Asymmetric Arbitration Clauses

**Amritanshu Rath and Shreya Tiwari

Abstract

This essay discusses the increasing use of Asymmetrical arbitration Clauses in commercial contracts and analyses why it is a rising public policy issue. It delves into how such clauses defile the basic principles of Arbitration such as equality between parties. Through a consideration of judgments from Indian courts and Courts in Dubai, the authors draw out the stance of these countries in dealing with Asymmetric clauses. Advocating for a controlled intervention by courts, the essay ultimately provides a uniform test to bring a balance between commercial viability and procedural sanctity. 

Introduction

Asymmetric arbitration clauses rarely attract attention when contracts are signed, but they often become the first battleground when disputes arise. Asymmetrical arbitration clauses, also known as “Unilateral Option Clauses” are those arbitration clauses under which only one party has the liberty to choose whether to refer a dispute to arbitration or not while the other party is bound to accept the unilateral choice. The practice of using such clauses in financial, infrastructural, and cross-border contracts or in contracts between public and the private sector has increased significantly, where for example, in financial transactions, the lender has the greater liberty in deciding jurisdiction, etc. 

While they provide a commercially viable option, the growing number of disputes surrounding them exposes a deep foundational tension. At the heart of the debate lies the conflict between autonomy of parties to consensually accept the terms of contract on one hand and principles such as equality between parties in terms of access to justice on the other hand. 

In this piece, the authors analyse why asymmetrical arbitration clauses are problematic and how they affect the core principles of arbitration. The authors then examine the judicial interpretation of these clauses across India and draw a comparative perspective from Dubai. The authors conclude by suggesting a fourfold-test for assessing the validity of  asymmetric arbitration clauses. 

What Makes Asymmetric Arbitration Clauses Controversial?

It is important to understand how Asymmetrical arbitration Clauses differ from other dispute-resolution mechanisms such as Optional arbitration clauses, Tiered dispute resolution clauses, and Exclusive jurisdiction clauses. 

The Bombay HC, in GTL Infrastructure Ltd. v. Vodafone Idea Ltd. (VIL) held that the use of words like “may” in the arbitration clause makes arbitration merely optional and contingent upon the future agreement between parties. Additionally, the Supreme Court in BGM and M-RPL-JMCT (JV) v. Eastern Coalfields Limited held that the presence of phrases like “may be sought” in an arbitration clause makes arbitration an option. These are examples of Optional Arbitration Clauses.

Tiered Dispute Resolution clauses or Escalation Clauses on the other hand, provide for a forum of alternative dispute resolution routes at each stage, which finally escalates to arbitration. For example, appointment of an “ombudsman” before going for arbitration is a pre-arbitral step often seen in tiered dispute resolution clauses.

Exclusive jurisdiction clauses settle the jurisdiction at one particular place. For example, “The disputes arising from this agreement shall be subject to the jurisdiction of the courts at Allahabad”. 

However, all these clauses are different from asymmetrical arbitration clauses in one aspect: equality of the parties. Asymmetrical clauses are different not due to the options they provide, but due to the fact that such options are provided to only one party. 

Therefore, the controversy around asymmetrical arbitration clauses gives rise to the question of whether arbitration requires mere mutuality of consent, or is it that the mutual consent must lead to mutual obligations. Worries over whether countries like India are fit for such clauses also arise because of the practical realities where one party in a dispute is often more powerful as compared to the other, which further compromises their power to secure justice. 

Asymmetrical arbitration clauses become a public policy issue as they permit one party, which typically holds more power (for ex. public sector in a private-public contract) to retain unilateral control over various aspects of the arbitration proceedings, which are otherwise meant to be neutral. Indian Courts have already acknowledged that the principles of equality and fairness should be observed not only by the arbitral tribunal but also by the parties when laying down any rules of procedure (JSW Steel Limited v South Western Railway, 2024 INSC 857, ¶52). That the parties shall be treated equally is also a mandatory provision of the Arbitration and Conciliation Act, 1996 (“the Arbitration Act”). 

Beyond questions of imbalance, the debate also touches upon a more fundamental issue: is arbitration merely a contractual privilege that parties may distribute unequally, or is it a procedural right that must be equally available to all parties once invoked?

Dubai’s Experience: Not Uniform, But Instructive

Dubai’s approach in dealing with Asymmetrical Arbitration Clauses has been inconsistent, but nonetheless reflects a balance between contractual sanctity (derived from Pacta Sunt Servanda) and procedural fairness. Courts in Dubai had treated such clauses as a part of high-value transactions, especially in financial contracts, where clear consent is demonstrable. These contracts are mostly multi-national, therefore, recognition of Asymmetrical Clauses in such contracts would offer more protection from risk and foreseeability to foreign parties. However, it would be wrong to say that Dubai courts have granted complete approval to Asymmetrical arbitration Clauses, given the contradicting stance of courts. 

In Sunny Varkey v British International Investments PLC, the facts were such that in a dispute only one party had the right to resort to any judicial body in any other court with jurisdiction. The Court interpreted the clause verbatim to settle the issue of jurisdiction. The Court observed that the asymmetric clause merely gave one party the option to choose the forum for dispute resolution. The other party cannot rely on such a clause to oust the Court’s jurisdiction.

However, the view that the court took was not a “direct” recognition of the asymmetrical clause. The fairness of the clause was not even in question. The Court was rather deciding on whether it has the jurisdiction in the matter.

Contrary to this, in Appeal No. 735 of 2024, Commercial Appeal, the Court of Cassation of Dubai, dealt with a dispute where the arbitration clause granted the Appellant the sole right to determine the body responsible for adjudicating any dispute. The Court held that such a clause did not constitute a binding arbitration agreement, as it failed to reflect a clear and unequivocal mutual intention of the parties to submit disputes to arbitration. Crucially, the Court reasoned that enforcing such a clause would leave the counterparty unable to initiate dispute resolution independently and compel it to await the unilateral election of the dominant party.

The existence of judicial dispute on the issue of asymmetric arbitration clauses pragmatically illustrates the continuing problem of how courts are required to weigh the conflicting ideals of party autonomy and procedural fairness. Asymmetry, far from being viewed as deferentially presumptive or mandatorily enforceable, must be subjected to judicial scrutiny on the basis of its effects.

Indian Courts on Asymmetric Arbitration Clauses

The issue of validity of Asymmetric Arbitration Clauses has come up before various High Courts across the country. But the conclusions that each of them have arrived leaves the legal position of such clauses up in the air.

This issue was first addressed by the Delhi High Court (“DHC”) in Lucent Technologies Inc. vs. ICICI Bank Limited, where the DHC held that Asymmetric Arbitration Clauses are in contravention with Section 28 of the Indian Contract Act, 1872. The DHC observed that Asymmetric Arbitration Clauses give only one party the option to choose the forum for dispute resolution, while leaving the party without any say in the process. The DHC held that this lack of mutual consent makes the clause void and unenforceable. Therefore, according to the DHC, Asymmetric clauses do not qualify as valid arbitration clauses under Section 7 of the Arbitration Act. 

Recently, the Bombay High Court (“BHC”) was asked to examine the validity of an Asymmetric arbitration Clause in Tata Capital Ltd. v. Vijay Devij Aiya. In this case, the impugned arbitration clause provided one party the option to opt out of the arbitration agreement in the event he becomes a beneficiary of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) and other special debt recovery legislation referred to therein. No such provision to opt out was provided for the other party. The BHC held that the arbitration clause should not be rendered invalid because it gives only one party the right to opt out. The BHC held that such a clause can be saved if the unilateral clause is removed or if both the parties are given the right to opt out. Therefore, the BHC did not provide a clarification of the legality of asymmetric clauses, rather it interpreted it as a curable defect in the clause.    

The Madras High Court (“MHC”) on the other hand took an opposing view in Castrol India Ltd. v. Apex Tooling Solutions. By relying on the precedents set in England and Australia,  the MHC held that it was standard international practice that the arbitration clause need not necessarily have mutuality. Therefore, the MHC upheld the validity of the asymmetrical clause which gave Castrol the unilateral option to choose between arbitration and litigation.

Unfortunately, the Hon’ble Supreme Court is yet to provide a ruling on the validity of asymmetric clauses, leaving the legal position of such clauses in the limbo. Citing the principle of equal treatment of parties, the Apex Court has already struck down unilateral appointment of arbitrators in Central Organization for Railway Electrification v. M/s ECI SPIC SMO MCML (JV)(¶137). Such intervention of the Apex court is yet to be seen in this matter. With the issue of Asymmetric arbitration Clauses, it becomes necessary to answer whether party autonomy can override the very essentials of the arbitral proceedings. The Apex Court’s silence may also lead to the privatisation of procedural rights undermining the public confidence in arbitration. This silence itself becomes a policy failure by promoting forum shopping and opportunistic and partial drafting. 

Consent, Clarity, and Control: A Test for Asymmetric Arbitration Clauses

The persistent judicial inconsistencies surrounding the interpretation and validity of these clauses emphasizes the need for a workable test to determine whether an asymmetric clause is valid or not. For determining the same, we propose the following four-fold test.

First, there has to be explicit and clear consent to the arbitration process. An asymmetrical arbitration clause is only valid if the contract reveals that there was a clear and deliberate intent to arbitrate the dispute, despite the asymmetrical nature of the arbitration mechanism. Where arbitration is merely set out as part of several alternative fora without precluding the jurisdiction of state courts, it cannot be said to be a binding arbitration agreement.

Second, the provision cannot make a party procedurally passive. A provision that shells one party out of dispute resolution altogether, on the ground that it waits for the unilateral election of the other party, is likely to affect access to justice, and the provision cannot be supported.

Third, courts should consider whether the asymmetry demonstrates a commercial allocation of risk, rather than procedural domination. Unilateral options in contracts between commercially sophisticated parties will be justified by pricing, credit risk, or enforcement. But where asymmetry is clothed with a guise that distorts bargaining power or denies meaningful recourse, relief should be granted.

Finally, courts should favour construction over invalidation. Where the parties’ intention to arbitrate is clear, the unilateral exit options should either be reduced or severed in order to preserve the arbitration agreement, but they should not be invalidated in full.

The adoption of such a test will make Indian arbitration in line with international standards and promote equality and access to justice.

Conclusion

Asymmetrical clauses are an emerging fault in contemporary arbitration landscape which cannot be justified by a simple reliance on party autonomy. Though they may be a commercially viable option, their enforcement endangers procedural rights such as equality of parties, equal access to justice and more. Sustained indecisiveness of the courts makes the sphere of arbitration unpredictable and erodes public confidence. Therefore, fixing this glitch in the matrix of arbitration becomes essential to establish harmony of Indian arbitration standards with the International standards and to reaffirm the efficacy of arbitration as a mode of dispute resolution. 

**The authors, Amritanshu Rath and Shreya Tiwari, are second-year BA LLB (Hons) students at National Law University Odisha.

**Disclaimer: The views expressed in this blog do not necessarily align with the views of the Vidhi Centre for Legal Policy.