Times are Tough, and the Tough may have to go to Court, or Arbitration! 12 May 2020
Times are Tough, and the Tough may have to go to Court, or Arbitration!
In this piece, and in a companion piece to follow[1], we address the “elephant in the room” of many of our recent Alerts. That is, what happens if the parties in any given business relationship are, for whatever reason, unable to resolve their differences in our now profoundly changed world?
Where a contractual dispute has been triggered by COVID-19, there will likely have been, through no fault of their own, a fundamental shift in the economic relationship between the parties. For example, one party will almost always be in a much better position, financially, to withstand the present punishing economic conditions. This is often the case with international Contracts where one of the parties from a country whose economy was already stronger before the pandemic.
Regardless, the parties to a dispute, preferably prior to any settlement negotiations, need to understand the Contract’s Dispute Resolution Provisions found in their contracts, which should be carefully reviewed, ideally with the assistance of experienced dispute resolution counsel. These Dispute Resolution Provisions can vary wildly, and usually favor one party over the other. Their impact must be understood and factored into the position any given party to a dispute intends to take in the negotiations to follow.
What does the Contract say?
Most international Contracts will have, or should have, provisions setting forth both: (i) the Domestic Law to be applied when resolving any contractual disputes; and (ii) who, as the Trier of Fact and Law, will sit in judgment when resolving those disputes, i.e., a National Court or an Arbitral Tribunal.
While this may seem fairly straight forward, the possible variations are actually quite numerous. This is particularly true when the choice is Arbitration, which includes such additional considerations as which Arbitral Institution, if any, is to be used, the Location of the Arbitration, the number of Arbitrators making up the Arbitral Tribunal, the Language of the Arbitration to be used, etc.
In the following, we discuss two examples of Dispute Resolution Provisions found in the Contracts of Clients we are now advising about disputes triggered by COVID-19, both to provide examples of the tremendous differences one can find in these provisions and to contrast an unfavorable one, at least for our Client, with a, relatively speaking, unfavorable one.
Contracts providing for Dispute Resolution by National Courts
Out first example involves a Distribution Agreement to which our Turkish Client, the Distributor, is a party and who now finds itself embroiled in a serious dispute, triggered by COVID-19, with its counterparty, a Spanish Manufacturer. The Distributorship Agreement Dispute Resolution Provision reads as follows:
Governing Law and Jurisdiction: This Agreement is governed by Spanish Law. The Parties agree to the exclusive jurisdiction of the Courts and judges of the city of Barcelona for the resolution of any disputes arising out of the Contract.
As provided for in this provision, if the dispute is not resolved through negotiations, our Client would find itself in an unfamiliar Spanish Court, before a Judge who speaks Spanish and who may, perhaps unwittingly, be biased in favor of his fellow national, the Spanish Manufacturer. Our Client would also have to incur significant additional expense in order to participate in a case in a country far from home.
Given these disadvantages, our Client has far less leverage when working to resolve its dispute with the Manufacturer than it would have had if the provision been drafted more favorably in the first place.
Contracts providing for Dispute Resolution by Arbitration
The Lease of one of our Turkish Clients – who rents a retail space in Dubai and who is, as a direct result of COVOD-19, now involved in a serious dispute with its Dubai-based Landlord – provides as follows:
Governing Law and Disputes
This Lease shall be governed by and construed in accordance with the laws of the Emirate of Dubai, U.A.E. Any dispute arising out of or in connection with the Lease … shall be settled by arbitration in accordance with the Dubai International Arbitration Centre (“DIAC”) Arbitration Rules (“the DIAC Rules”) by a panel of three arbitrators appointed in compliance with the DIAC Rules.
Like the Distributor, our Turkish Client here, if unable to resolve the dispute, would find itself faced with unfamiliar law. But, importantly, resolution of the dispute would be before a much more likely to be neutral DIAC, where the Language would also likely be English and at least two of the three Arbitrators likely to be non-U.A.E. nationals[2]. Our Client here would also be spared the sort of expense our Distributor Client would need to incur, as our Renter Client already has a presence in the Dubai.
As a result, unlike the Distributor, our Client here has far fewer disadvantages with regard to dispute resolution, and thus has much greater leverage when working to resolve its dispute with the Landlord.
So, you have lousy Dispute Resolution Provisions. Now what can you do?
Disadvantages created by the unfavorable Dispute Resolution need to be factored into the analysis of the strength of your position if litigation or arbitration are unavoidable. Sometimes a party whose position is supported by the facts and applicable law will have that advantage seriously undermined by an unfavorable Dispute Resolution Provision. Better to take that into account early on, rather than to blunder into risky, and expensive, litigation or arbitration.
But there may be other options as well. For example, in a situation similar to the one our Distributor Client now faces – i.e., the prospect of having to appear before a Spanish Court – it would make sense, if settlement appears unlikely, to quickly locate competent Spanish counsel, who can advise you on the local law and, if necessary, could represent you before the Spanish Court if litigation turns out to be unavoidable. By doing so, many of the disadvantageous created by the unfavorable Dispute Resolution Provision can be eliminated, or at least mitigated.
And sometimes, although rarely, unfavorable Dispute Resolution Provisions can be challenged. For example, in 2015 the Turkish Court of Appeal considered a Dispute Resolution Provision in a Contract for the transport of certain goods from the U.S. to Turkey, which provided for “United States Law” to apply law and designated the “Court of Houston, South Texas, USA.” In that case, the transported goods were, allegedly, damaged when being loaded onto a ship in the U.S. prior to shipment to Turkey. An insurer of the goods subsequently filed a lawsuit in a Turkish Court, seeking $300,000 in damages.
The insurer appealed after a Turkish court of first instance dismissed its lawsuit, finding the lawsuit should have been filed in a “Court of Houston and resolved according to “United States Law.” The Court of Appeal reversed, finding the dispute resolution provision was unenforceable[3]. And it almost certainly was, given there is, for all practical purposes, no such thing as “United States Law,” or a least U.S. law that would apply to the dispute in question. In addition, the reference to a “Court in Houston” is decidedly vague, as it could have referred to either a Texas State Court or a U.S. Federal Court, both of which are found in Houston[4].
Regarding Dispute Resolution Provisions providing for Arbitration that perhaps can be challenged as unenforceable, consider what are known as “hybrid ad hoc arbitration clauses,” i.e., clauses which provide for arbitration before an Arbitral Institution, say, the highly-regarded Paris-based International Chamber of Commerce’s Court of International Arbitration (the “ICC”), but which, at the same time, provide for the use of another Arbitral Institution’s rules of arbitration, say, the DIAC Rules mentioned above. It is likely the ICC would refuse to accept an arbitration governed by a “hybrid” clause. See ICC Rules of Arbitration, Article 1(2)(the ICC “administers the resolution of disputes … in accordance with the Rules of Arbitration of the ICC”); but see Insigma Technology v Alstom Technology [2009] 3 SLR(R) 936 (arbitration clause providing for arbitration before the Singapore International Arbitration Centre, while using ICC Arbitration Rules, found enforceable).
[1] In the companion piece, we will be discussing both the force majeure and hardship “excuses” for non-performance of contractual obligations, or more accurately, with regard to hardship, for asking a court to order changes to a Contract in light of a “fundamentally” altered “equilibrium” between the parties.
[2] Similar to the rules of most arbitration institutions, the Rule 10.1 of the DIAC Rules provides, “[w]here the parties are of different nationalities, a sole arbitrator or chairman of the Tribunal shall not have the same nationality as any party …”.
[3] Yargıtay 11. Hukuk Dairesi, E.2015/5517, K.2015/12591, T.25.11.2015.
[4] In the U.S., each of its 50 States has its own law and court system, which operate in parallel with a country-wide Federal court system; Federal Courts have limited jurisdiction, and a relatively limited, albeit significant, body of law.
Other News
-
15.3.2024
New Regulations Introduced With The 8th Judicial Package
The Law No. 7499 on the Amendment of the Code of Criminal Procedure and Certain Laws ("Law"), which contains amendments and new regulations known as the "8th Judicial Package", was published in the Official Gazette dated 12 March 2024 and numbered 32487. In this article, we will discuss the amendments to the Criminal Procedure Code No. 5271 (" CPC"), Turkish Criminal Code No. 5237 ("TCC"), Turkish Civil Code No. 4721 ("TCC"), Enforcement and Bankruptcy Code No. 2004 ("EBC") and Law No. 6384 on the Duties and Working Procedures and Principles of the Compensation Commission.
-
12.3.2024
Changes In The PDPL Was Published In THE Official Gazette
Law No. 7499 on Amendments to the Code of Criminal Procedure and Some Laws ("Law No. 7499") including critical amendments to the Law No. 6698 on the Personal Data Protection Law ("PDPL") was published in the Official Gazette on March 12, 2024.
-
9.2.2024
Amendments Were Made To The Regulations Based On The Occupational Health And Safety Law
In the Official Gazette dated 4 February 2024 and numbered 32450, amendments were made to some regulations issued based on the Occupational Health and Safety Law No. 6331:
-
1.2.2024
Turkish Competition Board Mergers And Acquisitions Outlook Report For 2023 Has Been Published
On January 5th, 2024, the Turkish Competition Authority has published the Report prepared by the Competition Board on Mergers, Acquisitions And Privatisation Transactions in 2023 ("Report").
-
31.1.2024
Important Principle Decision From The Advertising Board Regarding Discount Sale Advertisements
At the first meeting of the year held on January 9, 2024, the Advertising Board made an important principle decision regarding discount sale advertisements by amending the "Guideline on Advertisements Containing Price Information and Discount Sale Advertisements and Commercial Practices" in order to prevent consumer victimization through misleading advertisements and practices that lead to unfair competition in the retail trade sector.
-
17.1.2024
The Authority to Decide on Trademark Cancellation Passed to the Turkish Patent And Trademark Office!
In Article 192/1 (a) of the Industrial Property Law ("IPL") published in the Official Gazette dated 10 January 2017 and numbered 29944, the enforcement of Article 26 of the Law titled "Cancellation Cases and Cancellation Request" was postponed until seven years later, and with the Provisional Article 4 of the IPL, it was stipulated that the authority to decide on the cancellation of trademarks would be directly exercised by the Intellectual and Industrial Rights Civil Courts until 10 January 2024.
-
16.1.2024
Egemenoğlu Hukuk Bürosu / Internship Application
We are pleased to announce the opening of internship applications at Egemenoğlu Hukuk Bürosu. Legal Internship Application Deadline: March 15 Summer Internship Application Deadline: March 29 Prospective candidates are requested to submit their CVs either through our website www.egemenoglu.av.tr or by sending them to info@egemenoglu.av.tr.
-
12.1.2024
Turkish Sustainability Reporting Standards (TSRS) And Scope Of Application Of TSRSs Were Puslished In The Official Gazette
In the Official Gazette dated 29.12.2023 and numbered 32414, the Public Oversight, Accounting and Auditing Standards Authority (POA) announced the Turkish Sustainability Reporting Standards and determined the principles to be followed in sustainability reports.
-
11.1.2024
Important Regulations Which Are Effective As Of 2024 And/ Or Has Been Made Subject To Time Extension
Laws No. 5746 and No. 6550 extended the regulation on higher depreciation (showing expenses related to depreciation) and calculation rates and periods for new machines acquired for use in R&D, innovation and design activities.
-
19.12.2023
The Principles and Rules to be Applied in Retail Trade have been reorganize
With the "Regulation Amending the Regulation on Principles and Rules to be Applied in Retail Trade" prepared by the Ministry of Commerce and published in the official gazette on 14.12.2023, significant changes were made in the principles and rules of retail trade.
-
18.11.2023
Warning From The Authority On Sending Verification Codes To Customers Via Sms During Shopping
The Personal Data Protection Authority ("Authority") published a Public Announcement ("Announcement") on the Processing of Personal Data by Sending a Verification Code via SMS to the Data Subjects during Shopping in Stores.
-
14.11.2023
Communiqué Amending the Communiqué on the Procedures and Principles Regarding the Application of Article 376 of the Turkish Commercial Code No. 6102 has been published
In order to regulate the procedures and principles to be followed in cases of loss of capital or insolvency of joint stock companies, limited liability companies and limited partnership companies with capital divided into shares within the scope of Article 376 of the Turkish Commercial Code No. 6102 (Law), the Communiqué on the Procedures and Principles Regarding the Application of Article 376 of the Turkish Commercial Code No. 6102 (Communiqué) was first published in the Official Gazette dated 15/09/2018 and numbered 30536, and with the Provisional Article 1 of this Communiqué until 01/01/2023, Within the scope of Article 376 of the Law, it was stated that foreign exchange losses arising from foreign currency denominated liabilities that have not yet been fulfilled may not be taken into account in the calculations regarding capital loss or insolvency.
-
3.11.2023
Law No. 7464 on the Leasing of Houses For Tourism Purposes And Amendment To Certain Laws Has Been Published
Published in the Official Gazette dated 2.11.2023 and numbered 32357 and published in the Official Gazette dated 2.11.2023 and numbered 32357, the Law on the Leasing of Houses for Tourism Purposes and Amendments to Certain Laws (No: 7464) aims to determine the procedures and principles regarding the leasing of houses to real and legal persons for tourism purposes.
-
28.10.2023
Partial Payment Period In Pension: Regulation On Partial Payment In The Private Pension System Has Been Published
With the amendment made to the Private Pension Savings and Investment System Law on 19.01.2022, a regulation was introduced stipulating that the participant can be partially paid up to fifty percent of the accumulation amount in his account, excluding the amounts in the State contribution account, without leaving the system, in cases and conditions determined by the Insurance and Private Pension Regulation and Supervision Agency. In this case, payments can also be made from the amount in the State contribution account, not exceeding twenty-five percent of the partial payment amount and the principles and procedures regarding the transactions to be carried out within this scope, including the practices regarding the State contribution, will be determined by the Institution with the appropriate opinion of the Ministry and with the amendment dated 19.01.2022, the relevant regulation is included in the Individual Pension Savings and Investment System Law.
-
9.9.2023
Focus On Digital And Green Transformation: Türkiye's Medium - Term Program Published.
The Medium-Term Program (2024-2026), prepared by the Ministry of Treasury and Finance and the Presidency of Strategy and Budget, was approved and published in Official Gazette No. 32301 dated September 6th, 2023.