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Dr.

RAM MANOHAR LOHIYA NATIONAL LAW


UNIVERSITY, LUCKNOW

FINAL DRAFT: ALTERNATIVE DISPUTE


RESOLUTION LAW

UNILATERAL CLAUSES IN ARBITRATION:


VALIDITY AND ENFORCEMENT

Submitted to: Submitted by:


Mr. Prasenjit Kundu Shefali Kanojia

Semester: VIII

Roll no.: 119 Section: B


TABLE OF CONTENT

INTRODUCTION
JURISDICTIONAL ANALYSIS OF UNILATERAL

CLAUSE
A) ENGLAND
B) INDIA
CONSEQUENCES FROM THE INVALIDITY OF A
UNILATERAL CLAUSE

CONCLUSION
BIBLIOGRAPHY

INTRODUCTION-

The principle of party autonomy is the bulwark of the mechanism on which arbitration proceedings
work. Based on the principle, parties are free to choose the laws, forum, mode, manner, procedure
and other aspects of an arbitration agreement. However, the principle of party autonomy does not
extend to the extent of granting absolute freedom to violate mandatory laws which govern the
arbitration proceedings. Unilateral arbitration clauses are one such type of arbitration clauses
where the balance between a party's choices of an ADR mechanism needs to be weighed
carefully against the legal validity, enforcement, unconscionability and procedural equality of such
clauses.

One sided, split-option, hybrid, unilateral or asymmetric arbitration Clauses are the
nomenclature given to the type of optional arbitration clauses Where only one of the parties has
the choice of referring the matter to arbitration or commencing proceedings before a Court. Such,
clauses are generally of two types - clauses which provide an option to arbitrate or those which
provide for an option to litigate. In the former case, all disputes are referred to litigation but one of
the parties to the dispute is given the choice to commence arbitration proceedings. In the latter
case, there is a binding arbitration agreement between the parties which provides for settlement of
disputes but one of the parties retains the Option to go to Courts. The important feature of both
types of clauses is the lack of choice or non-mutuality with respect to the dispute resolution
mechanism wherein one party has the right to bring an action either before a Court or an Arbitral
Tribunal but the other party is deprived of this right.

This non mutuality or one sidedness of an arbitration clause arises as a result of unequal
commercial position of parties in certain kinds of finance contracts where one party (generally the
party with the unilateral option) is seen to have taken more risks pertaining to the contract.
Depending upon the jurisdiction to which such clauses are amenable, the position of the parties
and the drafting of the arbitration clause, unilateral clauses have beei3 held as valid or invalid.
Whereas most jurisdictions would uphold the validity of an unambiguous unilateral arbitration
clause, two recent decisions of the French and the Russian Courts have considered such clauses
to. be invalid or unconscionable. This has raised a number of questions with respect to the
implementation such clauses, essential ones being those of validity and enforcement. There may
be instances where a particular unilateral clause although valid as per the law of the seat might be
refused to be enforced in-a different jurisdiction due to public policy considerations of non-
mutuality, inequality and unconscionability. Another important question arises regarding the effect
of invalidating a unilateral clause. Would this imply that the entire arbitration agreement is
invalid or would the courts confer a similar option to choose the forum on the party deprived of
such option Some of these issues would be addressed during the course of this project
accompanied by a discussion on the validity and enforceability of unilateral arbitration clauses in
various jurisdictions.

Jurisdictional Analysis of Unilateral Clauses


A. England

Case laws and available literature suggests that unilateral arbitration clauses would be held as
valid and enforceable in England. Initial cases did suggest that a unilateral arbitration clause may
be void for non-mutuality and not providing bilateral rights of reference but subsequent
developments have rejected the non-mutuality arguments.

The question of mutual rights of parties in case of an arbitration agreement was delved upon by
the English courts in Baron v. Anderland Corporation. The case related to the implementation
of the remuneration scales for school teachers as per the Burnham Report. The clause in the Report
provided that the remuneration for teachers would be determined according to the scales and other
provisions contained in the Report. The Report further provided for a Committee of Reference and
the relevant clause read as follows:

"There shall be appointed a joint committee of reference consisting of 10 members


nominated by the representatives of local education authorities and 10
members nominated by the representatives of the teachers and any question relating
to the interpretation of the provisions of this, report brought forward by a local
authority acting through the authorities' panel or by any association of teachers
acting through the teachers panel... shall he considered and determined by the joint

Mr. Baron, a teacher claimed that he was entitled to additional salary in accordance with the
provisions of the Report before the Court. The local, educational authorities however, claimed that
the aforesaid clause Was an arbitral clause and sought for The court proceedings to be stayed to
enable the matter to be referred to arbitration. The stay was refused by the Court of Appeal on the
ground that the said clause did not provide for bilateral rights of reference. The Court noted that
an arbitration agreement must always provide both the parties with the option to refer matters to
arbitration. There was a complete lack on mutuality in the said matter and the clause was held as
invalid:

This was followed by the judgment in -Tote Bookmakers Ltd. V Development and Properly
Holding Co. Ltd. but subsequently reversed in Pittalis v Sherefettin. Both the cases involved
similar rent review clauses which gave the tenant an option to refer the determination of rent to an
independent surveyor in case he disagreed with the rent as determined by the landlord. The
landlord on the Other hand did not have any such option to refer the matter to an independent
surveyor.

In Tote Bookmakers the decision of the Court of Appeal in Baron that an arbitration
agreement must always provide for bilateral rights was regarded as -ratio by the Court and the Judge
considered himself to be bound by the aforesaid decision. However, in Pittallis the Court
overruled the decision in Tote Bookmakers and held that there was no reason to render an
arbitration agreement invalid because it conferred only on one of the parties a right to refer the
matter to arbitration. In reaching this conclusion, the Court of Appeal relied on two judgments that
were delivered prior to that of Baron, namely, Woolf v Collis Removal Service and Heyman v Dat-
wins. As per the decision in the former case, a unilateral clause is in essence mere machinery which
even though one-sided would not make them invalid. In the latter case, it was categorically stated by
the Court that arbitration clauses may be of varying natures and the parties are at a liberty to decide
and define the matters which they want to refer to arbitration. Therefore, Pittallis considered the
observation made in Baron as a biter which was not binding upon the Court and unilateral
arbitration clauses were recognized as being enforceable and valid.

It has however been noted that these cases did not lay down a general acceptance for validity and
enforcement of unilateral arbitration clauses. They were accepted as being valid only because
upholding them seemed appropriate given the peculiar facts of these cases. For instance, in
Pittalie the tenant's unilateral right to refer the assessment of rent arbitration was upheld because
the landlord was protected by his own assessment of rent. The dispute would arise only if the rent as
assessed by the landlord was not acceptable to the tenant. Therefore, it was reasonable for the
tenant to have a unilateral right to have the rent assessed by an arbitrator. This issue was
highlighted in RGE (Group Services) Ltd. v Cleveland Offshore Ltd which followed Pitallis and
the position of unilateral arbitration clauses still suffered from some uncertainty with respect to
their validity being upheld in all factual contexts and not just those similar to Pitallis.

The confirmation to the validity of unilateral arbitration clauses being applicable to all factual
circumstances was finally laid down by NB Three Shipping Ltd V Harebell Shipping Ltd The
arbitration clause in this case conferred jurisdiction on English Courts to settle disputes-between the
owners of the vessel and the charterers. The owners had an additional unilateral right to refer the
dispute to arbitration. The charterers (NB Three Shipping) commenced proceedings in the High
Court while the owners (Harebell Shipping). wanted to exercise their right to refer the dispute to
arbitration and sought for a stay on the High Court proceedings. The owners relied on Pittalis to
assert their case while the charterers contended that the exercise of the unilateral right to refer the
dispute to arbitration could have been exercised only if the owners brought the claim before the
Court. Morrison J. while dismissing the contention of the charterers clarified that the validity of
unilateral clauses is laid down in Pittalis was not limited to specific clauses based . on the same
factual context. As per Heyman v DanVilli the parties were free to agree on any type of dispute
resolution mechanism even if it meant conferring unilateral rights of reference on one of the parties.
He further went on to explain that the, unilateral option was not open ended. If the Owners took a step
towards the fiction or led the Charterers to believe that the option would not be exercised, the option
would cease to exist.

After the decision in NB Three Shipping the Status .and operation of unilateral clauses was
accepted as being valid and enforceable for all circumstances. However, a subsequent question arose
with respect trumping the reference to arbitration in situations where a unilateral arbitration clause
would provide for disputes to. be referred to arbitration while providing one of the parties with the right
to bring proceedings in a court. The validity of such Clauses-was addressed in Debenture Trust
Corp Plc. v Elektrim Finance BV and others. A Unilateral arbitration clause providing an option to
one of the parties to bring the dispute before Courts was upheld in this case, provided, that the party
with the option had not participated in arbitration proceedings. In such cases, the party with the
option to bring a claim before the Courts could also trump the arbitration proceedings if they had been
commenced by the other party. However, the right to bring the dispute before State Courts would be
considered to have been waived if such party proceeded with the arbitration proceedings.
Unilateral clauses to arbitrate have received recognition by Courts in England. However,
certain issues may arise with respect to the operation of these clauses in Consumer disputes
where the Consumer might be considered to be as occupying a weaker position with respect to
negotiation. The unilateral arbitration clauses providing an additional right to one of the parties to
bring the dispute before State Courts might also be considered to be pathological for lack of
certainty of a binding agreement to arbitrate.

B. India and Other Jurisdictions

There has been a slight ambiguity in India with respect to the validity of unilateral clauses.
While earlier High Court cases on the point seem to suggest that such clauses are not valid and
enforceable in India, more recent judgments look upon such clauses favorably.

Union of India v Bharat Engineering Corporation considered a unilateral arbitration clause to be a


contract of option which was contingent upon the exercise of that option and became binding
only when the option was exercised. The said arbitration clause between the Railways and their
Contractors conferred upon the Contractor a unilateral option to refer the dispute to arbitration.
The Delhi High Court considered the definition of an arbitration agreement under Section 2
(a) of the Arbitration Act 1940 and held that it does not contemplate a contingent agreement or
an agreement to agree all the future. The Court placed reliance on Heyman v Darwini and
concluded that for an arbitration agreement to be born, both parties must promise to submit
differences to arbitration. As there is a like promise on each side, the contract is bilateral and
promises become binding by mutual acceptance and create an immediate agreement. The law
does not contemplate an arbitration agreement which is contingent
or conditional or confers an option. This view taken by the High Court
seems to be incorrect and the reliance placed by the Court on Heyman v Darwins also seems to be
opposed to the interpretation of the same case as given in Pittedis.

In another judgment of the Calcutta High Court, the Court specifically differed from the
Delhi High Court's decision and upheld the validity of a unilateral arbitration clause. As per the
arbitration agreement, the petitioner Bank had the option to go to arbitration or not. The Court
noted the decision in Bharat Engineering Corporation and held that the position of law as laid
down in the case has been dissented from by various authors and judgments. The court took the
view that in spite of option clause, the arbitration agreement remains valid. The Court concluded that
there was valid arbitration agreement between the parties but both the parties had agreed that
when future disputes will arise it would only be the privileged party who would, have the right to
snake the reference, but the privileged party could also render thee arbitration agreement
infructuous by not exercising its option. This 'option' would not negative the existence of the
arbitration agreement but would only restrict its enforceability.

The validity of unilateral arbitration clauses was further upheld in Jindal v Fuerst Day
Lawson. The arbitration clause in the said case provided the Buyer(Respondent) an option to
either commence-arbitration proceedings or to bring the dispute before the High court in England.
The judgment delivered by the Delhi High Court marks a significant departure from the ease law
decided earlier on the same point. The Court noted the aforementioned English Case Laws on the
validity of unilateral arbitration clauses and held that there is no dispute as to the validity of such
clauses anymore. The Court rejected the contentions raised by the Petitioners that unilateral
arbitration clauses were against the public policy of India and would also be hit by Section 28 of
the Indian Contract Act, 1872.

The court decided in consonance with legal position in England with respect to unilateral
arbitration clauses and also noted that mutuality was no longer a requirement for an arbitration
clause to be binding. Further, the Court went on to say that,

"Even if the English law did not apply, then also upon a proper construction of the
Disputes Resolution Mechanism as contained in Clause 17 of the General Conditions
of Purchase, there was an irrevocable open offer by the grantor of the option,
namely, the petitioner to submit differences to arbitration and the power of
acceptance vested in the option holder namely, the respondent. When the option was
exercised and the offer accepted, the arbitration mechanism became mandatory
with full implications thereof. Consequently, in my view, the petitioner's
submissions that there was no legally valid arbitration agreement, is contrary to the
facts of the case and untenable in law.
In the absence of a Supreme Court judgment confirming the validity of unilateral arbitration
clauses, the status of such clauses are far from being resolved. It is important to note that the
judgment given by the Single Judge of the Delhi High Court in Fuerst Day Lawson is at
variance with that of the Division Bench decision in M/s. AVN Tubes Ltd the Court in the former
case extensively relied on English cases with respect to the validity of unilateral arbitration clauses
and upheld the validity of such clauses. A probable reason for this could be the nature of the
arbitration clause which allowed disputes to be brought before Courts in England.

In the latter case however, the Division Bench in a short judgment held that unilateral
arbitration clauses could not be upheld as being valid. There does not seem to be a general
consensus in Indian Courts which could provide for a conclusive validity being granted to unilateral
clauses.

The question of public policy also looms large when such clauses are considered in the Indian
text and more so, when the threshold of public policy differs between domestic and International
Arbitration. The enforcement of a foreign award arising from a unilateral arbitration clause
may not be refused on the grounds of public policy. but given the lack of case law Upholding the
validity of arbitration clauses, it seems to be open for Indian Courts to set aside a domestic award
arising from a unilateral arbitration clause on the ground of it being patently illegal. This lack of
clarity on the status and operation of unilateral arbitration clauses raises far greater concern for
parties while choosing to designate India as the 'seat' for arbitration proceedings.

International Law Firm Clifford Chance has analyzed the effectiveness of arbitration
clauses in about 40 jurisdictions. The survey notes that such clauses have been somewhat effective
in most countries except for Bulgaria, Poland, Russia and Romania. In most civil law continental
jurisdictions, arbitration clauses are considered as procedural agreements and are required to fulfill
certain mandatory requirements for their validity. The refusal to uphold unilateral clauses in
such jurisdictions mostly occurs when there are significant imbalances between the parties or
one of the parties is at a manifest disadvantage.

CONSEQUENCES FROM THE INVALIDITY OF A UNILATERAL CLAUSE


If the unilateral clause is structured so as to combine proceedings in a jurisdiction recognizing
such clauses and one that does not, it is possible that one party will initiate judicial or arbitral
proceedings, while the other may file its claim but in another forum on grounds that the
unilateral clause is void and the seized court is competent to deal with the matter under the
applicable private international law rules. As a result, two proceedings with two contrary
outcomes may follow. It is quite possible to have significant problems with enforcement as well.
If the matter has been decided in a EU Member State court, the decisions would be subject to the
Brussels I Regulation regime. If a court decision has already been issued in the jurisdiction
approving the unilateral clause, when the claimant contending that the jurisdiction clause is
invalid attempts to enforce the decision, it would face the bar of Article 34 of the Brussels I
Regulation, according to which enforcement cannot contravene a decision from another Member
State. It is important to take into account one more perspective to unilateral clauses. Where the
parties have opted for an arbitration layer in their jurisdiction clause, the party which has
obtained a favorable arbitral award would be eager to enforce it in any jurisdiction where it may
reach assets of the debtor. For instance, a bank which has obtained a favorable award is certainly
keen on pursuing the debtors assets wherever they might be. As the award would be subject to
enforcement under the New York Convention, a defendant who has not succeeded in invalidating
the clause within the arbitration procedure may be expected to seek reliance on Article V of the
New York Convention, including the public policy exception. It is not unimaginable that courts
in countries hostile to unilateral clauses would find unilateral clauses to fall within the scope of
the public policy exception and refuse to enforce the foreign award.

CONCLUSION

Unilateral jurisdiction agreements have become attractive, mainly due to the strong business
logic supporting their use in international contracts. Currently thousands of such jurisdictional
agreements, in the areas of finance, property, shipping, sales, etc., have been concluded and may
become subject to review and court scrutiny. As it has been observed in this article, many courts
would not strike down such a clause per se, but there are a number of jurisdictions where in
particular cases unilateral clauses have been refused valid effect on a variety of grounds,
including fairness and equality. The inference that unilateral clauses currently face, and may face
in the future, a serious backlash is disturbing, as unilateral clauses are primarily the product of
the opportunity granted to contractual parties to mold their relationship in the best (lawful)
manner that suits their interests. Uncertainty regarding whether a clause might be held invalid in
some jurisdictions is a bar to their insertion in contracts, also. However, there are lessons to be
learned as well. The unilateral clause is on the verge of being pathological, i.e., featuring an
elaborate mechanism which is capable of becoming defective or inoperable, in general, or only in
a particular context, which may as a result disrupt the ensuing litigation or arbitration, or both.
There is an a priori deficiency and risk included in the very tenets of a unilateral clause: it may
work somewhere but, as the review in this article suggests, it certainly would not work in all
jurisdictions. The operability (and possibly the validity as well) of such a clause is to a
significant extent dependent on its drafting. This is a Caveat for the legal practitioners, who often
fail to predict that such a clause, although well-tailored for a common law jurisdiction, for
instance, may on arrival before a French judge face abrogation for the variety of reasons
analyzed in this study. This is a caveat especially for the practice of international law firms, who
may tend to use standard, boilerplate clauses without duly modifying them in view of the
particular features of the contract in which the clause is to be inserted, the parties to it, and any
related circumstances. This cautionary tale suggests that the wider and more imprecise the scope
of the clause, the greater the risk that it may also shipwreck on the rocks of a hostile jurisdiction.
But there is also a caveat for the courts. Some jurisdictions seem to have been unreasonably
quick to find defects in such clauses, which are the result of the explicit intention of the parties
(even more, commercial parties), albeit the clauses are asymmetrical. The reasoning seems to
have utilized broad concepts such as justice, fairness and good faith which are instrumental for
arriving at any result and can support reasoning both pro and contra. This is why the study has
attempted to sift through the case law and the doctrinal underpinning of unilateral clauses and
suggest that there are solid arguments in favor of upholding unilateral clauses, in their entirety or
at least partially even if not in any context, then at least in some. However, the viability of this
contractual mechanism, along with the business interests that it facilitates, should primarily be
not the product of black letter law but of rational human conduct and understanding by
contractual parties, clause drafters and dispute resolution bodies alike.