Alternative Dispute Resolution
In International Trade Disputes
Att. Gökce Gösterişli
In recent years, developments in science and technology rapidly are increasing communication and interaction among people, so that economic and social relations are also developing and diversifying accordingly. This rapid change brings with it a lot of new problems. As some consequences of this situation, new approaches are being sought in the solution of legal disputes.
The dispute resolution is mainly the duty of the governments. The first and the main way to resort to a dispute between the parties of a legal relationship is to apply to the state courts. This is called "judicial or traditional procedure".
However, the expectation of the resolution of every dispute in the private law may cause the courts to face too much workload, which may prolong the length of the proceedings. This is contrary to the principle of trial in reasonable time, which is an element of the right to a fair trial. For these reasons, alternate dispute resolution methods, which are an alternative to the state justice and are referred as "ADR" (alternative dispute resolution) in the solution of disputes, are preferred.
ADR and International Trade
According to widely accepted trade principles, if a party agrees to the terms of one party, a valid contract is made. According to CISG and many countries’ legal system, parties are free to make provisions in their contracts, if they do not contravene the compulsory legal rules. This principle is called "freedom of contract" in commercial law. The written contract in in international trade is not required. It is a matter to be decided between the parties. However, it is clear that it will help the parties in determining the rights and obligations of the parties. On the other hand, it is obvious that written contracts have the qualification of evidence in the event of a dispute, but oral contracts do not have this characteristic.
When a contract is made, it will be appropriate to indicate in the contract how the dispute will be resolved if a dispute arises. The parties can decide any form of ADR or legal proceeding for resolving the trade dispute with their own will. In addition, when the parties make an
agreement, they should be informed about which country's legal legislation will be applied in the event of a dispute. Indeed, even though each country’s International Private Law has rules to be applied in the event of a dispute, these rules vary from country to country. For example, the legislation of some countries is based on the legislation of the country in which the contract is to be implemented and the legislation of some countries is based on the legislation in which the country of the debtor.
Even if they make every effort to fulfill the commitments of the parties in international trade relations, it is inevitable that trade disputes arise because of the interpretation of the terms of the contract from different perspectives. In customs transactions, business laws and practices, translation errors and deficiencies, etc. It is always possible to face negative factors outside the control of the parties. As a result, it is possible that dispute between parties may have to be resolved with help from the outside.
There are various methods for resolving disputes arising from international trade relations. It is also possible for the Parties to apply to one of the following methods instead of going to a national court of one party’s country. In practice, it is usually mentioned in the trade agreements in which of these methods will be applied.
Interpretation of obligations arising from the trade agreement may vary according to the applicable law. For this reason, some international organizations or institutions have introduced some internationally accepted rules and regulations. Applying these rules will ensure that the trading operation is easily completed and that the solution avoids legal conflicts.
Even though parties apply the common rules that everyone can interpret similarly, dispute can still arise between parties. The parties to the dispute may want to resolve their disputes in a shorter period rather than a long period of litigation. At this stage, ADR has an important role on international trade relations. Nearly 90% of the disputes in the United States are resolved before the trial by ADR’s forms.
In the light of this information, the purpose benefits of ADR can be summarized as follows:
The main purpose of the ADR is to ensure that the parties negotiate their disagreements, reveal the problems, make them clearer, and bring the solutions to the parties and make them settle on these solutions. The purposes of the ADR can be classified as follows: Reduction of costs and expenses, reduction of time spent in order to establish order in the society quickly, gathering lessons that can solve events with more effective methods without litigation.
Undoubtedly, resolving disputes with ADR these methods will reduce the burden of the government.
In addition to reducing the burden of the government, the main reason for seeking and choosing alternatives in the state judiciary is to ensure that both sides of the path to a peaceful settlement between the parties are shaped in the direction of their will. In ADR, the will of both sides will be taken more into consideration than in the legislation, and instead of protecting the society like in legislation, there is only one protection in ADR which is a prection for the parties themselves.
In addition, another purpose of ADR is time saving. it is a cost-effective alternative to the solution of conflicts. With ADR, the parties are more satisfied with the judicial system, and the needs of the parties are more answered. Relations between individuals and, consequently, society are restored by this way.
Resolving disputes by ADR is not only a preference for a more reasonable judgment, such as reducing costs and saving time, but it is also becoming an imminent necessity. As a matter of fact, the European Parliament recommends member states that instead of going to court, they should remove the barriers which prevent to resolve the disputes on the electronic environment with Article 51 " Each Member State should be required, where necessary, to amend any legislation which is liable to hamper the use of schemes for the out-of-court settlement of disputes through electronic channels; the result of this amendment must be to make the functioning of such schemes genuinely and effectively possible in law and in practice, even across border."
Types of ADR
Negotiation, which is one of the most common methods of ADR and which contributes to the formation of other ADR methods, is a method of encouraging two or more parties to solve the disputes by talking and deciding.
Negotiation; Is a method by which parties can come together without seeing any help or support from a third party and reach an agreement by listening and negotiating. Negotiation is the process of settling in which parties are involved in an attempt to resolve dispute through negotiation.
Negotiations are an effective communication process between two or more parties. Negotiators can develop different types of methods and can benefit from different sources to achieve a settlement. Negotiators often try to resolve disputes by showing their situations in the negotiations172. The greatest contribution of the negotiation is to give detailed information about the dispute to the parties and to show the dispute from other perspectives. If the dispute is settled by arbitration or court proceeding, the parties are likely to spend all their energy to win the case. However, if they solve their disputes by negotiation, the parties endeavor to produce a solution that will protect their interests. The aim here is not to refute the other party's claims but to provide a clearer picture of the problem and to reach a solution that both sides can accept.
Stages of negotiations; Preparation, exchange of information, reconciliation and resolution of the proposal.
In 90’s, this form of ADR was used as a preliminary step for arbitration and litigation. However, in recent years, the most popular ADR methods is mediation and its used as a primary method to resolve many disputes. This method is widely used among many more parties who have fallen into disputes.
Mediation is an alternative method for solving the disputes between two or more parties with a neutral third party, called the mediator, to achieve a cooperative solution Mediation means that parties seek help from a neutral third party to help them find a solution to a dispute. The mediation can be applied before or during the court proceeding. The mediator helps the parties to the dispute, enables them to communicate with each other, and encourages them to solve the dispute. The mediator identifies the main points of why the relationship between parties was broken down, submits proposals of parties, exposes the essential interests of the parties. The main duty of the mediator is to create a relax environment to facilitate the negotiation.
The parties may add mediation clause to their contracts so that future disputes can be resolved through mediation. As a result, before applying another solution method such as arbitration, litigation etc., they may be required to go through mediation or parties can make a separate mediation agreement when a dispute arises. In the agreement or a clause, it is important to mention the qualification of the mediator, the limit of expenses, meeting places and other related matters in both of these ways. However, it is important for all parties to propose a deadline or automatic expiration mechanism in order to terminate the mediation process. Otherwise, mediation will go on without time constraints and time will lead to loss of time because the parties cannot reach a settlement.
Mediation process can come at various stages. First of all, parties can choose mediation as a first step of the other process. In this case, if the mediation does not solve the dispute, parties can continue with the arbitration procedure. For this reason, it is recommended that a clause be added to the contracts so that the dispute may be resolved through arbitration if the mediation procedure does not result.
According to WTO Dispute Settlement System (DSS), if the international trade disputes belongs to the parties which are governments and a member of WTO, then WTO’s Dispute Settlement Body (DSB) is responsible to resolve the dispute. Private companies and individuals do not have access to DSS.
When there is a dispute between the member of WTO, firstly, parties must apply the process of consultations. Under the consultation process they can benefit from WTO’s mutually agreed solutions such as mediation, conciliation and Good Offices voluntarily. Good Offices provide the parties a good environment to negotiate only. In a conciliation and a mediation process, WTO provide the third party to the parties in disputes to negotiate. In addition to the voluntary application, if the parties want WTO to establish Panel to solve the disputes. As a first stage, consultation is a mandatory process for parties and the panel will not be established for 60 days from the date of the application for consultation. However, if the parties decide to apply good offices, mediation or conciliation process during the consultation process, they do not have to wait 60 days to request panel. When they cannot reach a settlement during the mutually agreed solutions of DSU, they can request panel immediately.
In addition to WTO’s DSS, there are also many arbitration institutions, such as the International Chamber of Commerce ("ICC"), provide administrative services by setting rules for mediation. Since mediation is a voluntary practice, the parties need to agree in writing that the dispute will be resolved through mediation. The above-mentioned organizations also publish model mediation rules and agreements.
The ICC launched the new Mediation Rules on December 4, 2013, which replaced the 2001 ADR Rules as from January 1, 2014.According the this Mediation Rules of ICC, each party can request mediation from ICC even though they do not have prior agreement or clause about mediation. In this case, the ICC informs the parties regarding the one’s request. Moreover, if the parties have not decided the features of mediation such as language and place, the ICC can decide instead. The lastly, if the parties do not agree on confidentiality of settlement agreement, these agreements are confidential and private. Moreover, they cannot even use these agreements as evidence in any arbitral, judicial or similar proceedings.
Mediation encourages parties to exchange information, enables parties to acquire new information about dispute, and helps each party to understand the other party’s approach. It contributes to achieving the solution in a smooth and effective way, it gives encouragement about control and flexibility, and the most important one is that mediators help the parties to resolve their problem by themselves in a peace. As a result, the relationship between the parties would not be affected as much as in the legal proceedings.
Conciliation is another method of ADR that provides a conciliator to solve the dispute between 2 or more parties and to reach a settlement in cooperation. The conciliator, after meeting the parties about the dispute, prepares a settlement agreement per his perspective and proposes these agreements to the parties.
There are regulations in international trade that contain standard rules for conciliation. For example, the ICC Rules of Conciliation, and the United Nations Commission on International Trade Law (UNCITRAL) Conciliation Rules. What is noteworthy about these rules is that if a dispute cannot be resolved through conciliation, the same conciliator will no longer be able to be appointed as an arbitrator to resolve the same dispute.
Arbitration is a form of ADR that disputes between parties are submitted to arbitrators to make binding decisions by parties themselves. The arbitrators have no official tittle, like judges, to resolve the dispute referred to them. However, the parties have agreed to settle the dispute with them by giving them a right to decide the related dispute so that arbitrators have become a court about the dispute. As the other ADR process, arbitration is also a voluntary process. Parties do not have to choose this process to solve the dispute. However, unlike the other forms of ADR, the result of arbitration is binding.
In industrialized countries, in particular in the case of disputes arising from commercial relations, the arbitration institution is widely used today, and as the natural consequence of this practice, the arbitration procedure is preferred in the settlement of the disputes in the business circles of these countries.
There are some international rules and institutions to regulate the international trade such. The most preferred arbitration rules in international trade disputes belong to ICC and UNCITRAL.
a) The ICC Rules of Arbitration
International commercial arbitration is considered a normal practice in resolving international commercial disputes. As a matter of fact, the national laws relating to arbitration in the majority of countries have been updated. The International Court of Arbitration, established in 1923, has evolved from experiences of international arbitration cases and has become an institution that work with parties and arbitrators from over more than a hundred countries which have different legal, economic, cultural and linguistic backgrounds.
Each ICC arbitration case is conducted by arbitrators with the responsibility of reviewing the case and final decision. The cases and the whole process are closely monitored by the Secretariat and the Court.
Parties wishing to implement "Incoterms Rules", created and published by the ICC, in trade agreements may determine that these rules will be applied to these agreements and also they may determine that all disputes will be settled under the Rules of Arbitration of the ICC by ICA. The application to the ICA, in particular, is only possible if the parties expressly state this in the agreement they have made, or if they do not have a contract in the meantime, so long as they specify this in their written correspondence.
b) UNCITRAL Arbitration Rules
UNCITRAL has adopted by General Assembly of the United Nations in 1976, have been amended to be used worldwide, and developing and developed countries have been adopted these rules. UNCITRAL has considered all existing international arbitration conventions and important arbitration rules in various countries when determining the rules. The UNCITRAL Arbitration Rules did not stipulate the administration of an arbitrator. UNCITRAL has adopted that an existing arbitral tribunal may serve as a designated authority and may assist the parties in the manner of appointment of an arbitrator. The parties to a trade contract may determine in an agreement that a possible dispute may be resolved in accordance with the UNCITRAL Arbitration Rules with a clause.
What are the advantages of choosing the arbitration process in trade disputes?
The parties have many advantages in choosing the way of arbitration in the settlement of trade disputes. First, arbitration is much faster than domestic court proceedings.
Secondly, because of the equality of the parties and international courtesy, the selection of the national court of one of the parties as the competent jurisdiction is not appropriate. The distrust of the parties' national courts is also one of the factors.
Thirdly, national court selection brings with it problems such as procedural law to be applied and determination of the competent court. However, the parties want to eliminate such problems.
Fourthly, since the correspondence and hearings in the arbitration are confidential, and the decisions have not been announced unless expressly agreed by the parties, they give the parties a definite privacy.
Fifthly, it can be said that international commercial disputes are generally very complex issues and require special knowledge and expertise. For this reason, the parties demand that their disputes be resolved by the arbitrators who are experts in the relevant disputed areas.
Finally, it should be noted that the most important of the international arbitration convention is The Convention on the Recognition and Enforcement of Foreign Arbitral Awards ("the New York Convention") adopted and implemented in almost 150 countries around the world. The members of this conventions must recognize and enforce the arbitration awards. Since there is no court above the nations, the enforcement of the other nation’s court’s decision in another country can be difficult for the parties. That is why also why in international trade disputes, parties are more likely to choose the arbitration rather than legislation.
However, in some cases, choosing the arbitration can be dangerous for parties. If one of the parties are not a member of the New York or any other convention which provides the recognizing the arbitration awards, enforcing the arbitration awards in that country can be difficult or impossible sometimes. Also, international arbitration can be an expensive way if the amount of dispute is small.
If the parties are willing to apply to arbitration in international trade disputes, they can choose either ad hoc arbitration or institutional arbitration.
1. Ad hoc arbitration
An ad hoc arbitration is a type of arbitration where an institution is not involved and the transaction is organized by parties. The parties shall establish the rules for arbitration, including the choice of the arbitrators, the law to be applied, the determination of arbitration rules and the competence of the arbitrators.
Such arbitration provides the parties with full freedom to determine appropriate procedures for the settlement of the dispute. However, in the case of ad hoc arbitration, the parties have the option of enforcing the arbitration rules adopted by different institutions instead of determining. The UNCITRAL Arbitration Rules are the most preferred arbitration rules in international disputes for ad hoc arbitration.
In ad hoc arbitration, parties are advised to refrain from applying detailed arbitration clauses. Because very detailed provisions result in the loss of flexibility, which is essential for the arbitrators in order to prevent obstacles arising from the disputes of the parties.
However, this flexibility does not always produce positive results. Difficulties may arise during the selection of the arbitrator. Since there is no authority to choose the arbitrator instead of the parties who cannot decide about the arbitrator, these difficulties may never be resulted. As a result, choosing this form of arbitration may prevent the arbitration process.
Moreover, the reflection of the gaps or uncertainties in the arbitration clause / contract to the arbitration process may lead to the arbitrator’s decision to be questioned in respect of the unsatisfied party.
Finally, it can be argued that ad hoc arbitration will be less costly than institutional arbitration, since no money has been paid to any organization. However, this claim is not always true. In institutional arbitration, the costs and fees that the arbitration bodies demand from the parties are determined and announced in advance. However, since there is no institution that will determine costs and fees, costs and arbitrator’s fees are often a problem in ad hoc arbitration. Costs incurred in the ad hoc arbitration and arbitrator’s fees to be paid may exceed the costs of Institutional arbitration from time to time.
2. Institutional Arbitration
In institutional arbitration, the parties chose a specialized institution which takes the responsibility of administering the arbitration process in the event of dispute. In other words, institution has its own rules, own frameworks and own arbitrators as a package.
Arbitration procedure in institutional arbitration shall be governed by the rules of arbitration of this institution. As a result, addressing these institutions in the trade agreements can save the parties to determine all details of arbitration process. Institutional arbitration is preferred because of the reliability and the service offered to the parties.
There are many arbitration institutions and rules in the world at national and international level. The parties agree that the International Court of Arbitration of the ICC ("ICC Court") or the American Arbitration Association ("AAA") or the London Court of International Arbitration ("LCIA") etc. The most preferred one is the ICC Court
In the beginning, due to the inexperience of the parties, the ad hoc arbitration method may not be able to resolve the dispute when the arbitration agreement does not properly identify the problems. However, the rules of arbitration of institutions can provide effective arbitration for the production of an enforceable decision. These rules contain provisions for appointment of arbitrators to arbitration, and provisions that prevent one of the parties or the arbitrators themselves from complicating the arbitration process.
However, some of the disadvantages of institutional arbitration should also be pointed out. For example, the administrative fees for the use of the services and facilities of the arbitration institution (such as court halls, etc.) may be excessive in high volume disputes, especially when these charges are calculated over the amount of dispute.
Recognition and Enforcement of Foreign Arbitral Awards
Performing the decisions voluntarily and the cooperation are the primary purposes of the arbitration. In this context, the ICC rules of Arbitration state that the arbitrators’ decisions are binding and they want the parties to perform the decision without delay. According to Article 34 of ICC Rules of Arbitration, “Every award shall be binding on the parties. By submitting the dispute to arbitration under the Rules, the parties undertake to carry out any award without delay and shall be deemed to have waived their right to any form of recourse insofar as such waiver can validly be made.”
In case of the parties do not carry out the decision voluntarily, international agreements oblige enforcement. The New York Convention dated 1958, which has the greatest scope. Another convention is European Convention on International Commercial Arbitration in 1961, this convention protects the foreign arbitral awards regarding the commercial disputes. In many cases, the validity and enforceability of foreign arbitral awards is better protected and provided when compared to foreign court decisions, which is one of the most attractive factors of international arbitration.
a) 1958 New York Convention
The Convention regulates the phase after the award decision. The New York Convention is a more advanced form of international agreements of 1923 and 1927 concluded in Geneva with the aim of recognizing and resolving foreign arbitral awards in Geneva. With the same subject matter, certain ambiguous terms and expressions of the Geneva Convention on the Execution of Foreign Arbitral Awards were drawn up, with a simpler and more inclusive approach were added. The principles in the New York Convention are based on the approaches of ICC and UN Economic and Social Council (ECOSOC) to achieve the best result.
The foreign arbitral awards mentioned in this convention include both awards made in ad hoc arbitration as well as awards in institutional arbitration.
A valid arbitration agreement for the recognition and enforcement of foreign arbitral awards must
The New York Convention has a special significance for Turkey. Turkey did not participate in the Geneva Convention on the Execution of Foreign Arbitral Awards, 1927. This nonregistration of Turkey has led to the loss of many commercial possibilities at that time. Many foreign institutions were reluctant to enter into business with Turkey because of the courts that have looked at foreign arbitral awards as a foreign court decision and applied costly and imperative enforcement procedure for them. Turkey's participation in an agreement accepted by almost all states in the international arena, such as the New York Convention, has been an important step in showing the nations that it has reformed its provisions in the field of arbitration. As a matter of fact, Turkey actively participated in the preparation of the New York Convention. But somehow the approval process lasted many years and the Convention signed in 1958 was approved in 1991.
b) European Convention
The European Convention on International Commercial Arbitration, which was signed in Geneva on 21 April 1961, is a treaty about international arbitration in international commercial relations, especially in disputes arising from East-West trade.
1958 The New York Convention has established only one phase of the arbitrators. With the European Convention, the process and relations between the recognition and enforcement of the international arbitration award and the whole process to through the enforcement, namely the formation of the arbitration till the finalization of the arbitration award, have been arranged.
The most significance article of this agreement is Article 4. As it is mentioned above, If the parties choose ad hoc arbitration, they are free to appoint the arbitrators or the procedure for appointment of arbitrators, the place of arbitration, and the procedure to be followed by the arbitrators. If the parties have not agreed on the precautions to be taken for the ad hoc arbitration, it is likely that the parties will have great difficulties in the process of the arbitration. The European Convention aims at resolving the problem without requiring the intervention of the judiciary by bringing provisions to fill the gaps and to complete the parties' will. According to the convention, one of the parties requests an arbitration, and if the other party does not choose the arbitrator within 30 days of the date of the request, an arbitrator is selected.
As a result, The New York Convention and European Convention completed each other. However, NY Convention has more members than EU Convention, but EU convention was prepared more detailed than NY Convention.
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