This article examines the arbitration clauses Turkish courts treat as invalid, and explains multi-tier clauses and how to draft an effective arbitration clause.
In most contracts, the arbitration clause sits on the last pages and receives the least attention during negotiations. When a dispute arises, it becomes the most important clause in the contract. A poorly drafted arbitration clause can drag the parties into a jurisdictional fight lasting years before the merits are even reached. Worse, the clause may be held invalid altogether, leaving the dispute to a state court the parties never contemplated. This problem, known internationally as the "pathological arbitration clause", is particularly significant under Turkish law because of the strict approach Turkish courts take to the clarity of the intention to arbitrate. This article examines the minimum elements of an arbitration clause, the types of clauses Turkish courts treat as invalid, raising the arbitration objection in time, multi-tier clauses with negotiation and mediation steps, and the elements of an effective arbitration clause.
1. Minimum Elements and Form of an Arbitration Clause
Domestic disputes seated in Türkiye are governed by Articles 407 et seq. of the Code of Civil Procedure (CCP), while disputes with a foreign element seated in Türkiye are governed by the International Arbitration Law No. 4686 (IAL). Under both regimes, an arbitration clause is an agreement by the parties to resolve existing or future disputes by arbitration instead of the state courts.
- Written form: the arbitration agreement must be in writing. Besides a document signed by the parties, an exchange of letters, faxes or e-mails satisfies this requirement. An express reference in the main contract to another document containing an arbitration clause may also suffice.
- Separability: the arbitration clause is independent of the main contract. A claim that the main contract is invalid does not in itself invalidate the arbitration clause.
- Minimum content: the only element essential to a valid arbitration clause is a clear intention that disputes arising from a defined legal relationship be resolved finally by arbitration rather than by the state courts. Gaps on matters such as the number of arbitrators, their appointment or the procedure do not invalidate the clause; they are filled by statute. For example, if the number of arbitrators has not been agreed, three arbitrators are appointed.
Most problems arise from this last element. Turkish courts require the intention to arbitrate to be expressed clearly, definitively and beyond doubt, and they interpret narrowly an intention that results in waiving access to the state courts.
2. Clauses Turkish Courts Treat as Invalid or That Carry a Risk of Invalidity
- Optional clauses: clauses providing for arbitration and state court litigation as alternatives, such as "disputes shall be resolved by arbitration or by the Istanbul courts", are held invalid in Turkish Court of Cassation practice on the ground that they do not contain a definitive waiver of the state courts.
- Unilateral option clauses: asymmetric clauses giving only one party the right to choose between arbitration and the courts are accepted in some foreign legal systems, but carry a high risk of invalidity when governed by Turkish law or relied on in Türkiye.
- "May" language: wording stating that disputes "may be referred" to arbitration or "may be resolved" by arbitration invites argument over whether arbitration is mandatory or merely an option.
- Non-existent or misnamed institutions: institution names that do not exist, are misspelt or could refer to more than one institution may render the clause unworkable where it cannot be established which institution the parties chose.
- Clauses conflicting with court jurisdiction: it is common for the same contract to contain both an arbitration clause and a provision such as "the Istanbul courts and enforcement offices shall have jurisdiction over all disputes". Such provisions can sometimes be reconciled by reading the court clause as covering court functions supporting the arbitration. Where the conflict cannot be resolved, however, the court may conclude that the intention to arbitrate is not clear.
- Terms in unilateral documents: arbitration terms printed on documents issued unilaterally by one party, such as invoices, delivery notes or order confirmations, are not treated as an arbitration agreement unless expressly accepted by the other party.
- Authority and representation: the person signing on behalf of a company must have authority to represent it. An arbitration agreement concluded through an attorney also requires an express special authority in the power of attorney (Article 74 CCP).
- Standard terms: arbitration clauses in standard-form contracts that the other party could not negotiate, and about which it was not adequately informed, risk being deemed not to form part of the contract under the standard terms provisions of the Turkish Code of Obligations.
- Arbitrability: disputes concerning rights in rem over immovable property and matters not at the parties' free disposal are not arbitrable. Arbitration clauses covering such matters are invalid.
3. Raising the Arbitration Objection in Time
A valid arbitration clause does not prevent a state court from hearing the dispute of its own motion. If a lawsuit is filed despite the arbitration clause, the defendant must raise the arbitration objection as a preliminary objection within the prescribed time (Article 413 CCP, Article 5 IAL). An objection not raised in time is lost, and the party is deemed to have impliedly waived the arbitration clause. In practice, one of the most common and irreparable mistakes is for a company relying on an arbitration clause to bury the objection among its defences on the merits in the statement of defence, or not to raise it at all. Likewise, routes such as starting enforcement proceedings for a receivable covered by an arbitration clause, and then filing an action to set aside the debtor's objection, may be met with an arbitration objection. Collection strategy should therefore be built around the arbitration clause from the outset.
4. Multi-Tier Dispute Resolution Clauses
Particularly in construction, energy and long-term supply contracts, multi-tier clauses requiring steps such as negotiation between senior executives, mediation or expert determination before arbitration are common. Their purpose is sound, but poorly drafted versions cause serious problems:
- Whether a step is mandatory: general wording such as "the parties shall first try to settle the dispute amicably" is often read as a statement of good intentions rather than a binding condition precedent. If a step is to be mandatory, this should be stated expressly, with its starting point, duration and end defined.
- Consequences of skipping a step: in international practice, failure to comply with a pre-arbitration step is increasingly treated as an issue of admissibility rather than one that deprives the tribunal of jurisdiction. The English High Court adopted this approach in Republic of Sierra Leone v SL Mining (2021). In a 2014 decision, the Swiss Federal Supreme Court also held that, where a mandatory conciliation step has been skipped, staying the proceedings is more appropriate than dismissing the claim. As there is no settled case law on this point under Turkish law, it is all the more important for the clause to set out the consequences expressly.
- Limitation risk: negotiations between the parties do not interrupt or suspend limitation periods. Where mediation is commenced under Law No. 6325, the mediation period is disregarded in calculating limitation and preclusive periods, but this rule does not apply to every contractual pre-arbitration step. The clause should therefore allow arbitration to be commenced before the earlier steps are completed where a limitation period is about to expire.
- Interim relief: the clause should state expressly that the earlier steps do not prevent applications for interim relief, such as interim injunctions or precautionary attachments.
Mandatory mediation in Turkish commercial disputes applies, as a rule, to lawsuits filed before the state courts. The scope and consequences of a mediation step agreed by the parties in their contract are determined by the clause itself.
5. Elements of an Effective Arbitration Clause
- Scope: broad wording such as "any dispute arising out of or in connection with this contract, including any question regarding its existence, validity, interpretation, performance or termination" should be preferred.
- Institution and rules: where institutional arbitration is chosen, the full and correct name of the institution and the applicable arbitration rules should be stated. Using the institution's own model clause is the safest course.
- Seat: the seat determines the procedural law of the arbitration, the court that will hear any annulment action and where the award is deemed to have been made. It is distinct from the venue of hearings and should be chosen with the countries of enforcement and sanctions risks in mind. We discussed the effect of sanctions on the choice of seat and institution in our previous article.
- Number of arbitrators: one or three. For contracts with lower values in dispute, a sole arbitrator is generally more appropriate in terms of cost and time.
- Language and governing law: the language of the arbitration and the law governing the merits should be stated separately. Specifying the law governing the arbitration agreement itself also prevents interpretive disputes.
- Multi-party and related contracts: where several contracts relate to the same project, their arbitration clauses should be compatible and allow consolidation. Otherwise, different tribunals may issue conflicting awards on the same facts.
- Confidentiality and expedited procedure: confidentiality is not automatic under all arbitration rules and, if desired, should be provided for expressly. An expedited procedure may be provided for disputes below a certain value.
6. A Sample Clause
The following example illustrates the basic structure of a two-tier institutional arbitration clause. It should be adapted to the needs of each contract:
"Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity, interpretation, performance or termination, shall first be notified by either party to the other by written notice of negotiation. If the dispute is not resolved within thirty (30) days of service of that notice, it shall be finally resolved by three arbitrators under the Arbitration Rules of the Istanbul Arbitration Centre. The seat of arbitration shall be Istanbul and the language of the arbitration shall be English. The negotiation step shall not prevent either party from seeking interim relief or from commencing arbitration to prevent the expiry of a limitation period."
7. Conclusion
The arbitration clause is among the provisions given the least attention during negotiation and the most decisive once a dispute arises. The key points can be summarised as follows:
- The only essential element of a valid arbitration clause is a clear intention that disputes be resolved finally by arbitration rather than by the state courts.
- Optional clauses, unclear institution names and provisions conflicting with court jurisdiction carry a risk of invalidity before Turkish courts.
- Lack of authority to sign, or the absence of a special authority in the power of attorney, can render even a well-drafted clause ineffective.
- The arbitration objection is lost if not raised as a preliminary objection in time.
- Multi-tier clauses should state expressly whether each step is mandatory, how long it lasts, what happens if it is skipped and how limitation risk is addressed.
- Institutional model clauses, broad scope wording and a deliberate choice of seat are the most effective protection against pathological arbitration clauses.
For advice on drafting and reviewing arbitration clauses, arbitration objections, multi-tier dispute resolution processes and domestic or international arbitration proceedings, please contact us at info@guzeloglu.legal.