Principle of party autonomy is the fulcrum at which the entire arbitration proceedings is based on. The principle empowers the parties with the freedom to choose the laws, forum, mode, manner, procedure and other aspects of an arbitration agreement. Nonetheless, the principle does not encompass the scope of granting an absolute freedom to the extent of infringing mandatory laws governing the arbitration proceedings.
Optional arbitration clauses are the form of arbitration clauses wherein a balance needs to be carefully measured between the party’s choice of ADR mechanism and the legal validity, enforcement, unconscionability and procedural equality of such clauses.
Optional arbitration clause – Meaning
Preliminarily, the phrase “optional” arbitration agreement is imprecise. In fact, all arbitration agreements are “optional,” in the sense that either party has the option of commencing arbitration or doing nothing and, when one party does commence arbitral proceedings, the other party is bound by the agreement to arbitrate. The better descriptive term is a “non-mandatory” arbitration agreement, which would leave both parties free, after a dispute arises, to decide whether or not they wish to arbitrate that dispute.
Optional clause is a hybrid dispute resolution clause wherein parties agree on a flexible dispute resolution mechanism, that is, they may either opt for arbitration or litigation depending on the nature of dispute arising later. Parties agree to such provisions only to consider arbitration as an alternative or optional means of dispute resolution if future disputes arise, but not to require mandatory submission of such disputes to arbitration.
The decision of final mode of mechanism opted may be of one party or both the parties to the agreement. This feature differentiates the optional arbitration clause into two type – unilateral/asymmetric optional clause and bilateral/symmetric optional clause. The right to choose in the former is only with one of the parties whereas the latter confers the right to choose the dispute resolution mechanism to both the parties.
The primary concern with the use of option clause is the uncertainty in referring the dispute to arbitration and its enforceability. The use of terms “may” or “can” might have adversarial effects as compared to the use of more assertive word like “shall”.
The clause facilitates the party with the choice to embark on litigation to obtain summary judgement that may not be possible through arbitration or opt for arbitration because judicial decision may not be enforceable in other party’s jurisdiction or the place where their assets are located.
THE RATIONALE BEHIND THE OPTION
Advent of foreign investment has endorsed use of unilateral option clauses in international commercial contracts. The asymmetry in conferment of rights under the unilateral optional clause stems from the unequal position or power of the parties under the contract. The party having the bargaining power capitalizes the right to choose amongst the range of options of resolution forums as compared to the weaker party.
Globally, the clause is commonly included in financing agreements and debt and equity market transaction documents where the right of one party to refer a dispute of settlement is greater than the other party due to the nature of the transaction involved. The use of the clause in rising in tenancy agreements, employment and consumer agreements also.
The underlying reason for the inclusion of such a clause is to give effect to the negotiating power of the lender or the dominant party due to the ones-sided nature of the obligations in the agreement.
While both the parties need to manifest their consent to the agreement, the manifestation need not be equal in time, place or form. The agreement need not put the parties in the same position, and it would be rather illogical to put this as a mandate.
Arbitration is construed to be more flexible mode of dispute resolution than litigation as it provides a vast scope for the enforcement of arbitration awards through New York Convention. Nonetheless, at times disputing through litigation can also be advantageous.
For example, in case the debt for the loan provided is certain and cannot be disputed, it would be beneficial for the lender to file a lawsuit for recovery of debt in the competent court. Herein, litigation would provide the opportunity to get the order for recovery of debt in the shortest time possible with minimum cost as against arbitration proceedings that would be expensive and time consuming.
The lender herein would enjoy the benefit of having the alternatives available that it would select based on the nature of dispute by virtue of being the economically stringer party. The clause would offer the lender an additional security and facilitate the lender to pursue the debtor’s assets for faster and convenient recovery.
One of the quintessential objectives of the arbitration is procedural neutrality. Though the parties to the arbitration have the autonomy to decide the procedure which will govern their arbitration, the basic equality of the parties forms a fundamental feature of arbitration and is considered to be sacrosanct.
Party autonomy is essential for an arbitration clause to be valid. However, the optional clause would be a limitation to the party autonomy.
Another recurrent issue pertaining to validity of such optional arbitration clauses is establishing whether the parties in fact consented to arbitrate, and, more specifically, consented to the terms of a particular arbitration agreement. Where the contractual obligation is contingent on the choice of one of the parties, the question would arise as to whether before exercising the option, a binding consent was provided by the other party.
Further, Section 8 of the Arbitration and Conciliation Act, 1996 provides that when there is an arbitration clause, the court shall refer the matter to arbitration, unless the agreement is invalid. There is no scope of “may” in the provision. In absence of very clear words to arbitrate, the option cannot be construed to be enough for submission for arbitration.
Furthermore, enforcement of the award would be difficult. Even if the clause is valid as per the law of the seat, the enforcing court in other jurisdiction may refuse enforcement of award on finding that the arbitration clause is invalid by virtue of public policy consideration of non-mutuality, inequality and unconscionability.
Option clause may lead to serious dispute over the forum selection that could even surpass the initial dispute and create a prolonged legal conflict. For instance, Party A invokes the arbitration clause. Party B would have to oblige with the Party A’s option. But there might be a situation where party B does not accept the chosen jurisdiction on the grounds of invalidity or maybe mere deterrence and convenience. Either of the parties may thereby approach the courts for violation of the dispute resolution grounds.
Accordingly, the use of uncertain words like “may” or “can” might lead to unnecessary cost and delay if one of the parties commences litigation, with the hope to get a default decision or that the other party fails to get a stay, without knowing if the other party intends to arbitrate or not. In case the other party succeeds in obtaining the stay, significant time and cost will already have been wasted. Although, it not be possible to recover the lost cost as neither of the parties have violated the agreed dispute resolution clause.
Further, if the particulars of the dispute would be disclosed during litigation, it would lead to loss of confidentiality which also forms the genus of arbitration proceedings.
LEGAL POSITION IN DIFFERENT JURISDICTIONS
A number of national courts have considered whether arbitration can be compelled under apparently optional provisions of this sort. The pronounced tendency of these authorities is to treat even ambiguously-drafted provisions as “mandatory” in commercial settings, thereby either obliging parties to submit their disputes to arbitration, and to refrain from litigation of arbitrable disputes or granting either party the option to initiate arbitration.
1. United Kingdom
The English courts have constantly held the clause to be valid and enforceable.
The Court in Pittalis v. Shorefettin, (1986) 1QB 868, held that, the clause conferring a right on one of the parties to refer the dispute to a particular resolution mechanism was bilateral as both parties had agreed to be bound by the agreement. The fact that only one or both the parties had the right was irrelevant. It was held that there was no lack of mutuality in the clause.
The decision in Fiona Trust & Holding Corp v Privalov (2007), upheld the validity of unilateral option clause and further held that the party’s intention towards the dispute resolution clause should be given effect to upheld the fundamental principle of party autonomy. Similarly, the optional arbitration clause was upheld to be valid in the case of Deutsche Bank AG v Tongkah Harbour Public Company Limited (2011), as mutuality was not deemed to be an essential ingredient under English arbitration law.
The Privy Council in the case of Anzen Ltd. v. Hermes One Ltd., (2016) UKPC, adjudicated that the if one of the parties have commenced the court proceedings, the other party can choose to stay the proceedings and opt for initiation of arbitration proceedings. Thereafter, in a way both the parties would become bound to arbitrate.
The Council observed that such clauses are permissive in nature and not exclusive. The decision had safeguarded the validity of such arbitration to the extent that even though the terms like “may” or “can” has been used, if the intention and conduct of the parties is to refer the dispute to arbitration, the arbitration clause would be valid.
“For “optional” arbitration clauses, one party should not be able to gain an advantage over the other by “jumping the gun” and commencing litigation.”
The Singapore Court of Appeal in the case of Dyna-Jet Pvt Ltd v. Wilson Taylore Asia Pacific Pvt Ltd,  SGCA 32, upheld the validity of optional arbitration clause. The decision is pertinently unique as it was the first time when the Singapore Court had adjudicated on the validity of the optional arbitration clause under the Singapore law. The court held that merely because the dispute resolution clause rendered arbitration of future dispute as option instead of imposing on the parties an immediate obligation to arbitrate, the clause would not become invalid.
The position on validity of the optional arbitration clause is still unclear as the Indian judiciary have rendered inconsistent decisions. The Courts earlier have settled that the court shall refer the dispute to arbitration only in case there is a clear and unequivocal intention of the parties to arbitrate the dispute.
The Delhi High Court in the case of Union of India vs Bharat Engineering Corporation ILR 1977 Delhi 57, held unilateral optional clause to be invalid on the ground of lack of mutuality. Further, it was held that the Indian arbitration law does not validate an arbitration clause contingent on exercise of any option.
However, the Calcutta High Court in New India Assurance Co Ltd v Central Bank of India & Ors AIR 1985 Cal 76, declined the reasoning in Bharat Engineering and upheld the validity of the unilateral option clause, although it would be enforceable only by the party who choose to arbitrate.
The Delhi High Court in Bhartia Cutler Hammer Ltd. v.Avn Tubes Ltd., (1993) BC 472, invalidated the unilateral optional clause on the ground of absence of mutuality. It was held that,
“according to Section 2(a) of the Arbitration Act14 1996, when an arbitration agreement gives an option or liberty to only one of the parties to agree to submit, present or future differences to arbitration, it is not an arbitration agreement, there must be an unqualified or unconditional agreement to submit present or future differences to arbitration.”
Unilateral option clause was again invalidated by the Delhi High Court in the case of Emmsons International Ltd. v. Metal Distributors, (2005) BC 465. The court opined that, since the clause imposes an absolute restriction on the right of one of the parties to approach any dispute resolution mechanism, it is violative of Section 28 of the Contract Act and against the public policy of India.
On the contrary, the Delhi High Court upheld the validity of unilateral arbitration clauses in Jindal Exports v. Fuerst Day Lawson, (2010) 1 Arb LR 1. The Court relied on the English cases law and similarly decided the legal position. It was opined that mutuality was no longer a requirement for an arbitration clause to be binding under the Indian regime.
The Supreme Court in the case of Zheijang Bonly Elevator Guide Rail Manufacture Co. Ltd. vs. Jade Elevator Component, 2018 (9) SCC 774, had upheld the validity of the optional arbitration clause. The Court held that the where both the parties have agreed on the optional clause and either one of the parties invoke the clause then dispute shall be referred to arbitration and not litigation.
Recently, the Bombay High Court in Quickheal Technologies v. NCS Computech, Arbitration Petition No. 43/2018, decided on June 5 2020, interpreted the optional arbitration clause and held it to be invalid. The Court distinguished the clauses that grant an option to both the parties to arbitrate their disputes without any specific mention about the option of litigation and clauses specifying that the dispute would be referred either to arbitration or litigation.
The implications of the adjudication are that the in case of former, the party selecting the option will have to obtain fresh consent of the other party before invoking arbitration. On the other hand, in latter, there would be deemed consent of both the parties for arbitration as well as litigation, wherein a party would simply require to opt for either of the option and that would be binding on both the parties. On receiving an application in the prescribed manner, the Controller will grant a compulsory licence solely for manufacture and export of the concerned pharmaceutical product to such country under the terms and conditions as may be specified and published.
In many instances, courts have reasoned that the arbitration clause creates an option, permitting (but not requiring) either party to initiate arbitration, and that, if the option is exercised by either party, both parties are then bound to arbitrate. The basis for this conclusion is that it would make little or no commercial sense for parties to agree to optional arbitration in an entirely non-mandatory sense, leaving both the parties free to decide when disputes arise whether or not they wish to arbitrate.
Nonetheless, it may not always be rationale for the parties to incorporate such optional clause in their agreements because of important issue including enforcement and validity of the clauses. Where there are jurisdictions that have upheld the validity of optional clause, there are also jurisdictions that have held the clause to be invalid based on non-mutuality, unconscionability and procedural inequality.
Henceforth, it is imperative for the parties to consider the plausible issues before incorporating the clause in their agreement including:
1. Thecommercial background of the transactions.
2. The laws of various jurisdiction including laws governing the arbitration, law of the seat of arbitration and law of nation where enforcement would be sought. This might not be easy, considering the legal position in many jurisdictions is still evolving.
3. If the option is necessary and whether the benefits offsets the risks.
4. How to deal with any existing proceedingsthat have already been commenced before the option is exercised and also the costs of those proceedings.
The legal position on validity and future of the optional clause in India is further complicated because of the divergent decisions of various High Courts. The issues of patent illegality and public policy are also respectively problematic with regards to domestic and international arbitrations.
Though, recent judgment indicate that the judiciary would permit optional arbitration clause, the position is far from settled. Thus, it is crucial for the parties to be cautious of incorporating such clause with reference to India as a seat of arbitration or as a place of enforcement. Unless the dilemma is conclusively resolved by the Supreme Court or the legislature, the validity of optional arbitration clause remains uncertain and unclear.
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