Economic weakness of a party and validity issues in international commercial arbitration

International commercial arbitration has emerged over the years as a preferred alternative dispute resolution mechanism, in addition to traditional litigation. While arbitration is arguably seen as a profitable option because of its objective of minimizing losses for the parties as a whole, this is not the case in all arbitration proceedings. In some cases, a party to the arbitration may be in a state of economic weakness and may not be able to finance the costs of the arbitration proceeding. In such circumstances, the validity of the arbitration agreement may be challenged. Whether or not such a challenge should be accepted is debated among lawyers and is universally controversial. As we know, unlike legal disputes, there is no legal financial aid mechanism in international arbitration. Nonetheless, over the past decade a relatively new practice known as “third party financing” has emerged in international investment arbitration and has begun to be applied to commercial arbitration as well. This new method of financing, among other advantages, also offers a solution to the situation of economic weakness and a chance to maintain the arbitration agreement in the face of the legal debate on validity by avoiding it.

Cost of arbitration

Under the Turkish Law on International Arbitration (IAA-Nr. 4686) (“Turkish Law on International Arbitration”), the rules applicable to the cost of arbitration are determined in Article 16 / B and include ; 1. the fees of the arbitrators; 2. the travel and other expenses of the arbitrators; 3. the fees paid to the experts, and to other persons whose assistance is requested and who are, collectively, appointed by the arbitral tribunal, and the costs of the site inspection; 4. travel and other expenses of witnesses to the extent approved by the arbitral tribunal; 5. if represented by a lawyer, the legal fees of the winning party, which are calculated taking into account the minimum scale of fees, subject to the approval of the arbitral tribunal; 6. the charges to be made for claims under Turkish international arbitration law to the courts; 7. the costs of notification concerning the arbitral proceedings. ‘ In the same article, it is said that “Unless otherwise agreed by the parties, the procedural costs are the responsibility of the unsuccessful party and in the event of partial success, the costs are distributed between the parties according to their degree of justification.“.

On the other hand, the advance and the securing of costs are two essential elements to point out. These commonly used terms should be distinguished because of the possible impacts of such a differentiation: the guarantee for the costs is generally requested by a party and aims to prevent the loss of that party, while the advance is the deposit requested by the party. arbitral tribunal to the claimant for arbitration costs before the start of the arbitration proceedings. The advance is generally regulated in institutional and national rules since it protects arbitrators and institutions from possible losses, while the demand for a bond is regarded as an interim measure, and the decisions relating to it are very controversial. according to the rules to which they refer. Under Turkish law, the non-payment of the advance has serious consequences, as stated in paragraph C of Article 16 of the Turkish Law on International Arbitration: “…If the advance is not paid within the time limit set by the arbitral award, the arbitral tribunal may suspend the proceedings. If the advance is paid within thirty days of notification to the parties of the suspension, the arbitral proceedings are continued; otherwise, the arbitration will end. ‘ In addition, as no legal aid is provided for international commercial arbitration under Turkish law, in the event of a party’s economic weakness, that party may not be able to afford to take the case to court. arbitrators due to a lack of sufficient funds. This begs the question: what should happen in such cases?

Economic weakness of a party

Relying on the economic weakness of a party to an arbitration agreement requires that this economic weakness exist at the time of the dispute and not at the time of the conclusion of the arbitration agreement. At this point we have to answer the following questions: 1. When should a party to the arbitration be considered economically weak? If so, does this situation affect the validity of an arbitration agreement? 2. Who will decide on this issue?

Access to justice and “pacta sunt servanda“Statements must be explained to answer Part 1. Many national arbitration laws include provisions regarding the jurisdiction of national courts confronted with an arbitration agreement. Likewise, under Article 5 of the law Turkish law on international arbitration, it is stated that: “If an action is brought in court in a matter which is the subject of an arbitration agreement, the defendant may oppose the arbitration. Acceptance [or denial by the court] of this objection and disputes regarding the validity of the arbitration agreement are subject to the provisions of the Code of Civil Procedure regarding initial objections. If this objection is accepted, the court dismisses the action on procedural grounds.…. ‘ So, what will happen if an advance is requested during the arbitral proceedings and the party is unable to pay due to economic weakness? This party will not be able to proceed to arbitration due to article 16 of the law (it should be noted that there are similar provisions in other national laws on arbitration), and will not be able to carry out its claim in national courts due to incompetence. This situation would deprive the weak part of access to justice, this is what is called “denial of justice”. Also, the lack of access to justice is qualified as a violation of the “right to a fair trial” which is one of the fundamental human rights protected by the European Convention on Human Rights. It can be argued that the right to a fair trial should be considered more important than “pacta sunt servanda“which is, on the other hand, one of the basic principles of lex mercatoria.

Article II / 3 of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards states that: “The court of a Contracting State, seized of an action in a case on which the parties have concluded an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration , unless he finds that the said agreement is void, inoperative or not capable of being executed. “Likewise, article 8 of UNCITRAL reads as follows:”The court seized of an action in a case which is the subject of an arbitration agreement refers the parties to arbitration, if a party so requests at the latest when filing its first brief on the merits of the dispute, unless he finds that the contract is null, inoperative or unenforceableThis challenge to validity also depends on national laws and interpretation of the law. If a state court decides that economic weakness is a reason for an agreement to be accepted as ‘incapable of execution’, then he will consider the agreement as invalid.

France, for example, admits that there is a potential lack of access to justice but maintains that the decision determining access to justice should be made by arbitrators rather than national courts. Germany and Portugal, on the other hand, empower their national courts to decide. In English law, for example, economic weakness is not accepted as a ground for invalidity. There is no case law on this subject in Turkish law. Thus, the situation remains unclear.

According to “pacta sunt servanda“, the arbitration agreement should be considered valid, as the main reason parties prefer international commercial arbitration is to avoid national courts. If a party is obliged to resolve the dispute in national courts due to economic weakness of another party, then confidence in the arbitration system will be drastically diminished.Furthermore, if the nullity is accepted, the argument of economic weakness can be maliciously diverted to avoid international arbitration and refer to the more favorable national rules.

In short, the lack of access to justice would be a reason which would render an arbitration agreement invalid. It is important to note that Turkish law on international arbitration does not contain a rule similar to article 8 of UNCITRAL. There is no consensus on whether the exclusion of such clauses (such as null and void, inoperative or unable to be executed) leads to the conclusion that the Turkish court will either refer the parties to arbitration or rule on the nullity of the arbitration agreement. At this point, the question of who decides the validity arises, the answer to which depends heavily on the interpretation of the competence-competence regulations, national laws and the particularities of each particular case.