arbitration once 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 a loophole in the clause.

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

A healthy arbitration procedure can only be built on a harmonized arbitration clause that has been sterilized from fancy words and verbosity including 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 the needs for sure. Therefore, one who is willing to draft a functional arbitration clause, and thus secure enforceability of a final award; should certainly ask for the supervision or assistance of a lawyer who has a history and experience of conducting arbitration procedures. 

By Efe Kınıkoglu, Partner, and Kaan Beylen, Trainee Lawyer, Moral Law Firm