Analyzing the Intricacies of Unilateral Arbitration Clauses in India


-Chetna Singh Raghuwanshi

(Institute of law, Nirma University, Ahmedabad)

A unilateral Arbitration clause can take several different forms. When a dispute occurs, it can give the beneficiary the exclusive right to choose between litigation and arbitration, or to litigate in a particular jurisdiction, thus restricting the non-beneficiary to a specific forum or mode of dispute resolution. As a consequence, UACs are unquestionably useful to one of the parties, and they are widely used in sectors such as Financing and construction. The legitimacy of UACs is also subject to a great deal of confusion and controversy due to a lack of regulatory guidelines and judicial practices that are on opposite ends of the spectrum. Courts that maintain their legality depend on the autonomy of the parties. Courts that reject or accept the validity of UACs majorly discuss three grounds to come on the decision i.e. Principle of equality, lack of mutuality and public policy.

In arbitration, party autonomy helps parties to a dispute to modify their dispute resolution clauses to meet their own needs. However, the principle of equality and fair treatment of parties guaranteed by Article 18 of the 1985 UNCITRAL Model Law may restrict this right. It says “Parties shall be treated equally, and each party shall be granted a complete opportunity to present his case,” According to the document, this fair treatment protection refers to equal treatment by the arbitral tribunal and equal opportunities to address one’s argument, but not to the parties’ treatment of one another or the option of forum. As a result, it may be argued that Article 18 deals in until the arbitration starts, rather than before the forum is chosen. In the other hand, according to a UNCITRAL Working Group study from 1984, Article 18 extends not only to the tribunal but also to the parties when setting down certain procedural laws. As a result, Article 18 may apply to the parties’ procedure. The English and Wales High Court (EWHC) noted in NB Three Shipping v. Harebell Shipping that UACs clearly grant the beneficiary a stronger right to choose between trial and arbitration, depending on which is more favorable for their claim. It does not imply that the clause is void. One might argue that selecting arbitration as the medium is a procedure and therefore comes under Article 18’s defense. In India, Section 21 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) states that arbitral proceedings shall be considered to have begun on the day that the respondent receives a notice of application for sending the matter to arbitration. As a result, unlike the appointment of arbitrators, the forum selection cannot be considered procedure. Furthermore, if a platform has been selected, both participants are on an even basis and have equal chances in the process. Even if Article 18 is broad enough to include the parties’ procedural compromise, a court is unlikely to rule that their choice of forum under a UAC is simply a matter of procedure. Asymmetry in UACs is often the result of disparities of bargaining power between the sides. The UNIDROIT Principles 2010 have an important protection in this respect. Article 3.2.7 prohibits a group from being manipulated because of its reliance on its counterparty, economic hardship, pressing demands, negligence, arrogance, inexperience, or a lack of bargaining ability. It provides for the invalidation of those provisions where there is a significant difference between the parties or an undue advantage in favor of the weaker party. The Delhi High Court held in Emmsons International Ltd. v. Metal Distributors that UACs exclude other parties’ legal options, which is a violation of Section 28 of the Indian Contract Act, 1872. When a UAC restricts one party to trial while allowing the other to select between arbitration and litigation, the weaker party’s trials can be stayed if the claimant prefers arbitration. This essentially grants the claimant the right to arbitrarily influence the other party’s legal status. As a result, UACs can be declared unconstitutional if they restrict a party’s ability to seek justice.

The Delhi High Court ruled in Bhartia Cutler Hammer v. AVN Tubes that a party did not have an exclusive right to invoke arbitration since the Indian Arbitration and Conciliation Act, 1996, required the parties to enter into a joint arbitration arrangement and provide for bilateral invocation. It will not be considered a binding arbitration arrangement notwithstanding the parties’ express commitment to such a provision. The Delhi High Court also holds a UAC to be invalid in Lucent Technology v. ICICI Bank. The court cited Bhartia Cutler and Emmsons International and cited Section 28 of the Indian Contract Act, 1872, suggesting that the party’s right to judicial redress has been breached. In Castrol India Ltd. v. Apex Tooling Solutions, the Madras High Court opposed the practice and upheld the general theory that arbitration clauses do not have to be mutual. On the merits, however, the court determined that the party trying to claim arbitration as its only remedy should not do so because it had refused to complain and had even engaged in the early stages of the proceedings. In a slight variance from its previous rulings, the Delhi High Court affirmed the validity of a UAC in Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. However, the effect of this ruling on the court’s position remains ambiguous, since the provision was upheld in applicable English law rather than Indian law.

While there seems to be a deeper recognition of UACs and strong arguments in support of their legitimacy, there is still a danger involved with their use. On the grounds of state policy, some states refuse to invalidate those clauses. This could find it impossible to execute future awards in jurisdictions that deem UACs to be against the law. Though UACs have previously been upheld in the United States, the situation in India remains unclear. Given the 2015 Amendment to the Arbitration Act’s pro-arbitration objective, it can be argued that the court should support and maintain party autonomy. In either case, the Supreme Court must explain the law on this because such clauses are becoming more popular, and an uncertainty in the law may hinder the implementation of an award in India. Consider the scenario stated above, in which one party is obligated to litigate and the beneficiary opts for arbitration while the other party’s court case is pending. The hearings could be stayed, resulting in a waste of time and resources for the disadvantaged group, as well as limiting their access to a forum. The positions of the parties entered into the arrangement are often unbalanced. The beneficiary should not take unfair advantage of the other parties’ lesser bargaining power or status, since this may adversely affect the agreement’s legitimacy. Although UACs can tend to be economically enticing, parties should weigh all of the risks before including one in their agreement.