Turkey: Choosing The ‘Right' Arbitration Institution—Guidance For Businesses On Costs

Last Updated: 10 May 2018
Article by Pelin Baysal and Bi̇lge Kağan Çevi̇k

Arbitration analysis: Pelin Baysal and Bilge Kağan Çevik of Turkish law firm Gün + Partners discuss the relevance of costs when concluding an arbitration agreement where the parties have settled on institutional rather than ad hoc arbitration.

Pre-nups and arbitration agreements

A metaphor used by Prof Dr. Loukas Mistelis suggested that arbitration agreements may be likened to prenuptial agreements made at the start of a relationship, with a possible exit strategy in case things go wrong. However, just like people in relationships, businesses—generally—only reluctantly consider the possibility of things not working out as planned. This is especially when they are in the process of getting to know each other, ie during contract negotiations.

When things do go wrong, businesses need to ensure that their arbitration agreements fulfil their expectations of an 'exit strategy'. This article seeks to provide guidance to businesses to help protect them from any rude awakening when things have not turned out in a way they expected. Even though the choices made by parties when concluding an arbitration agreement can result in important legal and tactical advantages, practice shows that the decision to include an arbitration clause is often based on habit or rather limited background information. While there are other important issues businesses need to consider, this article focuses on providing guidance on the 'right' arbitration institution when drafting an arbitration agreement.

When drafting agreements, businesses must make a simple but fundamental choice: ad hoc arbitration or institutional arbitration. With ad hoc arbitration clauses, a little more thought is required from the parties. In the absence of any agreed procedure, the arbitration will commence and be conducted outside any formal structure. Hence, it may be preferable for parties to create a detailed structure for the arbitration in the agreement, or else agree to the application of non-administered arbitration rules like those of UNCITRAL or the London Maritime Arbitrators Association (LMAA). In the absence of a clear statement on arbitration procedure, the law of the seat of arbitration will normally apply. On the other hand, in institutional arbitration, the task of agreeing the relevant procedure can be fairly easy as all institutions have their set of rules governing the conduct of the arbitration process if there is no contrary agreement between the parties.

When making this choice, it may be relevant that an arbitration clause in a wider agreement is often referred to as a 'midnight clause': introduced at a time when all other points are clear, and no one wants to elaborate on the detailed rules for possible disputes. At the eleventh hour, parties may have difficulty negotiating a detailed set of rules and agreeing on arbitral procedures which fit precisely with their particular needs. Therefore, for some businesses it is quite common to refer any future disputes to arbitral institutions. As such, this article focuses on choosing between different institutional rules.

For more information on the two forms of arbitration, see Practice Notes: What is ad hoc arbitration?and What is institutional arbitration?

We have selected five arbitration institutions that we believe represent a well-rounded mix with regards to their relevance, reputation, geographic location, and cultural preference, namely:

  • the International Court of Arbitration of the International Chamber of Commerce(ICC)
  • the London Court of International Arbitration(LCIA)
  • the Arbitration Institute of the Stockholm Chamber of Commerce(SCC)
  • the Singapore International Arbitration Centre(SIAC)
  • the Istanbul Arbitration Centre(ISTAC)

As for selecting the 'right' arbitration institution, numbers often speak louder than words. In a survey carried out by the Queen Mary, University of London School of International Arbitration in 2010, when selecting an arbitration institute, 46% of the interviewees considered the arbitration rules as an important factor while41% considered the overall cost of service as an important factor. It is no surprise that for businesses, it is the cost of arbitration that captures their interest. Although the cost of arbitration may not have an impact on the merits of the case, for businesses, cost may sometimes be the determinative factor on whether to pursue arbitration ornot.

For this reason, this article (the first in a twopart series) compares the overall costs of the arbitration institutions mentioned above. The second part will provide a detailed comparison of the institutions' arbitration rules. Having compared different arbitration rules and their costs, the aim is to enable businesses to find the 'right' arbitration institution for the dispute in hand.

Comparison of costs

ICC arbitration

In an ICC proceeding, the arbitrator's fee and administrative charges depend on the amount in dispute (ad varolem system). The ICC offers a cost calculator on its website, which will provide an estimate of the cost of an ICC proceeding according to the current fee standards.

For the arbitrator's fee, the ICC Rules set a minimum and maximum amount. The ICC Court determines the exact cost by taking into consideration the specific circumstances of the proceeding, such as, for example, how complex the case is or how timely the tribunal rendered the award. Where there is a tribunal involving three members, the arbitrator's fee is multiplied by three.

The administrative charges are based on a fixed percentage of the amount in dispute.

The chart below demonstrates how the amount in dispute affects the costs. It should be noted that the costs increase slower the higher the amount in dispute is. When looking at the allocation of these costs only, to choose the ICC as an arbitration institution appears to be economically more viable when the amount in dispute is rather high.

USD 1m dispute USD 10m dispute USD 30m dispute
Administrative charges in USD 23,335* 57,515 77,515
Min Max Min Max Min Max
Arbitrator's fee in 14,620 64,130 39,167 187,400 51,960 235,600

 

USD
Total in USD 37,955 87,465 96,682 244,915 129,475 313,115

*Figures indicated in this table are rounded to the nearest whole number.

LCIA arbitration

In LCIA arbitration, the arbitrator's fee and administrative charges are largely fixed on an hourly rate basis.

After a party has nominated or the LCIA has selected an arbitrator, the LCIA's Secretariat asks the arbitrator to advise the hourly rate applied in the case. The LCIA's Schedule of Costs generally sets a cap to thishourly rate, which is currently GBP 450 (USD 608.93 as of 10 January2018).

In practice, the LCIA Court will recommend a certain maximum rate based on the circumstances of the case before the arbitrator advises the Secretariat about their hourly rate. The recommended fee is often lower than the maximum rate. Normally, arbitrators follow the LCIA Court's recommendation. In cases with a modest amount in dispute, arbitrators have charged hourly rates of between GBP 150 and GBP 200.

Administrative charges consist of the time-based charges of the Secretariat, a non-refundable registration fee and an additional fee equal to 5% of the total arbitration fee. The hourly fees of the members of the Secretariat vary between GBP 150 and GBP 250, depending on the member's function in the Secretariat.

Due to the hourly rate system, a chart such as the above cannot be provided. However, the LCIA calculated the median costs (arbitrator's fee and administrative charges) of a LCIA proceeding while allocating these costs to an amount in dispute for a time-frame of four years. According to this calculation, the median costs for an amount in dispute between USD 1m and USD 10m, are USD 79,000. The median costs for an amount in dispute between USD 10m and USD 100m are USD 185,000.

When comparing these amounts to those of the ICC, in the USD 10m range, the LCIA costs may be substantially lower, even when considering the ICC's minimum amount only. A similar observation may be made in the USD 30m range, especially considering that this amount is placed on the lower range of the scale up to USD 100m.

SCC arbitration

As in the case of an ICC proceeding, the SCC's arbitrator's fee and administrative charges depend on the amount in dispute. The SCC also offers a cost calculator on its website.

As with the ICC Rules, for the arbitrator's fee, the SCC Rules set a minimum and a maximum amount. However, where there is a three-member tribunal, the arbitrator's fee is not multiplied by three. Instead, the SCC's cost schedule defines the fee for the chairman of the tribunal only. The co-arbitrators generally receive only 60% of such fee.

The administrative charges are based on a fixed percentage.

As typical for the ad varolem system, the costs increase slower the higher the amount in dispute is. Overall, arbitrators' fees and administrative charges are considerably lower when compared to the ICC. The higher the amount in dispute is, the bigger this gap is, which means that in proceedings with a high amount in dispute, the cost difference is substantial. This is even more valid when the case is decided by a tribunal due to the 60% cut with regards to the co-arbitrators' fee in a SCC proceeding.

USD 1m dispute USD 10m dispute USD 30m dispute
Administrative chargesin USD 20,546 45,629 55,187
Min Max Min Max Min Max
Arbitrator'sfee in USD 23,888 58,535 59,739 166,068 71,655 213,677
Total in USD 44,434 79,081 105,364 211,697 126,842 268,864

SIAC arbitration

As in ICC and SCC arbitration, the SIAC's arbitrator's fee and administrative charges depend on the amount in dispute. The SIAC offers a cost calculator on its website also.

For the arbitrator's fee, the SIAC Schedule of Fees sets only a maximum amount payable to each arbitrator. As an alternative to the Schedule of Fees, the parties may agree on another method for determining the arbitrator's fees. For the administrative charges, the SIAC Schedule of Fees also sets a cap only.

The SIAC costs range somewhere in the middle between those of the SCC and the ICC. In comparison to the SCC, the gap between costs increases the higher the amount in dispute is.

USD 1m dispute USD 10m dispute USD 30m dispute
Administra- tive chargesin USD 11,020 29,088 43,328
Min Max Min Max Min Max
Arbitrator'sfee in USD N/A 47,537 N/A 121,401 N/A 166,364
Total in USD N/A 58,558 N/A 150,489 N/A 219,692

ISTAC arbitration

As pointed out in the 2010 Survey of the School of International Arbitration, there is increasing demand for new arbitration institutions with regional knowledge and presence. ISTAC arbitration has played and will con- tinue to play a significant role in fulfilling this increasing demand along with other institutions across the globe.

ISTAC, an independent, neutral and impartial institution, opened its doors in the third quarter of 2015 with the ambition of providing efficient dispute resolution services not only for domestic but also for international par- ties. The ISTAC Rules reflect modern arbitral practice and sit well alongside those issued by high profile ar- bitration centers around the world. For example, the existence of fast-track arbitration, the appointment of arbitrators, and the conduct of the proceedings. Further, the ISTAC Rules have almost identical arbitration rules with the ICC Arbitration Rules, including the existence of Terms of Reference. Therefore, ISTAC Rules constitute a set of rules that are already familiar to parties participating in international arbitration.

Besides its modern arbitration and mediation rules, ISTAC has already established a good reputationamong legal and business circles and is receiving international cases. Indeed, ISTAC arbitration provides arbitration services highly similar to the services provided in ICC but for substantially lowprices.

Pursuant to ISTAC arbitration rules, the ISTAC's arbitrator's fee and administrative charges are fixed and depend on the amount in dispute. The ISTAC offers a cost calculator on its website also.

The cost of ISTAC arbitration can easily be determined by relying on the chart in its rules. Considering that not only administrative expenses but also arbitrator's fees are fixed and do not depend on the circumstances of the case, the cost of ISTAC arbitration can be accurately determined even before the initiation of the arbi- tration.

USD 1m dispute USD 10m dispute USD 30m dispute
Administrative chargesin USD 13,324 22,284 34,337
Arbitrator's fee* in USD 41,343 106,224 128,271
Total in USD 54,667 128,508 162,608

*It is worth noting that the total fee of a three-member tribunal, relatively speaking, is even less expensive. There is no multiplication but rather a fixed fee for the whole tribunal as well. According to this fee, the total cost for a tribunal in a USD 1m dispute is USD 79,961; the total cost for a tribunal in a USD 10m dispute is USD 218,176; the total cost for a tribunal in a USD 30m dispute is USD 331,954.

What should businesses bear in mind?

First of all, be ready to pay

For businesses referring a dispute to an arbitral institution, it is important to know that the institution will not only claim a first filing fee but will also require pre-payments to be made. Those pre-payments may be claimed before any meaningful step in the proceeding as well as at different stages during the proceeding.

A pre-payment may amount close to what is expected to be the total amount of the arbitration cost. Therefore, having monies set aside for this is desirable. The general rule is that pre-payments are shared by the parties. However, it is not uncommon, that a party—usually respondents—either refuses or fails to pay its share. In this case, to continue the proceeding, the other party may be compelled to make the pre-payment in full by itself.

Second, the numbers above are not everything

The total cost of an arbitral proceeding is more than the sum of the arbitrator's fee and administrative charges. There may be expenses of the arbitrators, costs for room hire, interpreters, transcription, etc. And, even more importantly, there will be legal fees.

Depending on the applicable law in the arbitration proceeding, these legal fees may become a major cost driver. For example, even if the LCIA appears to be an affordable option compared to the ICC and SIAC, assuming that the seat of arbitration was London and the applicable law was English law, costs might add up quickly when a Turkish party requires legal advice from an English law firm.

Third, a higher price usually implicates more service

The extent, to which an arbitration institution will get involved in the management of the proceeding, varies. For example, the ICC plays a very active role in the proceeding. This is particularly reflected by the ICC Court's mandatory scrutiny of the award. This scrutiny and approval process may prevent unwanted surprises when enforcing the award, and therefore, all in all, will reduce costs. The SIAC's role in a proceeding is similarly active than the one of the ICC—and, therefore, explains the rather high level in cost. Interestingly, the SIAC's administrative charges are substantially lower than the ICC's.

Fourth, more service is not always better or necessary

A strongly and actively managed proceeding generally indicates that the institution has means it uses to keep the process moving. This might be preferable when it is expected that the opponent may beuncooperative. However, there may be certain cases which make a hands-off approach more attractive. For example, if the case is so complicated that makes it impossible for the respective counsels to put forward each party's main arguments at the very beginning of the arbitration, ICC arbitration might not be the perfect choice, as it requires the parties to sign Terms of Reference in which counsels are expected to summarise theircase.

So, when it comes to cost, it is not a matter of selecting 'the best' institution, but only the best institution for the dispute in hand?

Cost is important, but it is not everything. This is particularly reflected by the fact that although the ICC tends to be the most expensive institution, it is at the same time the most popular. Naturally, when drafting arbitration agreements, businesses should always bear in mind the cost of arbitration if things go wrong. However, the important question to be asked is—do the benefits of that particular arbitration institution outweigh its costs?

Having compared the costs of different arbitration institutions, the next volume will explore the differences in the rules of arbitration institutions, and how these may affect the choice of an arbitration clause.

Competition is fierce! There must be good opportunities for businesses.

First published by LexisNexis, in 09.04.2018

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Erdem & Erdem Law
Erdem & Erdem Law
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Erdem & Erdem Law
Erdem & Erdem Law
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions