This article is written by Smarth Arora, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
A strong demand for arbitration has developed in India as a response to huge pendency of court cases, delayed judgments and overwhelming litigation costs. A big and diverse country like India, has its predicaments, primarily being delayed Court proceedings which ultimately leads to late delivery of justice.
With such pendency of court cases in our judicial system, people tend to avoid taking their matters to the court. They rather opt for outside court settlements which have been effective and efficient over the past few years.
Moreover, litigation can be very costly and parties might have to wait for years to get a final decision for their dispute, as matters get mired in a series of adjournments, appeals, revision, and review petitions.
A key advantage of arbitration is that, being a private proceeding, the details of arbitration proceedings and the award are kept confidential. Confidentiality of arbitral proceedings has been provided more emphasis to, in the recent amendments of 2019.
Given the above background, the reasons why parties choose arbitration are mainly the following:
- Speedy Resolution;
- Efficient and specialized resolution of disputes (specialized arbitrators);
- Commercial and business transactions mostly prefer arbitration;
- Cost effective in comparison to protracted litigation.
Arbitration Clause in Contracts: Standard Form of Contracts
In most Commercial Agreements and Transactions Alternative Dispute Resolution (herein referred as ADR) clauses, primarily the Arbitration Clause has become a standard feature. Such contracts are also known by the name of Standard Form of Contracts.
The Standard Form of Contracts are those Agreements that are usually pre – drafted giving more prominence to terms and conditions of one party, leaving no or very little scope for the other party to negotiate. It is more like a “take it or leave it policy”.
Such contracts are made up by industrialists and insurance policymakers. The primary feature and drawback of such contracts are “very low bargaining powers among the contracting parties.” These industries usually keep such pre – drafted contracts for their potential customers with the terms and conditions printed finely which often restrict and exclude their liability. Hence, their only option is to either accept the offer at hand or reject it.
The classic example to explain such a contract would be a scenario wherein a customer to get services from a Multinational Company and would have to agree to its terms and conditions by acquiescing himself to its Standard Form of Contract.
In the light of above-mentioned information one needs to understand how a standard form of contract can have a One – Way arbitration clause. For instance, consider A and B, who entered into an employment contract. A is the hiring company while B is the employee. The contract they entered into mentioned certain clauses that were considered unfair and unreasonable by the Supreme Court of India as per Section 23 of The Indian Contract Act (herein referred as ICA), in the case of Central Inland Water Transport vs. Brojo Nath.
Now in the present instance the contracting parties A and B also agreed to a clause of termination and arbitration as a mechanism of dispute redressal. This clearly means that if the employee has been terminated on certain grounds which the employee construes to be unreasonable and wishes to challenge it legally. However, the contract mentions that the disputing parties can refer to arbitration to solve the issue at hand and the HR of the company will be given the responsibility of the sole arbitrator.
In such an instance, where the hiring company/ hirer has the upper hand for invoking the arbitration clause and the employee/ hired is at a lower position as he cannot invoke the clause of dispute redressal. This clearly explains the unequal bargaining powers between the parties, which is a common feature of standardized contracts and One – Way arbitration clause.
The Concept of One – Way Arbitration Agreement
One – Way Arbitration Agreement or one-way Arbitration Clause(s) are also called Asymmetric (“One – Sided”) Dispute Resolution Clauses. These Dispute Resolution Clauses are those which give one party a greater say in the choice of Dispute Resolution Method i.e. Litigation or Arbitration.
Party A and Party B agree to the English courts’ exclusive jurisdiction, save that Party B (at its sole discretion) elect to refer any dispute to arbitration in French courts.
A One – Way Arbitration Clause is a Dispute Resolution Clause that confers a dedicated right to elect a specific Dispute Resolution Mechanism, i.e., it provides the option of resorting to arbitration or litigation.
However, this option is conferred upon only one party. Courts have had to consider whether they should uphold such clauses in the interest of party autonomy or intervene due to public policy considerations.
The situation in India with respect to the Unilateral Arbitration Clause can be examined through the following case laws:
Interpretation of The Delhi High Court (herein referred as DHC)
In this particular case, the plaintiff was a contractor who supplied Thyristor drive and Motors (hereinafter called the Equipment) to the defendant. The defendant failed to pay the outstanding balance of the plaintiff despite continuous reminders. The plaintiff filed a suit against the defendant.
The defendant, in turn, invoked an application under Section 34 of ACA, on the grounds that the contracting party, in this case, the plaintiff had already agreed to the condition as follows “Arbitration without prejudice to the above Clause 17, of the contract the company, M/s. AVN Tubes Limited reserves its right to go in for Arbitration if any dispute so arisen is not mutually settled within 3 months of such notice given by the Company to the Contractor. And, the award of the Arbitrator, to the appointed by the Company, M/s. AVN Tubes Limited shall be final and binding on both the company and the contractor.”
The Honorable High Court of Delhi (herein referred as DHC) in the light of the facts and evidences produced held that the arbitration clause mentioned in the contract of the disputing parties is not valid, since it gives the opportunity to invoke this clause only to the company i.e. the Respondent while the Petitioner does not get any such right to invoke this clause. The DHC relied on the judgment of the High Court of Calcutta in Union of India vs. Rati Lal R. Taunk. The DHC mainly rejected this Arbitration clause on the want of mutuality.
Hence, the agreement is not valid and the defendant’s application was dismissed on the ground of mutuality amongst the parties to invoke arbitration and a fair and bilateral opportunity for its invocation.
In this case, the plaintiff Emmsons International Limited, has filed a suit against the defendant Metal Distributors (UK) and Anr, for the recovery of a sum of Rs. 30, 61, 145/- for the defective supply of copperware bars.
The contract entered into between the disputing parties is that of International Commercial Trade with a clause in their Contract mentioning Arbitration as the preferred mechanism of Dispute Redressal and the Contract be construed in accordance with and governed by the English Law.
Clause 13 of the contract “Governing Law and Forum for Resolution of Disputes- This Contract shall be construed in accordance with and governed by English Law. Sellers shall be entitled in their opinion, to refer any dispute arising under this contract to Arbitration in accordance with the rules and regulations of the London Metal Exchange or to institute proceedings against buyers in any Courts of competent jurisdiction.”
The DHC held that the plaintiff is well within his rights to approach the Court(s) and Tribunal(s) setup by the State in order to get the issue at hand settled. Clause 13 in the Contract of the Dispute is Unilateral in nature which deprives the plaintiff to enforce his rights under the Contract either through the ordinary tribunals set up by the State or through ADR mechanism is void and cannot be enforced in India.
The court also mentioned that the absolute restriction imposed by Clause 13 of the said contract is violative in nature with respect to Section 28 of Indian Contract Act (herein referred as ICA), which ultimately makes it against the Public Policy of India.
Case Law – Lucent Technology vs. ICICI Bank
The Delhi High Court relied on its previous decisions in cases of Emmsons International Limited and Bhartia Cutler and invoked Section 28 of ICA about the deprivation of the plaintiff’s right to recourse through legal proceedings.
Analysis of Unilateral Arbitration Clause in India
Delhi High Court
- The Unilateral Arbitration Clause in India has mainly been considered problematic by the Honorable High Court of Delhi on the grounds of Public Policy, Mutuality and Invocation of Section 28 of ICA.
- However, these grounds of Mutuality and Public Policy do not have much backing as per the Arbitration and Conciliation Act, 1996 (herein referred to ACA). This is because Section 7 of the ACA which mentions about the essentials of an arbitration agreement, nowhere mentions the “Mutuality” among the parties in consideration of Arbitration as the preferred mode of Dispute Resolution and for the selection of an Arbitrator too.
- The Delhi High Court’s insistence on Mutuality under the One – Way Arbitration Clause arises from Section 25 of the ICA that mentions the absence of Consideration in any Agreement makes it void.
- The recent Amendments of 2015 to ACA exhaustively analyses and interprets the term Public Policy which ultimately makes One – Way Arbitration Clause valid.
- There have been certain arguments related to Section 28 of ICA and the validity of One – Way Arbitration Clause. However, such arguments are flawed as Section 28 mentions “absolute restriction of any party to enforce their rights and not partial restriction”.
- But, another argument that goes unaddressed in past case laws is related to Exception 1 of Section 28 of ICA which mentions the “Saving of a Contract to refer to arbitration if a dispute may arise”. This exception however makes the existence of an Arbitration Clause (and One – Way Arbitration Clause) completely valid.
- This is because Section 28 of ICA deals with the agreements which are in restraint of legal proceedings. Two of its essential ingredients mention about such absolute restriction of a party from enforcing their rights either in respect of a contract through the usual legal proceedings or something which limits the time within which one party may enforce their rights.
- Another ingredient mentions about the extinguished rights of a party or which discharges the liability of a party in respect of a contract, which restricts the party to enforce their rights is void to that extent.
- However, the exceptions to this section refers to the use of arbitration to solve the dispute at hand. It means that those contracts which resort to arbitration as a mechanism of dispute redressal instead of litigation makes section 28 inapplicable to arbitration clauses. This is because Section 28 mentions absolute restriction of a party to enforce one’s rights in case a dispute arises. However, the arbitration clause in an agreement does not restrict any party to enforce their rights, as arbitration is a widely accepted mechanism of dispute redressal.
- But one may argue that Section 28 mentions absolute restriction which the arbitration does not confirm to while the one way arbitration clause partially restricts one to enforce their rights. However, one must understand that such partial restriction is only/ mostly related to the appointment of arbitrator or the place/ venue of arbitration proceedings. However, in the light of recent case laws the Supreme Court’s interpretation relating to ineligibility of arbitrators provides a solution to such issues too.
- While on the other hand, the Honorable Supreme Court of India (hereinafter referred as SC) opines a different ratio in these aspects. The following case laws help in understanding it better.
- In the case of TRF Ltd. Energo Engineering Projects ltd. [(2017) 8 SCC 377], the SC held that the appointment of an arbitrator should be covenant to the norms specified in Section 12(5) read with seventh schedule of the ACA. The same decision was upheld by the SC in Bharat Broadband Network Ltd. vs. United Telecoms Ltd. stating that, “A case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course of arbitration and therefore the person who has an interest in the outcome or decision of the dispute must not have the power to appoint the sole arbitrator”.
- The very recent case pertaining to the issue of appointment of an arbitrator in the case of Haryana Space Application Centre (HARSAC) and Anr. vs. Pan India Consultants Pvt. Ltd. & Anr.
- The court held that the appointment of the Principal Secretary, Government of Haryana would be invalid under section 12(5) of ACA. This is because the Government of Haryana is a nodal agency and agreeing to this appointment without a contract/ agreement to the contrary, the relationship of the arbitrator with the appointing party, as per the norms of Section 12(5) read with seventh schedule of ACA makes it invalid to be appointed as one.
- The court reiterated on the fact that appointment of the Principal Secretary of the Government of Haryana would be ineligible for this position since he has a controlling interest in HARSAC being a nodal agency of the state.
- The court even appointed the parties a sole substituted arbitrator who was given the charge of conducting the proceedings of the issue at hand and grant the arbitral award within six months of the receipt of this order.
- In another landmark judgment; the SC dealing with the same issue of appointment of sole arbitrators held that a person who is ineligible to be appointed as an arbitrator, does not stand an opportunity to appoint an arbitrator. The case was Perkins Eastman Architecture DPC vs. HSCC (India) ltd. The facts of this particular case law are as follows- the applicant (Perkins) and the respondent (HSCC) entered into a contract which mentioned arbitration as the preferred mode of dispute redressal. It mentioned that the respondent’s Chief Managing Director (CMD) will appoint a sole arbitrator in case a dispute arises between the contracting parties.
- However, it was interesting to see that in the case of DK Gupta vs. Renu Manjulal with the facts and issues dissimilar to that of TRF, the Delhi High Court held the validity of the appointment of a sole arbitrator. This is because the parties consensually waived off Section 12(5) of ACA, and even went in for submission of the statement of claims.
Status of One – Way Arbitration Clause around the Globe
- Every country has its own Judicial System it follows while delivering justice to its citizens. It could be a common law country like England, United States of America and Singapore or it could be a civil law country like France and Russia.
- Where the Judiciary of United States of America, upholds the validity of One – Way Arbitration clause(s) on the grounds of “Mutuality Doctrine”, where they are of the opinion that the contracting parties are mutually agreeing to the contract and the said One – Way Arbitration Clause, while each of them is getting an equal opportunity to present their cases and approach the tribunal for resolving the issue at hand. They also give full regard to the fact that this clause, although, gives autonomy to one party over the other to appoint an arbitrator, does not make the existence of this whole clause invalid or unenforceable by the Law.
- The Judiciary of the United Kingdom and Singapore too, follow the same principle and uphold the validity of One – Way Arbitration Clause stating that it is not ultra vires to the English Law. The argument of mutuality among the parties was rejected by both of them.
- On the other hand, the Judiciary of France invalidates the existence of One – Way Arbitration Clause on the grounds of ‘Potestative Condition’ which is against the French law. Similarly, the Judiciary of Russia declared that the One – Way Arbitration Clause is void as this clause gives one party a greater negotiating power as compared to the other party which is invalid in the Russian Law.
- As per the Indian Judiciary, the validity of One – Way Arbitration Clause is contested in different High Courts i.e., Delhi and Madras. Both of them have had completely opposite ratios. While the DHC invalidated them, the MHC upheld them. However, the SC has yet not given any specific interpretations of the validity of One Way arbitration clauses in India. But it has given the interpretation and laid out certain guidelines pertaining to eligibility of the arbitrator while appointing one.
The author feels that the One – Way arbitration clause and their enforceability in India is an issue when there was no specific interpretation by the SC. However, the judgments provided by the High Courts have completely opposite views. While the SC has not particularly given any judgment on it, but its interpretation of appointment of the arbitrator by a single party who can be biased in giving the arbitral award given his/ her relations and positions with the company appointing him/ her. The interpretation of the SC related to the Section 12(5) read with seventh schedule of ACA puts the party with less negotiating powers in a better position as before. The author also feels that the prime motive of going for an arbitration proceeding over litigation is to save time and money. But if the arbitration clause is not drafted in a way that does not serve its true purpose, then the very existence of this clause is futile. So, one should make sure that the arbitration clause in any agreement is drafted in an air tight, crisp, precise and simple manner leaving no loopholes which ultimately lead to its resolution in a court through litigation.
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