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Avoiding Arbitration Pitfalls: The Turkish Court of Appeal's Take on Pathological Clauses

An arbitration process can only proceed with a valid arbitration agreement in place. When such an agreement suffers from flaws or lacks essential elements, or there's uncertainty regarding the parties' intent to engage in arbitration, these are deemed as 'pathological arbitration clauses'. These problematic clauses are often, but not always, deemed invalid. Thus, it is crucial to consider the Court of Appeal's interpretations of pathological arbitration clauses when drafting such clauses, to avoid sanctions like annulment or non-enforcement of the foreign arbitral award, which could result in financial and temporal losses.

 Under Turkish Law, an arbitration agreement's validity hinges on the parties' explicit and unequivocal intention to arbitrate. The Court of Appeal has explored this requirement in numerous decisions, interpreting it as the parties' view of arbitration as the final and conclusive remedy. The Court of Appeal has ruled that arbitration clauses that may create a contrary impression are categorically invalid. Such clauses are also labeled as "non-absolute" and "non-exclusive" in legal discourse.

 For instance, a 2017 ruling by the 15th Civil Division invalidated an arbitration clause stating, "If the dispute cannot be resolved through arbitration, the parties will resort to the state courts." The court reasoned that the parties' intent to arbitrate was not clear and unambiguous since they did not fully exclude recourse to state courts, thus invalidating the arbitration clause.

Similarly, the 11th Civil Chamber of the Court of Appeal, in a 2017 ruling, declared an arbitration clause that permitted state courts to resolve issues that could not be settled by the arbitrator as invalid due to the lack of a clear and unambiguous intent to arbitrate. This decision differs from others because there may be disputes that the parties cannot arbitrate (e.g., non-arbitrable disputes). It has been criticized for its stance on this matter, but the analysis of the Court of Appeal's rulings on this issue showed that any reference to state courts in the arbitration agreement leads to its invalidity.

 Another type of pathological arbitration clause stems from ambiguity in partial arbitration agreements. According to Article II (1) of the New York Convention, Article 4 of the International Arbitration Code (“MTK”), and Article 412 of the Turkish Civil Procedure Code (“HMK”), parties can choose arbitration only for specific types of disputes. Such arbitration agreements, known as limited scope arbitration agreements, must clearly define the scope and distinctly delineate the disputes subject to arbitration. If the arbitration agreements fail to clearly and unambiguously identify which disputes are subject to arbitration, the Court of Appeal may deem these clauses invalid due to a lack of "clear and unambiguous intent to arbitrate.

 The parties may specify qualifications for arbitrators or their appointment process in the arbitration clause. If an arbitrator cannot be appointed per these qualifications, this can result in another type of pathological arbitration clause. It is often interpreted that the parties' intention to arbitrate is explicitly linked to arbitrators of that qualification, and the arbitration clause can be considered invalid if this isn't fulfilled.

 Lastly, arbitration clauses that refer to a non-existent or defunct arbitral institution are also regarded as pathological arbitration clauses. It is important to note that not all such arbitration clauses are considered invalid, but their enforcement may sometimes become impossible.

 In conclusion, the analysis of the Court of Appeal's rulings on this matter emphasizes the importance of drafting arbitration clauses with great care and caution. A poorly drafted clause may lead to refusal of annulment or enforcement, rendering the arbitration process ineffective, and leading to wasted time and money.

 @Av. Dr. Omer Kesikli                                   

@Damla Bayrak

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