Author: Att. Alper Uzun from Erdem & Erdem Law Office (Turkey)
Terms of Reference
Terms of Reference is a document provided for the usage within international arbitration law by the International Chamber of Commerce with its main purpose being the fast and efficient progress of arbitral proceedings; the content of which is drawn and executed with participation and by mutual consent of the parties and arbitrators.
The document sets forth the scope and limits of the duties and competences of the arbitrators. The document includes information on the parties and arbitrators, a summary of pleas and defense of the parties, the claims, the dispute in question, and the procedural provisions which shall be applicable. Therefore, the drawing up of the document sets forth a framework to the flow of the proceedings, and as it reflects the consent of the parties, the recognition and enforcement of the arbitral awards at the end of the proceedings is assured.
The Advantages, Functions and Legal Nature of the Terms of Reference
The parties and the arbitrators, by drawing up the terms of reference, ensure that the dispute is explicitly put forward and defined. The parties negotiate and arrive to a consensus with respect to numerous material rules applicable to the procedure of the arbitration, such as the language and place of arbitration, terms, and means of notification. Therefore, some possible frustrating issues related to procedural matters which may arise at a later stage can be averted at the inception of the arbitration proceedings and any interruption in the proceedings may thus be prevented.
The Provisional Time Table separately prepared together with the Terms of Reference states in detail which items shall be fulfilled at which dates. Therefore, the more efficient usage of the arbitration period by the parties and the arbitrators is ensured.
By signing the document, the parties acknowledge explicitly and in writing that all proceedings executed so far, the procedure followed for the notification of the petitions, choice of place of arbitration, means of notification, advance on costs and numerous other matters have been carried out in compliance with law. Therefore, any application by one of the parties for the annulment based on matters set forth therein or raising similar claims at the enforcement stage is prevented at the inception of the proceedings. The arbitrators discussing and ruling of an issue falling out of scope of their competences is also prevented by the terms of reference. All these matters decrease the possibility of the arbitral decision being annulled and facilitate obtaining the enforcement decision from the courts of the country where the decision shall be enforced.
The Terms of Reference does not replace the arbitration clause or agreement, nevertheless it constitutes a new arbitration agreement interparty by the signing of the document by both parties. In case of controversies between the Terms of Reference and the arbitration clause, the parties shall be deemed to have declared their most recent intention and desire to put into effect by signing the Terms of Reference without any reservations, and this Terms of Reference shall prevail.
Another function of the Terms of Reference is to determine any legal gaps. The Terms of Reference provides the possibility to agree upon provisions for matters where the procedural rules to be applicable to the procedure of arbitration are silent where the International Chamber of Commerce’s Rules of Arbitration are applied.
The Terms of Reference, which has an important function in the current International Arbitration Law, has been frequently referred to by the ad hoc arbitration proceedings by the sole arbitrator or the arbitrators for its numerous advantages, even being introduced by the practices of the International Chamber of Commerce. The International Arbitration Act numbered 4686 requires the arbitrators to prepare a terms of reference unless the parties agree otherwise. Pursuant to Article 18 of the International Chamber of Commerce’s Rules of Arbitration, a Terms of Reference must include the following content: Information on the parties and arbitrations, information on notification, the dispute in question by summarizing the plea and defense, listing the matters to be resolved, place of arbitration, procedural rules, whether the arbitrators are authorized to act as amicable compositeur.
Material Consequences of the Terms of Reference
The preparation of the Terms of Reference bears numerous legal and other consequences. The Terms of Reference enters into force as of its execution by the parties and the arbitrator (or the arbitral tribunal) and bears all its impacts and consequences. Nevertheless, pursuant to the International Chamber of Commerce’s Rules of Arbitration, signing of the Terms of Reference by both parties is not mandatorily required in order to proceed with the arbitration proceedings. Therefore, the prolongation of the procedures by a party refusing to sign the Terms of Reference is prevented. The International Chamber of Commerce’s Rules of Arbitration regulates that in the event one of the parties refusing to participate in the preparation or signing of the Terms of Reference, the document shall be referred to the arbitral tribunal for approval. In the event a both parties choose not to sign a Terms of Reference, the document will not be subsist..
The possibility to file an annulment lawsuit for the reasons stipulated under article 15A/1 of the International Arbitration Code numbered 4686 shall materially be removed after the signing of the Terms of Reference. By preparing the Terms of Reference, the parties shall be deemed to have declared that they agree their current dispute to be resolved through arbitration, thus they may not claim the invalidity of the arbitration clause at a later stage. Given that the parties shall have acknowledged the choice of arbitrators, they shall not be able to initiate annulment proceedings claiming the undue choice of arbitrators, or the failure to pronounce a decision within the period of arbitration; requesting the annulment of the arbitral award by claiming that the arbitrators have ruled on a matter falling out of scope of the arbitration agreement or not ruling or all matters set forth in the claims of the parties or by claiming that the procedures have been violated.
Another consequence of the signing of the Terms of Reference by the arbitrator and the parties is to state that the arbitral award materially bears all enforcement qualifications. Pursuant to article 5/1 of the New York Convention, claiming the invalidity of the arbitration clause, that the appointment of arbitrators is in violation of the procedural law, that a matter falling out of scope of the arbitration agreement has been resolved, that all matters raised in the claims have not been addressed in the award, or that the procedure has been violated shall constitute a violation of the good faith principle in the event the parties have signed the Terms of Reference without any reservations.
The parties may not proceed with the annulment of the award for the reasons specified under the Terms of Reference and signed by the parties, and may not claim any such reasons at the stage of enforcement of the award.
The Terms of Reference, which has emerged as a result of increased necessity appearing in the arbitration proceedings, has become a very paramount document bearing material legal consequences with respect to its function in International Arbitration Law. The Terms of Reference aims to accelerate the proceedings, ensure legal security and efficiency by avoiding any potential procedural issues through determining matters such as revealing the respective claims and defense of the parties, the means of notification, and language of arbitration for the sake of solving the dispute in question. Furthermore, the parties once more expressly declare their agreement on the dispute to be resolved under arbitration law, thus preventing any future objections and challenges to this matter and obtaining an arbitral award, which may be recognized and has enforceability.