Examining the validity of asymmetrical & optional arbitration clauses
17/Feb/2022, 6:35 AM, Authored by Hiroo Advani, Asif Lampwala, Kenneth Martin, Srishti Ramchandani
- What are Asymmetrical Arbitration Clauses?
Arbitration clauses by its very nature envisages reference of all disputes governed under the auspices of an Arbitration Agreement to be resolved vide Arbitration by reference of the parties to the Contract. However, in certain instances, the parties enter into Arbitration Agreements that vest disparate powers pertaining to the reference of disputes. These clauses are also commonly known as ‘Unilateral Option Clauses’, ‘Hybrid Clauses’ and ‘Asymmetrical Arbitration clauses’ in international legal parlance.
An “asymmetric arbitration clause” or “unilateral option arbitration clause” under which the parties bound by it limit themselves to bringing an action in a particular jurisdiction, while at the same time allowing one or more parties to choose whether to refer a dispute to arbitration.
The asymmetric arbitration clause only gives one party the advantage of choosing whether the dispute should be resolved by means of arbitration, it follows that the party entitled to decide has a certain advantage over the other. For the beneficiary party, the clause can represent as an effective risk management mechanism as they will have the security and flexibility to initiate, however this shall only apply when the clause is deemed valid.
Any Arbitration clause which gives unequal powers to refer disputes for adjudication to all parties but one, are usually referred to as ‘Asymmetrical Arbitration clauses.’ This ranges from:
- Instances where only a single party has the power to refer the disputes to Arbitration (Unilateral clauses).
- Instances where both parties have an option to refer the disputes to Arbitration, however only one party has the power to refer the dispute to litigation or alternative redressal forums.
These clauses may be further tweaked by the parties such that reference of disputes to either litigation / Arbitration may be made at the option of only one party, which in legal parlance is referred to as ‘Option clauses.’
The present Article, in turn, seeks to examine the validity of asymmetrical Arbitration clauses including option clauses in the Indian scenario and analyse the judicial pronouncements that examine the validity and enforceability of Arbitration clauses and the extent to which such clauses affect the validity and existence of the Arbitration agreement.
- Pronouncements by Indian Courts on Asymmetrical Clauses.
The beneficiary of a unilateral Arbitration clause is vested with the power to refer disputes to Arbitration, usually at his option, however the same is distinguished from unilateral appointment of an Arbitrator. In the former, only one party may refer disputes to Arbitration however, the appointment becomes a different matter altogether; Whereas in the latter, only a single party has the power to appoint an Arbitrator. Such unilateral Clauses often contain provisions for unilateral appointments as well, however the operation and purport of the two are vastly different. The Supreme Court of India took the view that in an arbitration agreement providing for adjudication by a sole arbitrator, the appointment of the sole arbitrator cannot be made unilaterally by one of the parties, even if the clause so vested such a power in the said party, and that to maintain absolute fairness and impartiality, the competent Court alone could effect the said appointment in exercise of powers under Section 11 of the Arbitration and Conciliation Act, 1996
In the case of Emmsons International Ltd. v/s. Metal Distributors (UK) and Anr. 2005 (1) CTLJ 39 Del, the Delhi High Court decreed that where an Arbitration clause arising under a Bill of Lading is conceptualized with a view to deprive the other party of approaching the local courts / tribunals or initiate Arbitration, such clauses run afoul of Section 28 of the Indian Contract Act, 1872 (“Contract Act”) that declares agreements restraining legal proceedings as illegal and cannot be enforced as it is an agreement in restrain of legal. It is pertinent to note however, that the Arbitration clause in the instant case vested the seller with the option to initiate Arbitration as well as decide the forum of adjudication and gave no rights to the buyer to initiate proceedings.
The present case also reaffirms the decree of the Delhi High Court that holds invalid, any unilateral dispute resolution clauses that completely deprive the other party to seek recourse to legal proceedings as well as deciding the appropriate forum of adjudication without the consent and approval of the other party.
However, in a case before the Supreme Court, the validity of on Arbitration clause which provided only one party to either initiate appropriate legal proceedings in UK or initiate Arbitration was deemed to be valid and further stated that these unilateral options clauses are valid and that there is no dispute with the same. The judgment however is received with skepticism since the court has interpreted the clause in accordance with the applicable English law which cannot be used to interpret clauses governed by Indian law, however being a decision of the Supreme Court the powers under stare decisis operates, hence the applicability of the same is uncertain.
The Delhi High Court in the case of Lucent Technology v. ICICI Bank, yet again held that unilateral option clauses are invalid. The Hon’ble court relied on both Bhartia Cutler and Emmsons International cases and stated that the party’s right to recourse through legal proceedings had been infringed under Section 28 of the Indian Contract Act, 1872.
Curiously, the Madras High Court took a contrarian view in Castrol India Ltd. v. Apex Tooling Solutions by upholding unilateral clauses in line with the view adopted in international jurisprudence that an Arbitration clause need not necessarily have mutuality.
- Issues concerning Optional Clauses.
What differentiates an optional clause from a mandatory one is the positioning of any prefix to the option to Arbitrate/Litigate. The usage of prefixes such as ‘shall’, ‘will’ or ‘must’ presupposes that such clauses stipulate that all disputes arising must be resolved in the manner provided under the dispute resolution clause and the parties are bound by the same.
Whereas the usage of the prefix ‘may’ or ‘at the option of party (x)’ gives discretion to the party / parties with the option to initiate appropriate disputes at its time of choosing at such appropriate forums as may be enumerated in the dispute resolution clause. Where the option to refer disputes is to be exercised by the parties jointly, the disputes clause shall only come to life once the parties by consent agree to refer the disputes as per the mechanism enshrined. An example of such a clause is ‘all disputes arising thereof shall be referred for arbitration if the parties so determine’. This draws a distinction from optional clauses where either party has an option to arbitrate or refer the disputes which takes the form such as ‘all disputes arising thereof shall be referred for arbitration at the at the option of either party.’
The Bombay High Court has clarified that where the prefix ‘may’ is attached in optional Arbitration clauses, the party opting to initiate either Arbitration / Litigation has to seek consent anew of the other party before commencing Arbitration, whereas situations envisaging mandatory arbitration are those where consent is deemed to have been given with the usage of the word ‘shall’ or ‘will’ and thus either party to the Agreement may initiate appropriate Arbitration / Litigation proceedings.
The Bombay High Court also distinguishes the Supreme Court case of Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd. v. Jade Elevator Components, where both parties were given a choice to select a forum of under arbitration or litigation. Here, since the Petitioners initiated Arbitration, the Respondent was bound to comply with the Arbitration process as well since the clause was not optional in nature but mandatory.
- Analysis and Concluding Remarks
One of the more visible concerns in Asymmetrical Clauses is the power of the party having recourse to more than one forum of adjudication to seek and enforce a stay on proceedings initiated by a party having only recourse to a single method of adjudication. For example, where the party having a sole option to refer the disputes to Arbitration invokes the same, the opposite party having more than one option for adjudication of the disputes stemming from the contract, may invoke an alternative forum under the asymmetrical clause, thereby inconveniencing his counterpart though greater control of the dispute resolution process. This would also run counter to Section 28 of the ICA by way creating hindrances and restraints in the commencement of legal proceedings by the aggrieved party.
Yet, courts in India (with the exception of the Delhi High Courts) and abroad do not dispute the existence of arbitration agreements which are entered into willingly by the parties, since contractual covenants must be given effect to without deviation to the terms stipulated by the contractual intent of the parties. Therefore, as a logical consequence even if Arbitration Agreements are asymmetrical in nature the same would be valid keeping in line with the principles of party autonomy enumerated by the Supreme Court, which are the cardinal pillars of the Indian Arbitration and Conciliation Act, 1996.
On closer examination on contractual agreements containing such clauses it would be discovered that these are found in several employer-contractor agreements, usually with one side being a corporate entity with deep pockets and the tenacity to weather several disputes whereas the other side being small to medium sized companies who have little room to bargain.
When taking into account the nature of the parties entering into such Agreements, the clauses arising thereof would seem to be founded on unequal terms that violate Article 18 of the UNCITRAL Model Law where the ‘parties must be treated with equality and each party shall be given an opportunity to present his case.’ The sequitur being that even the ability of the parties to refer disputes must be treated at parity.
Contracts containing terms that do not keep parties at parity are deemed by the Supreme Court to be those against public policy and therefore invalid, since the parties do not enjoy equal bargaining power and therefore are construed as unconscionable contracts under Section 23 of the ICA.
However, the prevailing judicial view is that there is no requirement for mutuality in Arbitration agreements which stem from equal considerations given by the parties to a Contract and hence there is no requirement for an Arbitration agreement to confer a mutual right to initiate a reference to Arbitration and any Agreements providing for an option for one party alone to refer disputes to arbitration is deemed valid. The extent of consideration in the main contract that flows into the Arbitration agreement must be examined in further detail considering that Arbitration Agreements by its very nature are a separate agreement and are severable from the main contract.
At the present juncture in time, Asymmetrical and optional clauses are prima facie deemed to be valid by the Indian courts in line with the international cases conclusively opining on the same. However, there are disparate views prevailing across the Indian courts as to its validity unless there is a clear indication that the manner or terms of the Contract itself are contrary to the public policy of India.
Though the Courts in the United Kingdom and Singapore – two of the most Arbitration-friendly hubs – deem asymmetrical, optional clauses as valid, it is imperative that the Indian Courts analyse the validity of such clauses in the socio-economic backdrop of India rather than the prevailing global sentiment in order to give effect to a uniform standard as to the treatment of asymmetrical and optional clauses in order to ensure expeditious adjudication and disposal of Arbitration proceedings.
10Oil & Natural Gas Corp. v. Saw Pipes, (2003) 5 SCC 705; Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552; Shri Lal Mahal Ltd. v. Progetto Grano Spa, (2014) 2 SCC 433.
11NB Three Shipping vs. Harebell Shipping Ltd.  EWHC 2001; Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd  SGCA 32