Unilateral Clauses In Arbitration: Party Autonomy Or Pre-Judicial Practice?

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Unilateral Clauses In Arbitration: Party Autonomy Or Pre-Judicial Practice?

This is co-authored by Ms. Stuti Khare and Mr. Kishan Patel, 4th-year students, pursuing B.com LLB (Hons.) from the Institute of Law, Nirma University, Ahmedabad. In this article, the authors explained Unilateral Clauses In Arbitration.

Introduction

Fair and equitable conduct of the legal proceedings, judicial or quasi-judicial, holds enormous significance in the fundamental concepts of Natural Justice and it leaves no place for bias of any kind towards a particular party. Likewise, party autonomy is a paramount principle behind the idea of Alternative Dispute Resolutions. These concepts fall in contradictions in the cases where party autonomy might open a door for unfair and bias proceedings of arbitration. One of such practices is ‘Unilateral’ or ‘one-sided’ arbitration clauses which put one party on the upper pedestal in terms of rights such as a one-way right of agreement or disagreement on appointment of arbitrator or institutions. Such clauses in the agreement are prejudicially beneficial to the party upon whom the rights are conferred and the arbitral tribunal may display intolerance for other parties.

Also Read: THE CASE FOR INSTITUTIONAL ARBITRATION IN INDIA

International Views on Unilateral Clauses

The validity of Unilateral Clauses (UC) differs when countries are classified in common law countries and civil law countries. Courts of Common law countries have validated one-sided arbitration clauses unlike civil law countries which refuted the inclusion of such clauses in the agreement.

Under the English laws, Unilateral Clauses are considered valid and binding. ‘Mutuality Doctrine’ is the basis for validation of Unilateral Clauses by Courts of USA which states that properly executed party’s autonomy is entitled to be implemented in its whole effect.[i] Courts of Singapore and Hong Kong accepted that even lack of mutuality can’t prevent courts from invalidating Unilateral Clauses because principle of ‘Equal Treatment’ under Article 18, UNCITRAL Model law can only be applicable during arbitral proceeding and not while appointment of tribunal.[ii]
However, in civil law countries, inclusion of Unilateral Clauses in the agreement is problematic for equality and procedural rights because bilateral clauses are legally certain and morally fair. In France, ‘Potestative Conditions’ are considered as violative of law and thereby it is void because it gives entire control of agreement into the hands of one party.[iii] Russia put an end to the practice of Unilateral Clauses stating that principles of equality must be respected and clauses violating it would be invalid.[iv]

Read: Positive and Negative Attributes of Alternative Dispute Resolution

Indian Scenerio of Unilateral Clauses

In India, there has been ambiguity regarding Unilateral Clauses as India is a hybrid of common and civil law. There is neither any particular provision nor any legislation with respect to validity of Unilateral Clausess. Absence of any provision to invalidate Unilateral Clauses gives binding effect to it on other party. The earlier court decisions on the subject tend to suggest that such clauses are not valid or enforceable in India, whereas recent decisions have a more favourable view of such clauses.

While striking down the UCs, Delhi HC stated that Unilateral Clauses are contradicting to Section 28 of Indian Contract Act. Such absolute restraint on legal proceedings is against the public policy.[v] Notwithstanding expressed consent of parties, absence of mutual agreement without bilateral clauses would not be deemed valid.[vi] In 2017, Supreme Court ruled against Unilateral Clauses by holding Managing Director of one party to be ineligible to appoint an arbitrator under a UC.[vii] Delhi HC later on showed disagreed on the basis of distinguishment of facts with the TRF judgement. In 2019, Supreme Court put a rest to the ambiguous interpretations of precedents and stated that agreements with UCs, either where person is unilaterally empowered to be an arbitrator or he is unilaterally empowered to appoint the arbitrator, would be invalid in law.[viii]

Thus, from the above cases it can be seen that the courts with respect to Unilateral Clauses have adopted two approaches.

One being, following the principles of natural justice, public policy, party’s right to legal proceedings and striking down the UCs to protect the party from the abuse of power.
The other being respecting the freedom of contract, party autonomy and the mutually agreed terms of both the parties and thereby limiting its intervention in the arbitration process.

Also Check: Arbitration and Conciliation (Amendment) Bill, 2021: A Smart Move or Utopian Thought?

Problems with Unilateral Clauses

Unilateral Clauses in the arbitration agreement are no doubt a boon for the parties in whose favour the clause is made. But, on the other hand it acts as a ban for the opposite party.

Some of the problems associated with the Unilateral Clauses are –

Any UC will cause imbalance of power between the parties, as the distribution of power is unjust and unfair. It gives one party unreasonable advantage over the other in cases of appointment of arbitrator or the right to go to the court, or the right to select the procedural law to be applicable on the arbitration proceedings, or as the case may be.
Principle of party’s equality is violated by a UC as it explicitly takes away the opportunity of the other party with respect to the topic for which it is framed. Even if both the parties have consented to the terms and conditions in the agreement, the right to equal treatment is taken away from the party whose right has been waived off.
There is a doctrine of unconscionability which states that any agreement is so one-sided that prima facie it seems unfair for the other party. This majorly happens due to abuse of power, coercion, fiduciary relationship which leads to exploitation of the weaker party. Hence, the UCs should always have a background check in order to understand the reasoning behind one party waiving off its rights.
Another doctrine is potestative condition wherein the success of one condition of agreement is absolutely dependent on some event which is under the control of one party, to make it happen or not. Any obligation or right in the arbitration agreement which is made under potestative condition, gives upper hand to the party who has the power to control the condition.

Read: Joint Liability in Criminal Law- Joint Criminal Liability

Recommendations and conclusions

The nature of UCs has larger significance in deciding whether or not it is valid. Covering all the circumstances under one umbrella and then setting a precedent would be not appropriate, considering the different possibilities of UCs. In view of the above discussion, it is apparent that legal provisions are silent on UCs and that makes it valid but it has been differed by Judiciary making it invalid. Yet, it remained subjective as courts have also upheld, in some cases, the validity of UCs depending on facts of the case.

Institutional Arbitration should be promoted because of its procedure based on a standard set of rules from the appointment of arbitrators to the procedure of arbitration. This way, UCs would be restricted for choosing Institution only and no party will grab one-sided unequal powers of appointing an arbitrator. An amendment may be put on the floor which will focus on encourage parties for Institutional arbitrations.
The right should be given to the non-beneficial party of UCs by making UCs ‘voidable’, before an arbitral tribunal, in the cases of coercion, undue influence, fraud, or misrepresentation.
Limitations and certain duties of the beneficial party should be prescribed such as the duty to provide due information about UCs to other parties before making an agreement. This would prevent the party autonomy from being misused for gaining one-sided power.

In our opinion, it is high time to clear the stand which would be equal for both; legislative and judicial bodies. Absolute invalidation would contradict the party autonomy and freedom of contract and absolute validity would be against natural justice and procedural equality. Thus, amending particular aspects would suffice to remove uncertainty.