A unilateral option clause (UOC) is a dispute resolution provision that allows only one party to choose between a certain dispute resolution procedure, typically between litigation and arbitration. Some UOCs also restrict the opposite party to a specific jurisdiction while permitting one party to pursue litigation across numerous jurisdictions. The following is an illustration of a UOC in a sales agreement:

Section 10 Dispute Resolution

a) The courts in XYZ country shall have exclusive jurisdiction over any dispute arising out of this contract, subject to BUYER’s right to elect arbitration in clause (b).

b) The BUYER has the right to refer any dispute arising out of this contract to arbitration under the BIMACC Institutional Arbitration Rules, which rules are deemed to be incorporated by reference into this clause.
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Any party may sue under such a multi-tiered clause, but only the buyer (one of the parties) has the right to request arbitration. Starting off, there appears to be a fundamental imbalance between the two parties’ positions on UOCs. It appears to be patently unfair to limit one party’s ability to choose from a variety of dispute resolution forums while allowing only one party to do so. However, these UOCs are becoming more and more common in different commercial settings.

These UOCs are typically seen in financing and lending agreements, where the lender frequently has the choice to file a lawsuit in several jurisdictions but the borrower may only have a limited number of options. This is due to the fact that the lender assumes a sizable risk in these transactions and needs to be able to seek legal action in a country where it may recover its debt. However, UOCs are now often used in agreements between different commercial companies. The side with greater bargaining power may seek the adaptability of a UOC because the suitability of a certain conflict resolution process relies on the specifics of a given case.

Due to the widespread acceptance of the New York Convention, arbitration may be advantageous because an arbitral award is enforceable in a lot more nations than a court judgment would be. In circumstances where the matter cannot be arbitrated or if the party prefers a public hearing, it may be referred to litigation in public courts. In cases where the party would prefer confidential proceedings to protect their goods, they may choose arbitration.

Potential issues with UOCs
The inherent unbalancedness of UOCs has prompted many people to challenge the legality of such clauses for a number of different reasons. There appear to be several answers to this issue in different parts of the world. Such clauses have been upheld as legitimate in nations including the UK, Singapore, Hong Kong, and Spain, but have been invalidated in France, Russia, and Bulgaria. Decisions on the validity of UOCs frequently involve striking a balance between party sovereignty and the requirements of the arbitral process. The following discussion addresses several prevalent objections to the legitimacy of UOCs.
Equality: The need that all parties be treated equally and given an equal chance to submit their case to the Tribunal is the most important concept of arbitration. The success of a challenge alleging that a UOC violated the equality standard hinges on how broadly the arbitration agreement’s law applies to the equality principle.A UOC appears to be unbalanced because it primarily serves the interests of one party and requires the other party to follow the first party’s preference for the dispute resolution forum.

Such sections are said to be in violation of the fundamental principles of equality and the right to an effective defence, according to a common argument. The UNCITRAL Model Law and the Arbitration and Conciliation Act both include the equality principle, although it only applies to the procedures in a procedural sense. Checking if one side has a stronger potential to influence the case’s result is one of the criteria for identifying a breach of equality.

A typical UOC would permit one party to decide the venue but would grant equal rights to the parties once the arbitral process had started, including the ability for them to select an equal number of arbitrators, present their arguments in writing and orally, and present evidence. In other words, the start of the proceedings effectively corrects any imbalance, and neither party gains an unfair procedural advantage over the other. The venue chosen cannot by itself affect the outcome of the case. As a result, a UOC would not go against the UNCITRAL Model Law or the Indian Arbitration Act’s definition of equality.

Unconscionability: Arbitration clauses are ultimately contractual clauses and therefore, must satisfy all the conditions for a valid contractual term. Some courts have considered UOCs to be unconscionable if the party with the restricted choice is compelled to agree to manifestly unfair terms, due to its weaker bargaining position. For such a claim to succeed, the UOC needs to satisfy two elements – Procedural unconscionability, wherein the process of reaching the agreement was riddled with oppression due to unequal bargaining power; and substantive unconscionability, wherein the contractual terms agreed upon are manifestly unfair and one-sided.

Unlike equality, a claim of unconscionability depends on the facts of the individual case. Courts across the world have generally rejected claims of unconscionability between commercial entities. This is because these entities engage in extensive contractual negotiations, which reduces the chances of establishing procedural unconscionability. Further, their agreements may include a number of imbalanced clauses, favouring either party. Invaliding contractual clauses merely because of their one-sided nature would result in invalidating a large number of clauses, which may favour one party over the other. However, in cases of consumer and employment contracts, UOCs may be found to be unconscionable if they are included as standard terms in a contract or if they prevent the other party from seeking any legal recourse altogether. Thus, claims of unconscionability of a UOC depend on the nature of the contract and the parties.

Lack of mutuality: Invalidating UOCs for lack of mutuality stems from the common law doctrine of mutuality, which states that ‘either both must be bound, or neither is bound’. In these cases, the challenge is based on the fact that the weaker party does not receive any consideration for agreeing to a UOC. Such a narrow view arises if the UOC is viewed standalone from the rest of the contract. However, Courts have looked at the contract as a whole to come to the conclusion that contractual provisions need not give parties the exact same positions. It would seem illogical to require this because the basis of a contract is that value is given to both parties. If the law required that every contractual term be exactly symmetrical, no exchanges between parties would take place. This ground has been rejected in a majority of the jurisdictions for invalidating UOCs.

Public Policy: The public policy concerns with respect to UOCs are twofold – that of the law of the arbitration agreement and that of the jurisdiction of enforcement. Public policy grounds are intrinsic to the country and can be wide-ranging. While some countries might have domestic laws that do not permit UOCs, some countries might refuse to enforce awards arising out of such clauses. In India, an arbitral award may be set aside if it is in conflict with the public policy of India. At the stage of enforcement of an award, the court shall not review the merits of the dispute and shall only set aside an award if it shocks the conscience of the court.

Indian position on Unilateral Option Clauses
The discussion of UOCs in India is polarizing and rife with legal misconceptions. The Delhi and Madras High Courts have issued the only important judgments. However, a review of the relevant cases and legal framework reveals that Indian law should support the legality of UOCs.
The Delhi High Court, in Bhatia Cutler Hammer v AVN Tubes, 1995 (33) DRJ 672 invalidated a UOC stating that a party could have an exclusive right to initiate arbitration as the Arbitration and Conciliation Act, 1996 envisaged a mutual arbitration agreement with opportunity for bilateral invocation. However, the Madras High Court relied on section 7 of the Act to state that the law did not require arbitration clauses to necessarily have mutuality and upheld the UOC in Castrol India Ltd. v. Apex Tooling Solutions. (2015) 1 LW 961 (DB). Section 7 of the Arbitration Act lists out the requirements for a valid arbitration clause. It requires an ‘agreement by the parties’, meaning that the parties should have consented to it, and not mutuality of invocation or consideration. This is in line with the Madras High Court’s reasoning. However, it is observed that the insistence of the Delhi High Court on mutuality of consideration stems from Section 25 of the Indian Contract Act, which invalidates contracts lacking consideration.  However, this issue is resolved when an arbitration agreement is viewed in the context of the whole contract, where substantive concessions and benefits may be given to the other party in exchange for the UOC. However, in the absence of a clear authority on this point, uncertainty continues to exist in this regard.

In another case, Emmsons International Ltd. v. Metal Distributors2005 (80) DRJ 256. the Delhi High Court invalidated a UOC as it restrained one party’s recourse to legal proceedings and contravened section 28 of the Contract Act. It also stated that the UOC was against public policy in India.  However, post the 2015 Amendment of the Arbitration Act, the scope of public policy has been drastically narrowed. Thus, it is doubtful if UOCs would be invalidated on such grounds anymore. Concerning the argument on Section 28 of the Contract Act, it states that agreements restraining legal proceedings are invalid. However, this provision is attracted only when there is an absolute restraint on legal proceedings and not a partial one. In cases of UOCs, the option of a party to approach arbitration does not undermine the other party’s right to approach the default forum for dispute settlement. Thus, in light of these provisions and legislative changes, Indian law seems to favour the validity of UOCs. However, caution must be exercised in the absence of an authoritative word in this regard.

Practical Steps while Dealing with Unilateral Option Clauses

Although UOCs are finding widespread acceptance internationally, there are potential legal pitfalls associated with them. Therefore, careful consideration should be paid to their inclusion and drafting. Some practical considerations to be mindful of are:

• Always seek specialist advice about unilateral dispute resolution options, including their validity in various jurisdictions such as the law governing the arbitration agreement, the law of the seat of the arbitration and the law of the jurisdiction of enforcement of award;
• Assess the benefits of the UOC and whether that outweighs the costs and risks associated with the option;
• Draft the UOC precisely and clearly, and draft the arbitration and litigation aspect of the UOC as separate clauses to ensure that each of them can operate on their own, in case they are severed;
• In case the UOC fails, make sure that the default position is acceptable and adequate;
• The beneficiary of an option to arbitrate should avoid taking any substantive step in court proceedings before exercising the option to limit the risk of the clause becoming unenforceable. Similarly, the beneficiary of an option to litigate should avoid taking any substantive step in arbitration before exercising its option;
• The UOC should only restrict the initiation of proceedings to one party, but should not confer any procedural advantages on one party over the other;
• The UOC should not absolutely restrict any party from legal recourse.