Alleged Invalidity of Arbitration Clauses in Cross-Border Commercial Contracts and the Courts’ Approach

In a cross-border sale, distribution, carriage, or supply contract, an invalid arbitration clause is a primary commercial risk because it determines where a dispute will be heard. An invalid or inoperative clause may cause months of jurisdictional argument, parallel court and arbitral proceedings, higher security costs, and objections to enforcement of the decision.

The issue is not merely whether the word ‘arbitration’ appears in the text. The parties’ binding consent, written form, scope, signature and representative authority, arbitrability, applicable law, and the operability of the chosen mechanism are examined separately. The validity assessment of the arbitration clause should therefore begin before the contract is signed.

An Arbitration Clause and an Arbitration Agreement Are Not the Same Concept

An arbitration agreement is the parties’ agreement to submit all or some disputes arising or potentially arising from a defined legal relationship to arbitration. It may appear as an ‘arbitration clause’ in the underlying contract or in a separate agreement concluded after a dispute arises. The clause is therefore the contractual form of an arbitration agreement; the terms are not always exact synonyms.

This distinction matters when the underlying contract’s validity is challenged. Under Article 4 of the International Arbitration Law (IAL) and Article 412 of the Code of Civil Procedure (CCP), alleged invalidity of the underlying contract does not itself invalidate the arbitration agreement. Separability allows the tribunal to assess its own jurisdiction independently of whether the underlying contract was formed or terminated.

Separability is not, however, a shield that protects an arbitration clause from every defect. If no agreement was ever reached in relation to the arbitration clause, the signatory lacked the requisite authority, or the dispute is not arbitrable, the validity of the arbitration agreement itself is directly at issue.

First Determine the Applicable Arbitration Regime

Before examining validity, it is necessary to identify the law governing the dispute. Articles 1 and 2 of the IAL establish the framework for disputes involving a foreign element where the seat of arbitration is Türkiye, as well as for certain circumstances in which the parties or the arbitral tribunal select the provisions of the IAL. Where the seat is Türkiye but the dispute does not involve a foreign element within the meaning of the IAL, the domestic arbitration provisions in Article 407 et seq. of the CCP may apply.

The fact that the parties are located in different countries is not the sole criterion for determining the existence of a foreign element. The place of performance of the contract, the parties’ places of business, foreign investment, and cross-border movements of goods or funds may also be relevant in assessing whether a foreign element exists. The seat of arbitration affects the legal centre of the arbitral process, the courts’ supportive and supervisory role, and the country in which an application to set aside the award will be heard.

The law governing the substance of the contract must also be distinguished from the law governing the arbitration agreement. Article 4 of the IAL assesses the arbitration agreement under the law chosen by the parties specifically for that agreement or, in the absence of such a choice, under Turkish law. In matters connected with foreign law, Articles 2, 24, 30, and 32 of the Law on Private International Law and International Civil Procedure (PILA) may also be relevant to the particular case in relation to the application of foreign law, the contractual relationship, representation, and substantive validity. A statement in the underlying contract that only ‘English law shall apply’ does not invariably make it safe to assume that the choice unquestionably extends to the arbitration clause. Therefore, in each individual case, it is necessary to assess separately which law governs the arbitration clause.

In What Order Do the Courts Examine an Allegation of Invalidity?

If one party commences proceedings before a Turkish court despite the arbitration clause, the court’s examination will depend on the applicable regime and the objection raised. The process is not an automatic referral mechanism.

The Preliminary Objection Based on Arbitration Must Be Raised in Time

Under Article 5 of the IAL and Article 413 of the CCP, a defendant wishing to rely on the agreement to arbitrate must raise the preliminary objection based on arbitration within the applicable time limit. It is incorrect to assume that the court will refer the parties to arbitration of its own motion without any request from the parties. Failure to raise the objection in accordance with the applicable procedural requirements may result in the proceedings before the state court continuing.

When deciding the preliminary objection, the court examines not only whether the clause exists but also whether the claim before it falls within the clause’s scope. For example, if the clause covers only disputes ‘arising from the interpretation of this contract’, it may be necessary to determine separately whether non-contractual claims, guarantees, or other related contracts fall within its scope.

Written Consent, Scope, and the Parties Are Identified

The court considers whether the parties formed a clear and binding agreement to submit their dispute to arbitration. Wording such as ‘the parties may consider arbitration’, which requires a future agreement, may not create a binding obligation. Providing for arbitration in one clause and the exclusive jurisdiction of the state courts over the same dispute in another may likewise create uncertainty as to the forum selected.

The requirement of writing is not satisfied only by a single document bearing wet-ink signatures. Under Article 4 of the IAL and Article 412 of the CCP, electronic correspondence or records exchanged between the parties may, depending on the circumstances, also satisfy that requirement. It must nevertheless be proved who sent the email, whether the attached standard terms reached the other party, and whether the arbitration provision was in fact incorporated into the contract.

For clauses established by incorporation by reference, it is risky to rely on a statement such as ‘our standard terms apply’. The reference should make sufficiently clear that the document containing the arbitration provision is intended to form part of the underlying contract. Whether non-signatories such as group companies, guarantors, agents, carriers, or subcontractors are bound by the clause should not be determined solely by their economic connection; it must be examined separately under the applicable law and in the light of the particular relationship.

Applicable Law and Arbitrability Are Examined

The court assesses the substantive validity of the arbitration agreement under the law determined by the relevant conflict-of-laws rule. A party’s capacity and a representative’s authority need not be governed by the same law. Article 30 of PILA and the provisions of the Turkish Code of Obligations concerning representation and specific authority should be considered carefully when determining whether a representative or lawyer could validly agree to arbitration on behalf of a company. The method of representation recorded in the trade registry, signature circulars, corporate-body resolutions, and the scope of any power of attorney should be examined together.

The court then considers whether the dispute is arbitrable. Article 408 of the CCP provides that disputes arising from rights in rem over immovable property situated in Türkiye and from matters not subject to the parties’ will are not arbitrable. Article 1 of the IAL imposes a similar limitation. The parties’ broad drafting of the arbitration clause cannot override mandatory limits on arbitrability.

The Procedural Effect of a Valid and Operative Clause Is Determined

In domestic arbitration, unless the arbitration agreement is null and void, inoperative, or incapable of being performed, the court upholds the preliminary objection based on arbitration and dismisses the action on procedural grounds. In international arbitration, acceptance of a valid objection likewise results in dismissal on procedural grounds under Article 5 of the IAL. Article II of the New York Convention provides the international framework under which courts of Contracting States, at the request of a party, refer the parties to arbitration unless the agreement is null and void, inoperative, or incapable of being performed.

A simple error in the name of an institution does not invariably invalidate the arbitration clause. If the chosen institution or applicable rules can be identified with confidence from the parties’ agreement, the clause may remain operative. The court cannot, however, manufacture an agreement to arbitrate on the parties’ behalf by selecting a new institution in place of a non-existent one or by supplying missing essential terms.

The Arbitral Tribunal’s Jurisdiction and Judicial Review Operate Together

The principle of competence-competence, as reflected in Article 7(H) of the IAL and Article 16 of the UNCITRAL Model Law on International Commercial Arbitration, means that the arbitral tribunal may rule on its own jurisdiction and on the existence of the arbitration agreement. A finding that the underlying contract is invalid does not, for that reason alone, invalidate the arbitration clause.

This principle does not eliminate the role of the state courts. A court examines the validity of the clause when a preliminary objection based on arbitration is raised in time; after an award has been made, review may also take place under the applicable setting-aside or enforcement regime. Articles 7, 8, and 16 of the UNCITRAL Model Law provide an important model for national legislation, but the Model Law is not, by itself, a statute directly applied by Turkish courts.

One of the fundamental procedural determinations that must be made at an early stage of the dispute in the context of commercial and commodity arbitration is to determine before which forum, within what time limit, and on the basis of what evidence a jurisdictional objection should be raised. Coordinating proceedings before the court and the arbitral tribunal so that they do not conflict not only protects the parties’ substantive rights on the merits of the dispute but also their procedural rights and position.

Where Are the Principal Risks of Invalidity and Inoperability?

The most common problems in arbitration clauses fall into several categories:

• Selection of subject matter that exceeds mandatory limits on arbitrability
• A misnamed or defunct institution, or an unworkable appointment mechanism
• Bringing non-signatories within the clause’s scope without examining the relevant conditions
• Inability to prove compliance with the requirement of writing or the chain of electronic records
• A signature, representation, or power-of-attorney structure that is insufficient to bind the company
• Conflicting provisions that prescribe both the exclusive jurisdiction of the courts and mandatory arbitration for the same dispute
• Wording that leaves it unclear whether contractual and non-contractual claims, guarantee relationships, or related contracts are covered
• Wording that does not demonstrate the parties’ definite and binding agreement to arbitrate, but merely contemplates negotiation or an option

Asymmetric or optional clauses also require particular care. Provisions that give one party a choice between arbitration and litigation are accepted in some jurisdictions but may face objections concerning validity, equality, or certainty in others. It should not therefore be assumed that such a clause is valid in every country.

Interim Relief and Post-Award Review Reopen the Question of Validity

A party’s application to a court for an interim injunction or precautionary attachment does not, by itself, amount to a waiver of the arbitration agreement. Article 6 of the IAL governs this relationship in international arbitration. Whether the protective measure is compatible with the arbitration clause, whether the arbitral tribunal has been constituted, and how the measure affects third parties must be assessed in the particular circumstances. This aspect of the process may also be planned within the broader framework of legal protection in international arbitration.

The validity issue may not be conclusively resolved by the arbitral award. In an application to set aside under Article 15 of the IAL, it may be alleged that the arbitration agreement is invalid under the chosen law or, in the absence of a choice, under Turkish law. When a foreign arbitral award is to be enforced in Türkiye, Articles 60–62 of PILA and, to the extent applicable, Article V of the New York Convention may raise limited grounds for refusal, including incapacity, invalidity of the arbitration agreement, excess of scope, non-arbitrability, and public policy. However, this review does not amount to a rehearing of the merits.

Arbitration Clause Checklist Before Signing a Contract

Rather than copying a boilerplate clause, the following matters should be agreed expressly in the light of the transaction’s structure:

1. Will the arbitration be institutional or ad hoc?
2. Have the institution’s official name and the correct version of the applicable arbitration rules been stated?
3. Has the legal seat of arbitration been specified without confusing it with the physical venue of any hearing?
4. Do the notice and electronic-record procedures support the requirement of writing and the evidential chain?
5. In a multiparty or multi-contract transaction, have consolidation, joinder, and non-signatory risks been addressed?
6. Are the options for interim relief, an emergency arbitrator, and applications to the state courts consistent with one another?
7. Have the law governing the underlying contract and the law governing the arbitration agreement been distinguished expressly?
8. Is the scope of arbitration sufficiently certain in relation to the contract’s formation, validity, breach, termination, and related claims?
9. Are the language of the proceedings, the number of arbitrators, and the appointment method appropriate to the scale of the transaction?
10. Have the clause’s form, scope, and asymmetric structure been reviewed separately in the countries where a prospective award may be enforced?

If this review is conducted while the transaction is still being negotiated, the parties’ genuine preferences regarding the dispute resolution can be crystallized into a clear, definite, and enforceable mechanism. By contrast, resolving the same uncertainties that arise after a dispute has arisen may not be accomplished with the same degree of ease, as it often requires the counterparty to enter into a new agreement.

Contractual Safeguards for Arbitration Clauses with Esenyel Partners

An uncertain or inoperative arbitration clause may draw a company into a jurisdictional battle before the merits of the dispute are ever considered. Such a situation not only prolongs the proceedings and increases the costs, but may also have lasting consequences for enforceability of the resulting award.

Esenyel Partners provides legal support in drafting and reviewing arbitration clauses; structuring the choice of institution, rules, seat, language, and law; and coordinating validity challenges before courts and arbitral tribunals.

Contact Esenyel Partners to reduce the risks related to arbitration in your cross-border contract before signature or to manage an existing allegation of invalidity strategically.

This content has been prepared for general information only and does not constitute a legal opinion or advice on any particular dispute. Before being applied to the specific case, it should be reviewed separately in the light of the current legislation, the contract wording, and the circumstances of the particular dispute.

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