Our article addresses the validity of the arbitration agreement and pathological arbitration clauses under Turkish law, explaining the intention to arbitrate, written form, arbitrability, the certainty requirement, separability and competence-competence, and effective clause design.
The provision left to the very end in the negotiation of international commercial contracts, most often written in haste and copied from a template, becomes the first provision to be disputed when a dispute arises. The arbitration clause performs no function while the contract is in force; but when the relationship between the parties breaks down, it is the sole basis determining where, by whom and under which rules the dispute will be resolved. A poorly drafted arbitration clause may drag the parties into a jurisdictional argument lasting years; it may even close off the arbitration route entirely and return them to the state courts they had carefully chosen to avoid. In practice such defective clauses are known as pathological arbitration clauses and are, unfortunately, exceedingly widespread. This article comprehensively examines the elements of validity of the arbitration agreement, the written form requirement, the limits of arbitrability, the requirement of certainty, the principles of separability and of the tribunal ruling on its own jurisdiction, the types of pathological clause and how an effective arbitration clause is designed.
1. The Concept of the Arbitration Agreement and Its Forms
The arbitration agreement is the agreement setting out the parties' intention that all or part of the disputes arising or that may arise from a legal relationship be resolved by an arbitrator or arbitral tribunal rather than by the state courts. This agreement appears in practice in two different forms. The first form is the arbitration clause; here the intention to arbitrate is agreed before any dispute has arisen, as a provision inserted into the main contract. The overwhelming majority of arbitration agreements encountered in practice are of this type. The second form is the independent arbitration agreement; here the parties, after a dispute has arisen, agree by a separate contract to take the dispute to arbitration. The legal regime is in essence the same in both cases. An important feature as regards the legal nature of the arbitration agreement is that it carries both a substantive law and a procedural law dimension; on the one hand it is established as a contract of the law of obligations and is subject to the general conditions of validity, on the other hand it produces the procedural consequence of displacing the jurisdiction of the state courts. This dual nature requires that both contract law and procedural law criteria be observed together in the assessment of validity.
2. The Applicable Legal Framework
Under Turkish law, the validity of the arbitration agreement is assessed within the framework of different regulations according to the nature of the dispute. In disputes carrying no foreign element and relating wholly to domestic law, the arbitration provisions of the Code of Civil Procedure apply, and the definition and form of the arbitration agreement are regulated in the relevant article of that code. In disputes carrying a foreign element where the seat of arbitration is determined as Türkiye, or where the parties or the arbitral tribunal have chosen the application of that law, the International Arbitration Law comes into play; the definition and form of the arbitration agreement are regulated in the relevant article of that law. Where the recognition and enforcement of foreign arbitral awards is concerned, the relevant article of the 1958 New York Convention finds application. The striking feature of these three regulations is that they determine the conditions of validity of the arbitration agreement in almost identical terms. This parallelism creates a uniform framework as regards the validity of the arbitration agreement under Turkish law and provides foreseeability in practice. Determining correctly which regulation applies remains important nonetheless; for there are differences as regards procedure, periods and avenues of recourse.
3. The Four Elements of Validity
For an arbitration agreement to be regarded as valid, four special elements must exist together. The first element is the intention to arbitrate; the parties must have a clear and unequivocal intention that the dispute be resolved definitively by way of arbitration. The second element is written form; that the arbitration agreement be made in writing is not a condition of proof but a condition of validity. The third element is arbitrability; the subject matter of the dispute must be of a nature capable of resolution by arbitration under the law. The fourth element is certainty or determinability; the dispute submitted to arbitration must be certain or at least determinable. Alongside these four special elements, the arbitration agreement must also satisfy the general conditions of validity of the law of obligations; general conditions such as the capacity of the parties, the sound formation of intention and the lawfulness and morality of the subject matter are required here too. The absence of any one of these elements renders the arbitration agreement invalid and produces the result that the dispute will be heard by the state courts. For this reason, when an arbitration clause is drafted, it must be ensured that each of the four elements is satisfied.
4. The Definiteness of the Intention to Arbitrate
Among the elements of validity, the one causing most problems in practice is the definiteness of the intention to arbitrate. According to the settled case law of the Court of Cassation, for a valid arbitration clause to be said to exist it must have been agreed that the dispute will definitively be resolved by arbitration; provisions that eliminate or weaken that definite intention render the arbitration agreement or clause invalid. This case law has determined the fate of a considerable number of clauses in practice. For example, wording stating that disputes may be resolved by way of arbitration, but presenting this as a possibility, does not carry a definite intention. Likewise, soft wording to the effect that the parties may consider taking the dispute to arbitration or may attempt to have recourse to arbitration does not constitute a valid intention to arbitrate. A situation encountered more frequently and more dangerous is the presence in the same contract of both an arbitration clause and a jurisdiction clause conferring competence on a court; this contradiction impairs the definiteness of the intention to arbitrate and may lead to the invalidity of the clause. For this reason, when drafting an arbitration clause it is essential to express, in a manner leaving no room for doubt, that the dispute will be resolved definitively and exclusively by arbitration.
5. The Written Form Requirement
That the arbitration agreement be made in written form is a condition of validity provided for in the Code of Civil Procedure, in the International Arbitration Law and in the New York Convention alike. Breach of this condition renders the arbitration agreement void. However, what is to be understood by written form is a matter requiring attention, and the law allows flexibility here. The manner in which the written form requirement is to be regarded as satisfied is indicated in the relevant provisions by way of examples; its appearance in a document signed by the parties is the clearest instance, but the presence of the intention to arbitrate in letters, telegrams or electronic correspondence exchanged between the parties may also satisfy the written form requirement. Moreover, a reference in a contract to another document containing an arbitration clause may likewise be regarded as sufficient, provided the reference is such as to make the arbitration clause part of the contract. In the practice of the Court of Cassation there are decisions requiring, alongside the written form, the signature of the parties, while decisions interpreting the writing requirement more flexibly are also encountered. This uncertainty shows that, in practice, the safest course is for the arbitration clause to appear expressly in a signed text.
6. Arbitrability
Not every dispute can be resolved by arbitration. Arbitrability expresses the fields of dispute that the parties may take to arbitration by their own intention, and this limit is drawn by the law. The relevant provisions of the Code of Civil Procedure and of the International Arbitration Law determine the disputes that are not arbitrable. In this context, disputes relating to rights in rem over immovable property, in particular claims for the annulment of title and for registration, are not arbitrable. Likewise, disputes not subject to the parties' intention, that is, over which they cannot freely dispose, fall outside arbitration; actions relating to personal status such as divorce, paternity and nationality are in this group. A petition for bankruptcy is likewise not arbitrable. Certain limitations also exist as regards disputes arising from employment contracts and relating to public policy. In the field of intellectual property a distinction must be drawn; whereas licence and contractual disputes in trademark and patent law remaining within the parties' field of disposition are accepted as arbitrable, claims relating to the invalidity of a registered right are debated. Carrying out the arbitrability assessment at the contract stage prevents the arbitration route from becoming blocked in the future.
7. Certainty and Determinability
For the arbitration agreement to be valid, the dispute submitted to arbitration must be certain or determinable. In the definitions both in the Code of Civil Procedure and in the International Arbitration Law it is stated that arbitration relates to disputes that have arisen or may arise from a contract or from a non-contractual legal relationship. This wording also shows how the certainty requirement is to be satisfied. Where it has been agreed that disputes arising from a specific legal relationship will be resolved by arbitration, the dispute is regarded as certain; it is not necessary for each dispute to be listed individually. Indeed, in practice arbitration clauses are drafted broadly so as to cover all disputes arising from or in connection with the relevant contract, and this approach is correct. By contrast, drafting the scope of the arbitration clause narrowly or vaguely gives rise to serious problems; for example, a clause submitting to arbitration only disputes arising from the interpretation of the contract creates a jurisdictional argument as regards claims based on the validity of the contract or on tort. Determining the scope broadly and comprehensively prevents such fragmentation.
8. The Principle of Separability
One of the cornerstones of arbitration law is the principle of separability. Under this principle the arbitration agreement is regarded as an agreement independent of and separate from the main contract in which it is contained; the invalidity of the main contract does not affect the validity of the arbitration agreement. The Code of Civil Procedure has expressly regulated this principle and has provided that no objection may be raised against the arbitration agreement to the effect that the main contract is not valid. In the decisions of the Court of Cassation it is likewise expressly stated that the arbitration agreement is an agreement independent of and separate from the main contract, and that the validity of the arbitration clause is not dependent on the validity of the main contract. The practical function of this principle is exceedingly important. Were there no separability, a party wishing to escape arbitration could block the arbitration route merely by asserting that the main contract is invalid and could take the dispute to the state courts. The principle of separability forestalls this expedient and protects the parties' intention to arbitrate. The same provision also provides that no objection may be raised to the effect that the arbitration agreement relates to a dispute that has not yet arisen; this secures the validity of forward-looking arbitration clauses.
9. The Tribunal Ruling on Its Own Jurisdiction
The second fundamental principle complementing separability is the authority of the arbitrator or arbitral tribunal to rule on its own jurisdiction. Under this principle, objections relating to the existence, validity or scope of the arbitration agreement are assessed in the first place by the arbitral tribunal. The law has provided that whether a dispute to be resolved by arbitration under the contract has arisen is to be determined by the arbitrator or arbitrators. The purpose of this regulation is to prevent jurisdictional arguments from being taken to the state courts at the very outset and the arbitral process from being left in suspense. This principle does not mean that the tribunal's decision as to its jurisdiction is final and immune from review; the tribunal's decision that it has jurisdiction may be reassessed in the setting-aside review conducted over the final award or at the enforcement stage. That is, the principle does not eliminate review, it merely determines the order; the arbitrator decides first, and review is left to a later stage. These two principles together form a system of safeguards protecting the functionality of the arbitration agreement and preventing the parties' intention from being easily displaced.
10. Pathological Arbitration Clauses
Arbitration clauses that do not fully satisfy the elements of validity or that become impossible to operate are known in practice as pathological arbitration clauses. The most widespread types of such clauses are as follows. The first are clauses that do not carry a definite intention and present arbitration as an option. The second are contradictory clauses where the same contract contains both an arbitration clause and a court jurisdiction clause. The third are clauses referring to a non-existent arbitral institution or misspelling the institution's name; an erroneous institution name may sometimes be corrected by interpretation, but this is not always possible. The fourth are clauses in which the arbitral institution and the arbitration rules are confused with one another and it is provided that one institution will apply another's rules. The fifth are clauses containing contradictory or unworkable provisions as to the number of arbitrators, the method of appointment or the seat of arbitration. The sixth are clauses in which a mandatory pre-arbitration negotiation or mediation stage is regulated vaguely and it remains open to argument whether that stage has been completed. The common result of these clauses is the loss of time and cost through a jurisdictional argument before the merits are reached, and in some cases the closure of the arbitration route altogether.
11. Asymmetric and Optional Clauses
A debated type of clause in practice is the asymmetric clause granting only one of the parties the right to choose between arbitration and the courts. Such arrangements are widely used in favour of the party in the stronger position, particularly in credit and financing agreements; while the lending institution is given the possibility of going both to arbitration and to court, the other party is bound to one route only. The validity of these clauses is assessed differently in different legal systems and is debated as regards Turkish law as well. The dominant approach in Turkish law takes as its basis the criterion of the definiteness of the intention to arbitrate; where the parties have not agreed that the dispute will definitively be resolved by arbitration and one party has been left the possibility of going to court, the conclusion may be reached that the clause is invalid on the ground that a definite intention to arbitrate is absent. A similar argument applies as regards clauses granting a right of choice to both parties. In the face of this uncertainty the practical recommendation is clear; in international commercial contracts, symmetric clauses granting no right of choice to the parties and providing that the dispute will be resolved exclusively and definitively by arbitration should be preferred.
12. The Elements of an Effective Arbitration Clause
A well-designed arbitration clause must contain several elements in a manner leaving no room for doubt. The first element is the expression of the intention to arbitrate as definitive and exclusive; it must be written expressly that the dispute will be resolved finally by arbitration. The second element is the broad determination of scope; it must be stated that all disputes arising from or in connection with the contract, including claims relating to the validity, interpretation, breach and termination of the contract, will be subject to arbitration. The third element is that the arbitral institution and the applicable arbitration rules be written correctly and in full. The fourth element is the determination of the seat of arbitration; the seat is not merely a geographical preference but a critical choice determining the court competent in setting-aside proceedings and the procedural law applicable. The fifth element is the number of arbitrators and the method of appointment. The sixth element is the language of the arbitration. The seventh element is the determination of the law applicable to the merits; this is a matter separate from, but to be regulated consistently with, the arbitration clause. Using the model clauses published by institutional arbitration centres is the safest way of ensuring that these elements are satisfied in full.
13. Multi-Tiered Dispute Resolution Clauses
A structure frequently encountered in practice is the multi-tiered clause making a negotiation or mediation stage mandatory before arbitration. The aim of this structure is to allow the dispute to be resolved by amicable means without entering a costly arbitral process, and it is sound in its aim. However, where these clauses are not drafted carefully they turn into a serious source of problems. The basic problem is that whether the preliminary stage has been completed remains open to argument; where it is uncertain when the negotiation began, how long it will last and under what conditions it will be deemed to have failed, the other party may raise against the request for arbitration the objection that the preliminary stage has not been exhausted, and the process may become blocked at the very outset. In order to prevent this risk, the preliminary stage must be tied to firm periods and to clear criteria for its commencement and conclusion; for example, it must be written expressly that the stage will be deemed completed if no agreement is reached within a specified number of days from written notice. The effect of the preliminary stage on limitation and prescriptive periods must also be considered, and a provision that the periods will be suspended should be added where necessary.
14. The Consequences of Invalidity and What to Do When a Dispute Arises
The consequence of the arbitration agreement being regarded as invalid is the closure of the arbitration route and the hearing of the dispute by the state courts. This result creates serious disappointment for parties who have deliberately chosen arbitration; particularly as regards foreign parties, it means being tried in a judicial system they wished to avoid and under a procedure unfamiliar to them. The assertion of invalidity arises in practice at two points. First, it is raised as a jurisdictional objection at the beginning of the arbitral proceedings and is assessed by the arbitral tribunal. Second, it is argued again after the final award in setting-aside proceedings or at the enforcement stage; the absence of a valid arbitration agreement is a ground both for setting aside and for the refusal of enforcement. For this reason the first step to be taken when a dispute arises is to read the arbitration clause carefully and to assess its validity. Where there is a weakness in the clause, the risk of nonetheless going to arbitration must be compared with the consequences of applying to the state courts. It is also possible for the parties, after a dispute has arisen, to repair a defective clause by concluding a new arbitration agreement; however, this requires the cooperation of the other party and rarely occurs in practice.
15. Conclusion and Practical Recommendations
The arbitration clause is the provision of the contract left to the very end but becoming the most decisive at the moment of dispute. The basic considerations in this field may be summarised as follows. The validity of the arbitration agreement depends on four elements; a definite intention to arbitrate, written form, arbitrability and certainty. These elements are regulated in almost identical terms in the Code of Civil Procedure, in the International Arbitration Law and in the New York Convention. Written form is a condition of validity and the safest course is for the arbitration clause to appear expressly in a signed text. The Court of Cassation requires a definite intention; clauses presenting arbitration as a possibility or contradicting a court jurisdiction clause may be regarded as invalid. Thanks to the principle of separability, the invalidity of the main contract does not affect the arbitration clause, and the arbitral tribunal rules in the first place on its own jurisdiction. The limits of arbitrability must be assessed at the contract stage, and it must be known that arbitration will not operate as regards rights in rem over immovable property and claims relating to personal status. When drafting the clause, the institution, the rules, the seat, the number of arbitrators and the language must all be stated in full, and institutional model clauses must be taken as the basis. In multi-tiered clauses the preliminary stage must be tied to firm periods. Most importantly, the arbitration clause must be designed according to the concrete relationship rather than copied from a template.
The validity of the arbitration agreement is closely connected with the other fields of arbitration law and international contract law. Our article on the enforcement of foreign arbitral awards in Türkiye and the 1958 New York Convention, which addresses how arbitral awards produce effect in Türkiye, and our analysis of choice of law and jurisdiction agreements in international commercial contracts, which must be regulated together with the dispute resolution clause, address the matters connected with the arbitration agreement.
For advisory services on the design of arbitration clauses, the assessment of the validity of arbitration agreements, jurisdictional objections and the conduct of international arbitration proceedings, you may contact us at info@guzeloglu.legal.