Validation and Enforcement of Unilateral Clauses in Arbitration Agreement: An Indian Perspective

Neelabh Niket[i]

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Introduction

On the premise of efficiency and flexibility, arbitration law continues to attract new stakeholders and participants across the globe. This private arrangement provides parties with full autonomy and leeway to draft their arbitration agreement in a manner that suits their business style and equations. Lately, parties have started leaning towards asymmetrical arbitration agreements wherein only one of the parties have the right to refer a dispute to arbitration. In modern arbitration jurisprudence, these are being called ‘Unilateral Option Clauses’. While these are being readily accepted by the Courts in England, United States & Singapore, they are being struck down every now and then by the Courts in India. Different High Courts with contrary views have created nothing short of bedlam in the arbitration jurisprudence as far as such unilateral clauses are concerned. A case in point is Tata Capital Finance Limited v. Shri Chand Construction and Apartment Pvt. Ltd (‘TCFL case’) wherein the Delhi High Court has recently refused to accept these agreements as a valid arbitration agreement. This article, while assailing this judgement, will also attempt to give a macroscopic view of the legality of such clauses in Indian law.

The Jurisprudence and Analysis

It may be gleaned after reading multiple judgements on the issue that such unilateral clauses have been declared void by the Constitutional Courts in India mainly on three grounds- a) lack of mutuality, b) public policy, and c) restraint of a party’s right to legal proceedings. While the latter two reasons operate as the secondary fulcrum of the judgements, the first is invariably the primary one. Before we delve deeper, one must understand the meaning of ‘mutuality’. Mutuality as understood in the arbitration jargon is nothing but the parties having identical or bilateral rights while referring disputes to arbitration. In simple words, both the parties must mutually promise to each other that in the event of any dispute, they agree to submit these to arbitration at the option of either party. Mutuality, as a requisite in Indian Arbitration Law, has had a chequered history. While some High Courts have considered it not necessary in arbitration agreements, others have declared the agreement void if such a clause of mutuality has been found wanting. Mutuality, if reflected on a spectrum would have Bhartia Cutler Hammer Ltd. vs Avn Tubes Ltd ,(‘AVN Tubes case’) making it a sine qua non on one end, and New India Assurance Co. Ltd. vs Central Bank Of India, holding an agreement as perfectly valid without it, on the other. One would naturally place Union of India vs Bharat Engineering Corporation(‘Bharat Engineering case’) somewhere in middle, due [1] [NN2] to its equivocal and complex nature. To respect the term of ‘mutuality’, the case unnecessarily muddles itself into a labyrinth only to allow such clauses after a certain formality is met. The case will be discussed later in detail.

The Delhi High Court in the AVN Tubes case decided that a party cannot reserve a sole right to commence arbitration as the Indian Arbitration and Conciliation Act, 1940[Editor3] [4] [NN5] presupposes that there must be a mutual arbitration agreement between the parties, and an opportunity for bilateral invocation of the arbitration clause. Such a clause would not be considered a legitimate arbitration agreement, notwithstanding the parties’ full approval to it. It is however humbly argued that such reasoning is obtained via a flawed reading of the ACA, 1940. While the Act demands serious intention and obligation on the part of the parties to be bound by the decision of the Tribunal, it does not however warrant the attributes of thearbitration agreement to be mentioned in a valid arbitration clause. In the case of Jagdish Chander v Ramesh Chander, the Hon’ble Supreme Court outlined the requisites of a valid arbitration agreement under Section 7 of the ACA. Interestingly, the opportunity for bilateral invocation as one of the essential ingredients of an arbitration agreement was not included as a requirement. Furthermore, merely because one party has been given the power to opt for arbitration, this cannot be tantamount to the other party not being bound by the arbitration agreement, especially when such an agreement is founded on unconditional consent from both parties. The Court must respect the fact that contracting parties are free to exchange mutual promises and obligations in the manner they deem fit. Lastly, the Court wrongly interprets a unilateral right as a unilateral agreement. A unilateral agreement has much to do with the scenario when a party, without valid consent from the opposite party, initiates arbitration. On the other hand, a unilateral right means a right that has been conferred only on one of the parties. A mere presence of a unilateral right does not in essence make the character of the arbitration agreement unilateral.

In the context of interpreting mutuality in arbitration agreements, the Bharat Engineering case is a rather interesting one. The Delhi High Court opined that such unilateral arbitration clauses in an agreement would lay dormant unless the option was indeed exercised by the preferred party. Until then, it remained only as a contract of option and not an arbitration agreement. Once such option was exercised, mutuality would kick in and either party could then refer the dispute to arbitration. In simple words, the Court did not strike such an agreement as void but only made the election of an arbitration necessary before the agreement could be treated as valid. It is the author’s opinion that such complexity may be avoided and there is no need to classify the election and referring of the disputes to arbitration as two distinct stages in an arbitration. It is counterintuitive to say that the privileged party will elect to go for arbitration and then not refer the disputes. Furthermore, the Court hesitates to term it as an independent arbitration agreement citing lack of consideration in the promise. Nowadays, arbitration clauses are one portion of an agreement and it is not necessary that consideration for referring the disputes to arbitration be located in that very clause. Such an arrangement is usually reached by parties keeping in mind their commercial interests and leverage against each other. There are circumstances wherein the party which has decided to give up his right to refer the dispute to arbitration is otherwise protected by other clauses in the contract or simply on its own assessment of the situation.

Other relevant cases in some form or the other align with the criticism as mentioned in the above passages. The Calcutta High Court in the case of New India Assurance Co. Ltd. v. Central Bank of India held that, “This option (option to refer disputes) does not negative the existence of the arbitration agreement but only restricts its enforceability. If the privileged party alone can refer the dispute, it can do so only on the basis of the advance consent by the other party recorded in the agreement that the reference would be by the privileged party alone. This unilateral right to make the reference flows from the agreed term in the contract.” (Emphasis supplied)

Instant Judgement

The Delhi High Court in the TCFL judgement further established its strong resentment against unilateral clauses in arbitration agreements. The impugned dispute resolution clause in the case allowed only TCFL (“Appellants”) to opt-out of the arbitration agreement and pursue its claim under the SARFAESI Act or the DRT Act instead. “Chand Construction” (“Respondent”), which was required to arbitrate its claims, was not afforded such a privilege. The judgement rests its arguments substantially on the case of Bharat Engineering and finds mutuality missing in the above clause. With due respect, this conclusion cannot be sustained even going by the judgement of Bharat Engineering. At first blush, it may appear that Bharat Engineering is against such clauses. But as explained earlier, once the arbitration option was indeed exercised by the appellant, mutuality kicked in and the arbitration agreement was valid and sound. The Court further lays down that the Arbitration Act does not envisage the splitting of claims and thus such an arrangement which allows for a parallel proceeding, borne out of the same legal relationship at a different forum, cannot be given a green signal. One needs to simply reassess the Bharat Engineering case carefully to rebut this argument. The Delhi High Court had rejected the claim of the appellants to refer the dispute to arbitration, citing that the arbitration clause only talked about the “claims of the respondents to be referred to arbitration” and not the appellants, implying that the ‘splitting of claims’ was indeed possible within the arbitration regime. Lastly, the High Court judgement also goes against the Supreme Court ruling in the case of Indiabulls Housing Finance Ltd v Deccan Chronicle Holdings Limited. In this case, the Hon’ble Court held that merely because steps are being taken under arbitration would not mean that the remedy under the SARFAESI or the DRT Act is foreclosed. Therefore, this implies that a party was free to exercise its rights under these statutes parallelly with arbitration. In the instant case, the appellant wants to end the arbitration claims completely from his end and would rather enforce his rights under the given statute. Rationally speaking, the above scenario should be fully enforceable in the eyes of law.

Conclusion

Arbitration established on the theme of party autonomy should get to operate without unnecessary judicial intervention. The judiciary must not succumb to the vaulting pressure exerted by mutuality and must allow parties to choose the way in which the arbitration proceedings will commence. The age-old concept of mutuality which advocates giving identical rights to each party while referring disputes to arbitration must be shed. Given that nothing in the ACA, 1996 requires mutuality, these provisions should invariably be allowed to operate.

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Neelabh Niket is a third-year law student at Hidayatullah National Law University. He is actively developing interests in arbitration and insolvency law. For any discussion related to the article, he can be contacted at niketneelabh@gmail.com.

Validation and Enforcement of Unilateral Clauses in Arbitration Agreement

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