[Rishab Chand and Jitya Singh are 3rd year and 4th year students, respectively, at the National Law School of India University, Bangalore]
The recent Bombay High Court decision in Tata Capital Ltd. v. Vijay Devji Aiya has reignited the debate on the validity of Unilateral Option Clauses (“UOCs”) in arbitration agreements. While the Court held that UOCs are incompatible with principles of fairness and mutuality, it refused to invalidate the arbitration agreement as a whole. Although this judgment takes a step forward in reflecting the growing judicial recognition of the arbitration agreement despite a UOC clause, the invalidation of UOCs based on mutuality still reflects an outdated approach by the Indian courts. UOCs that either allow only one party the exclusive right to choose between arbitration or litigation, or give unilateral right to opt out of the arbitration are common in commercial contracts but have faced doctrinal challenges in Indian courts. This post argues that UOCs should be deemed valid under the Arbitration and Conciliation Act, 1996 (“the Act”), as amended in 2019, particularly in light of its alignment with the UNCITRAL Model Law and the principle of party autonomy.
Judicial Grounds for Invalidation of Unilateral Option Clauses in India
Indian courts have often taken inconsistent views on the validity of UOCs, leading to doctrinal inconsistency and unpredictability. One of the central grounds for rejecting the validation of UOCs is the lack of mutuality. The Delhi High Court, in Bhartia Cutler Hammer Ltd. v. AVN Tubes Ltd., held that a clause granting the defendant the sole right to initiate arbitration was unenforceable because it lacked reciprocal rights of invocation and thereby failed to qualify as a valid arbitration agreement under section 7 of the Act. However, this reasoning exceeds the statutory interpretation of section 7 as well as the UNCITRAL Model Law on which the Act is based. Section 7 of the Act merely requires an agreement between the parties to be submitted to the arbitration in case any dispute arises. The section nowhere mandates the condition of bilateral invocation of rights. The Apex Court, in Jagdish Chander v. Ramesh Chander,carved out the necessary conditions for a valid arbitration agreement under section 7 of the Act. Notably, it did not mention the opportunity for bilateral invocation as a necessary condition for a valid arbitration agreement (Para 8). Furthermore, section 7 of the Act mirrors Article 7 of the UNICTRAL Model Law, which similarly omits any reference to mutual invocation. This was further held in the English case of Mauritius Commercial Bank v. Hestia Holdings, where the Court discarded the argument that UOCs violate the right to a fair trial. The Indian courts failed to note that UOCs do not necessarily violate the right to a fair trial, as section 18 of the Act requires the arbitral tribunal to treat both parties in a fair and equal manner, hence placing both parties on the same pedestal.
The courts have also invoked contract law principles to argue that UOCs are invalid due to a lack of consideration. The Delhi High Court, in Union of India v. Bharat Engineering, held that, unlike a conventional arbitration agreement, where the reciprocal promise of referring the dispute to arbitration qualifies as consideration, the absence of such consideration in a UOC makes it an invalid arbitration agreement under sections 10 and 25 of the Indian Contract Act (“ICA”) (Para 19, 20). However, such a reading of a commercial contract is hyper-technical. Consideration is not required to be mutual within every clause; it suffices if consideration exists for the broader contract. As noted in international legal instruments such as Article 3.1.2 of the UNIDROIT Principles and Article 29(1) of the CISG, arbitration clauses, like other contractual provisions, derive their binding force not from mutuality within the clause itself but from the totality of the contractual exchange. This may include trade-offs such as pricing concessions, risk allocation mechanisms, or procedural advantages. Consequently, even a unilateral dispute resolution clause may be valid as part of a broader, commercially negotiated arrangement.
Further, public policy has been used as a residual ground to strike down UOCs, notably in Emmsons International Ltd. v. Metal Distributors, where the Court held that UOCs restrict access to courts and thus offend the public policy of India. However, this line of reasoning will not hold water under the amended Arbitration Act, as Explanation 2 to section 34(2)(b)(ii) has limited the scope of “public policy” to violations of fundamental policy, justice, or morality. The Supreme Court, in the case of Associate Builders v. Delhi Development Authority (Para 22), held that section 34(2)(b)(ii) now requires a high threshold to invoke public policy, as discussed in the next section.
In sum, there are two main grounds adopted for invalidating the UOCs, namely the principle of mutuality and the public policy principle under section 34. In this context, the next section turns to these very objections and normatively argues why they do not justify the invalidation of UOCs under Indian arbitration law.
Rethinking Mutuality and Public Policy
The primary objection to the validity of UOCs has been their alleged lack of mutuality. Courts have assumed that both parties must have symmetrical rights to invoke arbitration to qualify as a valid arbitration agreement. However, this argument confuses mutuality of consent with mutuality of invocation and imposes a non-existent arbitration requirement. Further, the rationale adopted by the courts for invalidating these clauses is that these clauses may operate against the weaker party, particularly in the standard form of contract, where negotiation is minimal. However, while this concern is legitimate in theory, it cannot justify a general rule invalidating UOCs. Indian law already provides targeted protections to address imbalances in bargaining power without the need to judicially manufacture a requirement of invocation symmetry.
For instance, statutes such as the Consumer Protection Act, 2019, the Industrial Disputes Act, 1947, and the Legal Services Authorities Act, 1987 recognize that certain classes of litigants, such as consumers, employees, and indigent persons, have less bargaining power and hence provide them with statutory safeguards by making such issues as non-arbitrable. Further, the Court, in Emaar MGF v. Aftab Singh, held that disputes arising under such welfare legislation are not arbitrable. The doctrine of non-arbitrability, thus, serves as a structural barrier to coercive dispute resolution mechanisms in cases involving weaker parties.
Further, even if the parties are not covered by any special legislation, the Arbitration Act provides enough statutory protection from any kind of inequality. Section 18 of the Act mandates the Arbitral Tribunal to treat both parties equally. Failing to observe equality under section 18 gives the party the right to challenge the arbitral award under section 34 of the Act. Section 34(2)(a)(ii) makes procedural unfairness a valid ground to set aside the arbitral award. Hence, there are adequate statutory protections provided to the weaker party.
Another ground invoked by the courts for invalidating UOCs is public policy concerns. As defined under Section 34, this includes notions of morality or justice as well as fundamental policy of the Indian law. A potential imbalance of power between parties has often been misinterpreted as a restriction on the rights of a party to pursue legal remedies. While the invocation or withdrawal from arbitration proceedings can be unilateral and would provide a greater advantage to one party over the other, it does not necessarily hamper the process of arbitration when invoked. This means that a unilateral option to invoke arbitration does not give the party deriving benefit from the clause the right to unilaterally appoint the arbitrator and thus prejudice the principles of equality or equal access to justice. As held in Mauritius Commercial Bank v. Hestia Holdings Ltd., the concerns regarding equal access to justice are considered within the forum chosen by the parties and not the choice of forum.
Courts have also been hesitant to validate UOCs in transactions involving corporations, financial institutions, and artificial persons, considering the natural imbalance involved. However, the Court ignores the fact that such UOCs are a result of negotiations between the parties that allow one party to determine the competent jurisdiction to adjudicate any dispute arising between the parties. To take the view that all such clauses are unfair and violate a party’s right to legal recourse would undermine party autonomy.
Towards A Pro-UOC Regime
The invalidation of UOCs has serious repercussions for India’s arbitration regime. UOCs are widely used in cross-border financing, technology, and intellectual property contracts as a bargaining chip where parties bargain over other terms of the contract by giving away the option of choosing the forum for dispute resolution. If Indian courts continue to strike down such clauses on grounds like lack of mutuality and public policy concerns, foreign parties will avoid choosing India as the seat due to its non-enforceability under Indian law. Moreover, even the foreign-seated arbitral awards would be rendered ineffective as they would not be enforced under section 48(1)(a) of the Act. This has been a concern, particularly after decisions like AVN Tubes, which invalidated UOCs due to a lack of mutuality and public policy concerns. The risk is that parties will avoid choosing India as a seat, fearing enforcement challenges in India. This creates uncertainty and commercial risk, especially in high-value international deals. If India has to become a global hub of arbitration like Singapore and London, the courts need to change their stance by allowing UOCs to be valid clauses.
Although the current jurisprudence highlights that there are legitimate concerns about UOCs, especially around fairness and procedural imbalance. However, an absolute bar on UOCs is not the appropriate solution. Instead, the right approach is to adopt a case-by-case approach to determine whether a particular UOC unfairly restricts the opposite party’s access to legal remedies. The burden should be on the objecting party to prove that a particular UOC is unconscionable if it is vaguely drafted, operates in a grossly one-sided manner, or breaches a statutory protection. Courts must assess the clause’s clarity, the surrounding contractual context, and whether meaningful consent was given. UOCs should only be invalidated in cases of demonstrable unfairness or legal infirmity; otherwise, they must be upheld in furtherance of contractual freedom and commercial certainty.
– Rishab Chand and Jitya Singh