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
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.
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.
- 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.
- 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
- 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.
- 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.
- 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
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
This view was further confirmed in NB Three Shipping vs Harebell
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.
Wilson Taylor Asia Pacific Pte Ltd v. Dyna-Jet Pte Ltd, 2017CJ 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).
- First, that there is a valid arbitration agreement between the parties
to the court proceedings;
- Second, that the dispute in the court proceedings (or any part thereof)
falls within the scope of the arbitration agreement; and
- 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
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
New India Assurance Co. Ltd. vs Central Bank Of India, 1984The 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
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:
- Fundamental policy of Indian law
- the interest of India or
- 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.
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.
- Arbitration and Conciliation Act, 1996
- Commentary on Arbitration law by J. R Bachawat
- Unilateral Jurisdiction Clauses In International Financial Contract, ICC
- International arbitration report 2017, Norton Rose Fulbright