Unilateral Arbitration Clause- To Be or Not To Be, That is the Question

Introduction:

Basically, contracts are divided into two broad types Unilateral and Bilateral Contract. The term unilateral means any contract which only allows one party or individual person to make an agreement or promise.  Arbitration is the process where the dispute is submitted to the impartial 3ird Party whose decision which is usually binding on both the parties. Arbitration Clause is that section of any Contract, Partnership Deed, agreement etc. where the parties expressly mentioned about to solve their legal disputes by the means of arbitration proceedings. So Unilateral Arbitration Clause only gives a single party to refer the dispute to arbitration.

Arbitration and Conciliation Act 1996

The origin of arbitration may be traced back to the age-old system of village Panchayats prevalent in ancient India. The arbitration act of 1940 was replaced by the Arbitration and Conciliation Act 1996. The abovementioned act was intended to comprehensively cover international and commercial arbitrators and conciliation also domestic arbitrators and conciliators. The act of 1996 was introduced in the view of the growing complexities of the modern commercial transactions in the wake of globalisation of economy which necessitated an effective redressal mechanism for speedy settlement of domestic as well as international commercial disputes so as to ensure an uninterrupted flow of trade and commerce. Following are the 4 major ways of any alternative dispute resolution-

1. Arbitration
2. Conciliation
3. Mediation
4. Negotiation

All the matters related to Crime, Minor Guardianship, charity, will be related and matrimonial treated as the non-arbitration dispute.

Historical Background

In India, the first statutory enactment on arbitration law was the Indian Arbitration act, 1899, which was modelled on the English Arbitration law,1899. It was in 1940 that the Indian Law on arbitration was consolidated and redrafted in the form of Arbitration Act,140 on the pattern of the English Arbitration Act,1934[1]. While the English Arbitration Act, 1934 was subsequently modified by the Act od 1950 followed by the Arbitration Act of 1979, remained in force until it was replaced by the new arbitration and conciliation act, 1996.

Scope of Arbitration Law

The very purpose of this law is to provide justice as fast as possible. Because if we talked about litigation justice is never denied there too but took a long time to seek it due to the natural principles which court have to follow. The other important merit of this mechanism is it helps to reduce the overburden cases in the courts. The Indian Law relating to Arbitration provides that any dispute or difference relating to commercial matters including shipping, sale, purchase, labour etc., arising between the parties in India or a party in a Foreign Country or between foreign parties who agree or have agreed for arbitration, shall be determined and settled in accordance with the Arbitration and Conciliation Act, 1996 and the rules framed thereunder.

Advantages of Arbitration are

The following are the various advantages of Arbitration:

1. Arbitration awards enjoy much greater international reorganisation than judgements of national courts.
2. Neutrality and mutuality are perhaps the most redeeming features of the arbitration process.
3. Arbitration offers parties a unique opportunity to designate persons of their choice as arbitrators, which is not possible in litigation cases. This enables the parties to have their disputes resolved by people who have specialised competence and expertise in the relevant field.
4. Arbitration is faster and less expensive than litigations in Court.
5. The element of confidentially which is wanting in Judicial Proceedings is an attribute of the arbitration system. Arbitration hearings are not public and only the parties receive the copies of the arbitral clause.

Unilateral Arbitration Clause

Most commercial contracts are equipped with a clause that may ensure resolution of disputes in a way that is mutually prearranged by the parties. A clause provides for seat, venue and applicable law, amongst other things. The growth of foreign investment has witnessed a steady growth of the use of unilateral option clauses in international commercial contracts. Usually, the party with bargaining power reserves the right to decide on between a wider choice of approachable forums to settle its disputes, as against the weaker party[2].

Position in India

Neither the Arbitration Act nor the Supreme Court has taken a particular stand on the validity of unilateral option clauses in India. However, a number of High Courts have decided on this issue. The recognition of unilateral option clauses in India can be traced back to 1991 and can still be found to be prevalent despite the non-uniformity in judicial precedents –

1. Bhartia Cutler Hammer v. AVN Tubes[3], this case is dealt with by the Delhi high court where the petitioner approached the court as the defendant fails to furnish the sales tax.  The court in this case while referring various other judgments held that no valid agreement existed in the absence of mutuality and the presence of conditional clauses. Other judgements used in this case was of Baron V. Subderlal Corporation Case, where the court held mutuality as the essential agreement in the arbitration clause.
2. Emmsons International Ltd. v. Metal Distributors[4] (), the court give a similar type of decision as given in AVN tubes case but on different Legal Reasoning. Now in this case court held that unilateral clauses are void as they bard the legal rights of one party and moreover it is in contravention of section 28 of contract act 1972.
3. The Supreme Court in the Renusagar Case (AIR 1944 SC 860) has observed that public policy should be construed narrowly. Where there is an arbitration agreement between parties, the effect must be given to the intention of the parties. Only when something is grossly against the fundamental policy of Indian law or its interests, justice, or morality, can it be said to be against public policy.36Thus, this case goes on to establish that unilateral clauses are valid relying upon a vast spread of judgements brought forward by both parties. The observations made by the High Court of Bombay addresses the main areas of dispute regarding mutuality, unilaterality of the clause, and violation of public policy. However, in the absence of a clear stance by the Supreme Court, the contradictory rulings of the High Court’s offer no solace to the parties wanting to ensure their rights under the unilateral option clauses.
4. The Calcutta High Court in New India Assurance Co Ltd v Central Bank of India & Ors[5], declined the reasoning in Bharat Engineering and upheld the validity of the unilateral option clause, although it would be enforceable only by the party who choose to arbitrate. 
5. Recently, the Bombay court in Quickheal Technologies v. NCS Computech, held on June 5 2020, interpreted the optional clause and held it to be invalid. The Court distinguished the clauses that grant an option to both the parties to arbitrate their disputes with none specific mention about the selection of litigation and clauses specifying that the dispute would be referred either to arbitration or litigation. The implications of the adjudication are that the just in case of former, the party selecting the selection will have to obtain fresh consent of the other party before invoking arbitration. On the other hand, in latter, there would be deemed consent of both the parties for arbitration also as litigation, wherein a party would simply require to decide on either of the selection which might be binding on both the parties. On receiving an application within the prescribed manner, the Controller will grant a compulsory licence solely for manufacture and export of the concerned pharmaceutical product Recently, the Bombay high court in Quickheal Technologies v. NCS Computech[6], decided on June 5 2020, interpreted the optional clause and held it to be invalid. The Court distinguished the clauses that grant a choice to both the parties to arbitrate their disputes with none specific mention about the choice of litigation and clauses specifying that the dispute would be referred either to arbitration or litigation. The implications of the adjudication are that the just in case of former, the party selecting the choice will need to obtain fresh consent of the opposite party before invoking arbitration. On the opposite hand, in latter, there would be deemed consent of both the parties for arbitration also as litigation, wherein a party would simply require to choose either of the choices which would be binding on both the parties. On receiving an application within the prescribed manner, the Controller will grant a compulsory licence solely for manufacture and export of the concerned pharmaceutical product to such country under the terms and conditions as could also be specified and published.

Pitfalls in Unilateral Arbitration Clause

1. Lack of Mutuality.
2. Limitation to the Party Autonomy.
3. Lack of Equality.

Section 89 of CPC (Alternate Dispute Resolution)

The provisions for alternate dispute resolution are also led down in CPC under section 89. According to this section, the court has the power to shift any matter in which there is a chance of settlement or compromise to alternate dispute resolution after the observance of the statements given by the plaintiff and defendant.  It is important to note that referring any matter to ADR is the choice of the court not the compulsion under this section.

Section 89 clause 2 says that if the matter has been referred to arbitration and conciliation than the matter will be governed by the Arbitration and conciliation act. If the matter has been sent to Lok Adalat by the court than Section 20 of the Legal Service Authority Act.  If the matter has been sent to Judicial Settlement than it will be heard by Lok Adalat and Legal Service Authority Act Shall apply and if the matter has been sent for mediation than the court has the advantage to use any provision for settle the dispute.

After the amendment in CPC Order 10 Rule1-A. 1-B AND 1-C read with Section 89 deals in settlement of matter outside the court

Disadvantages

1. Since this section has many Inconsistency which reduced the effectiveness of alternate dispute mechanism.
2.  If we opt outside court settlement through this section than there will be a delay to seek Justice.
3. There is no provision to punish the party who is unreasonably withdrawn from mediation.
4. There are no guidelines incorporated in this section regarding mediation or arbitration.
5. Due to lack of unawareness of outside court resolution mechanism this section is less effective and it can be another failing reason for this section.

Conclusion

Unilateral option clause merely confers a procedural advantage for a party to optimize its position in anticipation of legal disputes. The parties have equal substantive rights under the law. While procedural rights regulate where and the way a dispute is also resolved, the dispute would ultimately be determined in accordance with the parties’ substantive legal rights. The arbitration agreement is typically within the style of an article embodied within the main contract. The rights of the parties in arbitration are created by the contract. Thus, the parties should be unengaged to choose the extent of their rights as long because it doesn’t contradict with the operation of law. Nothing within the essentials of arbitration clause62invalidates unilateral option clauses. Nor does such a clause take away the correct of a party to voice its grievances and seek remedy for the identical. Thus, the author finds no reason why such clauses shouldn’t be recognised in India.

---

References:

[1] Avtar Singh

[2] Legal Service India

[3] 1995 (33) DRJ 672

[4] 2005 (80) DRJ 256

[5] AIR 1985 Cal 76

[6] Arbitration Petition No. 43/2018