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Unilateral arbitration clause- to be or not to be, that is the question?

To be or not to be, that is the question? this phrase from Hamlet's soliloquy reflecting indecisiveness is aptly applicable to the validity of the unilateral arbitration clause (UAC). With the numerous countering judgments of different courts, this grey area of Arbitration law is the slacklining rope for the drafters of the arbitration agreement.

Unilateral arbitration agreements empower only one party to refer the disputes to arbitration. The reason behind the proliferation of these agreements in the commercial contracts is - it allows the party with greater bargaining power to choose the forum of dispute resolution. The party with greater bargaining power to avoid cumbersome litigation prefers to reserve the right of reference to arbitration.

The imbalance and reservation of the right have been the core of the dispute. This ancillary agreement/clause in the commercial contract is a separate agreement as per sec 7(2) of Arbitration and Conciliation Act, 1996. Thus, the validity of such agreements will have no bearing on the main contract.

Rationale behind invalidity

The jurisdictions invalidating the enforcement of agreement believe that such agreements depart from the cornerstone principle of the agreement; mutuality and equality between the parties.
  1. Mutuality
    It is of the very essence of the arbitration that the submission should be mutual and the award should be binding on both the parties. The agreement should allow both parties to refer to the agreement. This restricted reference agreement would not bound the parties with the obligation to refer the disputes to arbitration as per the agreement.

    Baron vs Sunderland Corporation, 1965
    The plaintiff was a school teacher employed with the defendants. The terms of employment and salary were determined as per the provisions of Burnham Report. The plaintiff's claim for an increase in salary was denied. The report had a dispute resolution clause which stated that:
    any question relating to the interpretation of the provisions of the report brought forward by a local authority acting through the authorities' panel or by any association of teachers acting through the teachers' panel or by the chairman of Burnham committee to be resolved by a joint committee.

    The Queen Division Bench allowed the plaintiff's appeal and held - it was an essential ingredient for arbitration agreement to confer bilateral rights of reference of any dispute arising between the parties to the arbitrator; and since the plaintiff had no right to refer his claim but has to depend on other body to bring it forward on his behalf. It did not constitute valid submission to arbitration.

    1. Bhartia Cutler Hammer vs AVN Tubes, 1991
      This judgment by J. Usha Mehra is heavily relied on by the judges to block the enforceability of such clauses. The parties entered into an agreement that consisted of an arbitration clause in the form of clause 18.

      Clause 18 Arbitration Without prejudice to the above Clause 17, of the contract the Company, M/s. AVN Tubes Limited, reserves its right to go in for arbitration, if any dispute so arisen is not mutually settled within 3 months of such notice given by the Company to the Contractor. And, the award of the Arbitrator, to the appointed by the Company, M/s. AVN Tubes Limited, shall be final and binding on both the Company and the Contractor.

      J. Mehra held clause 18 of the agreement was an invalid arbitration agreement. It gave the right to invoke arbitration only to the defendant which did not amount to a bilateral arbitration clause nor prior consent by the plaintiff to such clause would make it bilateral. The application filed by the defendant under sec 34 of the Arbitration Act was dismissed by the court.
       
    2. Emmsons International Ltd vs Metal distributors (UK) and Ors, 2005
      An international commercial contract was entered between the parties containing clause 13 which provided arbitration as a dispute redressal mechanism. The defendant challenged the jurisdiction of the court to try and entertain the suit filed by the plaintiff. VK Sharma, learned counsel appearing on behalf of the plaintiff contended that the clause is against public policy and was hit by the provisions of sec 28 of the Indian Contract Act.

      The unilateral reservation by the defendant has deprived the plaintiff of their right or remedy. The Delhi High Court judge passed the motion in favour of the plaintiff and held that clause 13 would not fall under the exception of sec 28 as there was an absolute restriction on the plaintiff to enforce its right before an ordinary tribunal or through the Alternate Dispute Resolution mechanism. Such type of absolute restriction is hit by sec 28. The clause was declared void and unenforceable in India.
       
    3. Lack of equality
      The inequality in the bargaining power of parties is the resultant of the potestative nature of such clauses. The potestative right is the entitlement of one person to affect unilaterally the legal position of another person, where the later is obliged to bear with the consequences. By providing only one party the right of reference, the unilateral arbitration clause is inherently imbalanced. The party with stronger bargaining power can compel the other party to accept the proposed terms and conditions. The court had relieved the party from contractual obligation where it observed gross inequality of bargaining power- the weaker party had no meaningful choice or was under any compulsion.

      1. Ms. X v Banque Privee Edmond de Rothschild, 2012
        Ms. X a French national filed a suit for damages in Paris court against Rothschild. The defendant challenged the jurisdiction of the court due to the existence of the jurisdiction clause which conferred an exclusive right on the bank to bring an action in the court of the client's domicile or any court of competent jurisdiction. Cour de Cassation ruled that such a clause was potestative in nature and therefore void under article 23 of Brussels Regulation. Despite facing criticism for the judgment, the French Supreme Court in 2015 again held unilateral jurisdiction clauses unenforceable.
         
      2. Russian Telephone Company vs Sony Ericsson Mobile Communication, 2012
        The Court of Arbitrazh in its judgment set forth the principle of equality of civil relations parties' rights. Principles of adversarial nature and equality of the parties imply that the parties participating have equal procedural rights to defend their rights.

        The judges believed that the standard to secure a fair hearing in civil disputes should also be applicable in arbitration proceedings. Therefore, the dispute resolution clause cannot guarantee the right to one and deprive the other of a similar right. This invalid clause disturbs the balancing of the rights of the parties. The court allowed the plaintiff to refer to the government court so that it can enforce its guaranteed right to court protection.
         

Rationale behind validity

Is symmetry justice? Is the requirement of mutuality established by courts another way of interference with the alternate dispute resolution process? When both the parties have willingly consented to the arbitration clause then why symmetry in reference an additional precondition to initiate arbitration proceeding. For a valid arbitration agreement under sec 7 of the Act, there should be an agreement between the parties to submit the dispute to arbitration. The absence of ‘mutuality in reference' in the Act reflects legislators' intent not to make it a prerequisite to establish the validity.

The inequality of parties is a natural characteristic in a commercial contract. In the practical world, no two parties will be on equal footing. Invalidating arbitration agreement purely based on unequal standing is arbitrary. The courts have erred by viewing unilateral arbitration clauses narrowly and not considering its implications on international commercial agreements especially related to intellectual property. As 149 states have adopted the New York Convention enforcement of foreign awards is more convenient.

Pittalis vs Sherefettin, 1986

It was held by the English court that there was no requirement for a clause to necessarily allow the mutual election of arbitration. Fox LJ said:
There is a fully bilateral agreement which constitutes a contract to refer. The fact that the option is exercisable by one of the parties only seems to me to be irrelevant.

This view was further confirmed in NB Three Shipping vs Harebell shipping, 2004 in which the owners in the charter party had exclusive to choose to arbitrate. The charters approached the English court. J Morison acknowledged that the clause gave better rights to one party but emphasized on the fundamental objective of the 1996 Act to provide parties' autonomy over their choice of forum. The unilateral option was held not to be open-ended. It would cease to be available to the party if the party proceeded with action or led the other party to believe that the option would not be exercised. In his view, once the owners exercised their option the parties have agreed that the disputes should be arbitrated.
  1. Wilson Taylor Asia Pacific Pte Ltd v. Dyna-Jet Pte Ltd, 2017

    CJ Sundaresh Menon views were aligned with the judgment given in Tomolugen Holdings Ltd and another v Silica Investors Ltd, 2016 in which three requirements were enlisted for valid arbitration agreements as per sec 6 of the International Arbitration Agreement (IAA).

    1. First, that there is a valid arbitration agreement between the parties to the court proceedings;
    2. Second, that the dispute in the court proceedings (or any part thereof) falls within the scope of the arbitration agreement; and
    3. Third, that the arbitration agreement is not null and void, inoperative, or incapable of being performed.

      For the first requirement, it is immaterial that clause should entitle both the parties to arbitrate the dispute. The validity of unilateral arbitration in the Singapore High Court decision was reaffirmed by the Singapore Court of Appeal in this case.

     
  2. Fuerst Day Lawson Ltd vs Jindal Exports Ltd., 2009

    Took the road less travelled by-Till this judgment, Delhi High Court had consistently upheld the invalidity of the clause. This judgment retracted from the common opinion. J Manmohan found no reason why an agreement that confers only one of them alone right to refer should not be an arbitration agreement. When both the sided have accepted this arrangement then the unilateral reference is irrelevant. There is no lack of mutuality. He did not reconcile with the idea of clause conferring the bilateral right of reference. Further mentioned the SC in Wellington Associated Ltd duly noted Pittalis' judgment and did not dissent from it.
     
  3. New India Assurance Co. Ltd. vs Central Bank Of India, 1984

    The counsel for the bank contended that there was a valid arbitration agreement between the parties. The 'option' does not negate the existence of the arbitration agreement but only restricts its enforceability. If the privileged party alone can refer the dispute, it can do so only based on the advance consent by the other party recorded in the agreement that the reference would be by the privileged party alone. This unilateral right to refer flows from the agreed term in the contract. The judgment was given in favour of the bank. The Calcutta High Court judge held that there was an existing and binding arbitration agreement.

Is unilateral arbitration clause against public policy?

Supreme Court in Renusagar Power Co. Ltd opined that ‘public policy' should be narrowly construed. If the clause is contrary to:
  1. Fundamental policy of Indian law
  2. the interest of India or
  3. justice or morality then it would go against public policy.

Later in 2015, the amendment added an explanation to sec 34. The explanation defined public policy- an attempt to restrict the interpretation. The argument that UAC is against public policy will be accepted only if it satisfies any of the aforementioned criteria.

Conclusion
The consent to UAC is enough for the proponents of the validity of the clause while the opposition seeks mutuality in the reference. This mist of confusion will be cleared only after the clarification from the Supreme Court. Unilateral optional clauses should be drafted carefully keeping in check the jurisdictional trend and the court approach towards the validity. A good arbitration agreement should be airtight and clog all the potential loopholes.

References:
  1. Arbitration and Conciliation Act, 1996
  2. Commentary on Arbitration law by J. R Bachawat
  3. Unilateral Jurisdiction Clauses In International Financial Contract, ICC
  4. International arbitration report 2017, Norton Rose Fulbright

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