Unilateral option clauses
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This article is written by Gaurav Kumar, from Surendranath law College (University of Calcutta). In this article, the author discusses unilateral clauses and the steps to avoid pitfalls in drafting such clauses.


These days the civil disputes are mostly resolved through the process of dispute resolution. The parties in the contract agreements exclusively choose the alternate dispute resolution clause stating that the arising disputes shall be referred to the arbitration. Since arbitration is a time-efficient process that requires less cost as compared with litigation, and the parties have confidentiality while their disputes resolve. Moreover, the parties have the liberty to choose adjudicators who are expert in the respective fields. Further, the parties are free to tailor the arbitral process according to their convenience. However, the arbitral awards are mostly binding except in certain cases where the awards can be challenged in the courts. The arbitration process may become costly where the parties challenge the award in the court of law. For the purpose of avoiding such situations, a well-drafted arbitration agreement is necessary. An agreement that is written skillfully and sounds clear, expedites the process, eliminating the confusions henceforth provides the arbitrators to make understand the rules and honours the parties.

There are certain circumstances, where the parties intentionally agree to have arbitration as an alternate dispute resolution mechanism along with the option to litigate and vice-versa. This option can be chosen by either of the party (unilateral clauses) or both of the parties (bi-lateral clauses). So, a party with strong bargaining power may seek flexibility in the unilateral clause. However, pursuing flexibility has certain risks. These risks come in the form of getting unilateral rights invalid and unenforceable due to a lack of certainty, mutuality and the doctrine of unconscionability. If any of the parties challenge the unilateral option to arbitrate, the beneficiary shall have the option to resolve the disputes through a way of litigation.

So, in case the court declares the unilateral option invalid and unenforceable when the award reaches the stage of enforcement, it also gets declared invalid and unenforceable, making the whole process a waste of time and money. So, in order to avoid such circumstances, the drafting of the agreement needs to be clear and precise. The courts have also emphasized the importance of drafting as the ambiguity in the drafting may cause delay and wasted costs making the award unenforceable. In this article, we shall discuss the use of optional clauses in the agreement and the difficulties pertaining to it. The steps taken while drafting to avoid future difficulties have also been discussed.

Unilateral option clauses: arbitrate or litigate

Unilateral clauses are the dispute resolution clauses that are preferred by either of the parties or a group of parties (not all) in an agreement to choose between arbitration and litigation to resolve a dispute. These clauses are one-sided, asymmetrical, non-mutual and sole-option clauses. The unilateral clause provides the facility to choose the dispute resolution method in the case which is at hand. These are most commonly used in finance contracts (loan agreements) where the parties having superior power of bargaining i.e lender preserves the advantage of opting for both arbitration and litigation. As such clauses provide the party to opt for arbitration in the regions where the judgement of the court is not enforceable in the jurisdiction of the counterparty where the assets are located and resort towards the court litigation if the unilateral option clause is unenforceable in some of the jurisdictions to obtain the judgement.

So, while drafting the optional clause there is a necessity to balance the desire of the party for having a maximum level of flexibility that the other party can challenge the validity of the unilateral option clause and the arbitral award arising out of it. Such a challenge may endanger the enforceability of the unilateral option clause and the award arising out of it.

Jurisdiction plays an important role in the enforceability of awards. The unilateral option clauses are enforceable in many of the jurisdictions like Hong Kong, Singapore and England whereas they cause problems and are unenforceable, invalid in many of the jurisdictions like Indonesia, Russia, China and Thailand. 

In a Clifford Chance Unilateral Option Clauses – 2017 Survey, it was noted that the courts in the UK and several other common law jurisdictions have upheld the unilateral clause as they represent the bargain of the parties, despite the advantages it confers on the parties. The other jurisdictions like Russia and Poland have found the clause to violate the equality of the arms and procedural rights of the parties. There are some of the jurisdictions like China, Bulgaria and some of the states of the United States which have found the unilateral optional clauses wholly invalid on the public policy grounds as morality, good faith, fairness, unconscionability, potestative condition, legal uncertainty and lack of consideration.


Legal pitfalls

In unilateral option clauses, there are a number of legal pitfalls available. There are many jurisdictions in the world where the courts refuse to relinquish jurisdictions in the favour of the arbitral proceedings, in the case they find that the drafting of the agreement doesn’t contain the appropriate words according to them. There are some of the jurisdictions where the clear expression of the parties intent to resort to the arbitration. In some of the jurisdictions, the arbitration clause could be used to undermine the certainty with respect to the arbitration submission, making the clause highly strung of being challenged or held unenforceable. Even the jurisdictions being arbitration-friendly, the courts impose certainty related conditions on the validity of the unilateral option clause.

Position of English courts

The English courts have held that the beneficiary to the unilateral option clause must opt for the particular dispute resolution mechanism at the early stage of the process. In NB Three Shipping Ltd v. Hareball Shipping Ltd., the court ruled that the arbitration clause was not “open-ended” and ceased to be available to the beneficiary party of the unilateral option clause took an action in course that another party found that on reasonable grounds the option would not be applicable. Similarly in an English case of Deutsche Bank k AG v. Tongkah Harbour Public Co Ltd and another whilst a jurisdiction clause provides the beneficiary party to opt for arbitration and it is found to be valid, and the option has been exercised in the favour of the arbitration the option of shifting towards the litigation shall be a subject of statutory stay. Other jurisdictions have adopted a similar view. So, if the beneficiary party of the unilateral option clause takes substantive steps in arbitral or court proceedings before exercising their option, they may leave the right to arbitrate or litigate as available under the unilateral option clause.

Other jurisdictions

  • In some of the jurisdictions, the courts may hold the unilateral clauses invalid and unenforceable on the basis of lack of mutual consent. However, the argument that a unilateral clause provides one of the parties the option to choose either mode of dispute resolution is a violation of mutuality of contract, deems satisfied. The local laws of the jurisdiction may require the bilateral option clauses as the mutual consent of both of the parties or, a contractual consent from both of the parties providing the specific dispute resolution mechanism, mere agreement on whether to arbitrate or litigate may stand insufficient in the future.
  • However, several federal courts in the United States of America have upheld the unilateral option clause rejecting the view of mutuality agreement. Similarly, under English Law, the lack of mutual consent to agree over litigation or arbitration doesn’t amount to disqualification of the unilateral optional clause. The Court of Appeals in Pittalis v. Sherefettin stated that the unilateral option clause as exercised by one of the pirates only seems to me as irrelevant. However, this arrangement of having the unilateral option clause in the agreement suits both of the parties.
  • In a French case, which involved the exclusive jurisdiction of the Luxembourg Courts and unilateral clause option to the beneficiary party to litigate in another jurisdiction. The Cour de Cassation invalidated the unilateral clause as well as the jurisdiction clause as it was  “potestative” in the favour of the lender and hence a violation of Article 23, of the Brussels Regulation. The “potestative” condition as defined under the French law states that “one which makes the fulfilment of the agreement upon an event which one or other contracting parties has the power to happen or to prevent” is void. The jurisdiction clause which was subject to the potestative condition was held invalid. The judgment of Cour de Cassation illustrated the risk associated with providing for the unilateral option to arbitrate or to litigate.
  • Similarly in CJSC Russian Telephone Company v. Sony Ericsson Mobile Telecommu-nications Rus LLC, the Presidium of the Supreme Arbitration Court of Russia held the unilateral clause option in an agreement as arbitrary and invalid as it put the beneficiary clause party in a privileged position. Hence, the clause disrupted the balance of interest between the parties and violated the principle of equality.

The unenforceability of clause in the light of unconscionability doctrine

Unconscionability is one of the major grounds on which the parties challenge the arbitration agreement. There are two major forms of unconscionability:  

  1. Procedural 
  2. Substantive 

The procedural one connects with the way in which the arbitration agreement was formed. In this respect, the emphasis is over the thing that whether there was oppression arising out of the “inequality of the bargaining power” and surprise arising out of the inconspicuous nature of the agreement. Adhesiveness and conspicuousness are the two factors that contribute to procedural unconscionability. The substantive unconscionability of the agreement states the content of the agreement, whether the terms produce overly harsh or one-sided results. Designation of the arbitrator in a conflict of interest and imposition of the significant costs on the weaker parties are examples of substantive unconscionability. The courts take into consideration both the substantive and procedural aspects of the agreement to decide whether it is unconscionable or not.

Several courts of the United States of America have taken into consideration the “unconscionability doctrine” while deciding the validity of the unilateral optional clause. In Armendariz v. Foundation Health Psychcare Services, Inc, the California Supreme Court held that an arbitration clause in a standard employment contract was unenforceable as it was unconscionable both substantively as there was unequal bargaining power between the parties and procedurally it was overly harsh and one-sided.  In Iwen v. U.S. West Direct, the Montana state court held the same position as decided by the California Supreme Court.

Indian position

The Indian position in this regard is a little different. The Delhi High Court in Bhartia Cutler-Hammer Ltd. case held that where there is an absence of mutuality and conditional clauses in such cases the arbitration agreement shall stand invalid. The court emphasized the applicability of the bilateral option clause as it provides consent from both sides instead of a unilateral one. While deciding this case the court relied upon the judgement of Calcutta High Court in the case of Union of India v. Ratilal R. Taunk, where the court held that as per Section 2(a) of the Arbitration and Conciliation Act, 1996 when the arbitration agreement gives an option or liberty to one of the parties in the agreement to submit for any kind of development or differences to the agreement, such agreement shall cease to be an arbitration agreement. There must be an unconditional and unqualified offer in the favour of all the parties to the agreement, to exercise the option to submit if any kind of differences or development occurs in the arbitration. Further, the court further held that there need to be bilateral clauses and not unilateral ones for being valid and binding.

Similarly, in Lucent technology v. ICICI Bank, the Delhi High Court held the unilateral option clause to be invalid as it infringed the party’s right to recourse through the legal proceedings.

However, the Delhi High Court in Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. upheld the validity of the unilateral clause.

The position of Indian courts in this regard was quite unclear, as the clause was not applicable within Indian jurisdiction but it was applicable in the case of the English laws.

Practical steps while drafting pitfalls

Taking the pitfalls into consideration the careful consideration needs to be given while drafting. In order to avoid unnecessary delay and expenses due to litigation, the unilateral option clause should be clearly and precisely spelt. There are following options that need to be taken to avoid the pitfalls while drafting the unilateral clauses:

Arbitration as an exclusive dispute resolution mechanism

The arbitration law in Hong Kong states that the word “may” in the arbitration clauses can have unintended effects. It occurs in the context of multi-layered clauses where the parties need to resolve their dispute through negotiation before the parties can refer the dispute to arbitration. That means that if the clause leaves the space for the parties to commence litigation, the other party may request to stay the proceedings on the same page of arbitration where both of the parties are bound to stick to arbitrate, so that the word “may” effectively becomes “shall”. In  China State Construction Engineering Corporation Guangdong Branch v. Madiford Ltd, it was held that where the settlements can’t be reached by consultation, the matter shall be referred to arbitration.

Without knowing the other party’s preference that whether he wants to commence litigation or stick with the arbitration, the commencement of litigation by the first party on the use of the word “may” can result in unnecessary delay and costs. Moreover, if there is a breach of details it causes a loss of confidentiality. Further, if the clause uses may but lacks in any term defined as proposed arbitration i.e no place of arbitration, no referral to arbitral institution or rules, the clause doesn’t amount to a binding arbitration clause and if the defendant seeks a stay the courts will not compel arbitration. Such circumstances arose in the case of Hannice Industries v. Elite Union (Hong Kong) Limited, where the relevant part of the clause provided that “ where the negotiation is unsuccessful the parties may apply for arbitration where the arbitration clause lost its binding value. The intended flexibility is lost in such cases if the claimant commences the arbitration and the respondent seeks to challenge the arbitral tribunal jurisdiction on the basis of no binding value of the arbitration agreement.

Recommended action

If the parties wish to resolve their disputes under arbitration and no of the party goes to any forum seeking any kind of relief in such a case, the arbitral clause should clearly mention it by using the word “shall” instead of “may.” Hence, when there is a use of shall in the agreement and if the arbitration commences, no party can raise the dispute against such commencement. If another party turns for litigation it would be a breach of the arbitration agreement.

Option clauses

If the parties deliberately opt for an arbitration option by adopting a bilateral or unilateral clause in the agreement, there should be no use of the term “may” in the agreement.

Recommended action

The clause must clearly state that disputes shall be referred to the arbitration but either of the party or one of them has the option to refer the dispute in any court of that jurisdiction. The option clause needs to contain the following points:

  • The manner in which the party can exercise the option. Either by way of writing a notice or directly commence litigation or arbitration.
  • The time option can be exercised. It means before commencing any proceedings or before taking any specific step in the proceedings such as the nomination of the party by using the option.
  • How the proceedings can be terminated where the parties have commenced the proceedings the obligations of the parties in this regard that whether any of them shall bear the costs.

Unilateral option clauses

As we have earlier observed that unilateral clauses are valid in many jurisdictions but stay invalid in some of them. So, while drafting the unilateral option clause one must be conscious with respect to the balance of desire of the parties providing them with the maximum flexibility against the risk and another party may challenge the unilateral option clause and award arising out of it.

Recommended action

The insertion of the “unilateral clause” in the agreement must be done with the utmost care, checking whether the clause considers the risks and it is necessary to have it or not. The specialised legal advice of the person must be taken with regard to these issues provided as under:

  • The laws governing the arbitration.
  • The specific governing law of that place (jurisdiction) where the arbitration commences.
  • The law of the place where the arbitral award is likely to be enforced (the place where the losing party is having its assets).

Equitable Estoppel

There are many difficulties that arise while drafting an arbitration agreement that undermines or supports an equitable estoppel claim. It happens because there is no written agreement or contrary written agreement in the cases where the arbitration clause is inserted.

Recommended action

If there exists a main contract governing the relationship of the parties, the contract provides for amendments or modifications and one party’s action suggests amenability to arbitration then the party desiring the arbitration ought to amend the main contract by adding a clause. Further, if any other separate contract proposes litigation, then the drafter should include certain acts that will make the arbitration binding making the agreement void. The reliance over equitable estoppel to compel arbitration becomes unnecessary if these steps are taken.

Ambiguous and poorly written clauses

The clauses must be drafted in a manner sounding clear and there shouldn’t be any kind of inconsistency while drafting the clause. The drafter should also check the test of the application of each of the provisions while reviewing an unfinished version to ensure that each of the provisions produces rational results. 

Recommended action

The drafter needs to use the provision clearly and consistently providing singular meaning. There should not be any complex meaning that may lead the clause and arbitral award unenforceable.


The drafters of the arbitration clause must be well acquainted and draft it clearly without any kind of ambiguity. Any kind of ambiguity may lead to a deal and extra cost to the parties. An unclear clause opens the clause for more than one interpretation and the parties would be in a dilemma that they don’t have the understanding of their applied words. Further, it may create a risk of recalcitrant respondents taking the benefits of the ambiguity and make the dispute escape from resolving it through arbitration.


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