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Examining the Debate Around Unilateral Option Clauses in India

[This article has been authored by Rishita Khandelwal, a fourth-year law student at JGLS.]

Keywords: Unilateral Option Clauses, Party Autonomy, Mutuality, Arbitration Agreement

Unilateral Option Clauses (“UOCs”), or asymmetrical clauses, are dispute resolution clauses that give one party the choice to select a dispute resolution forum, or, in some cases, one party the right to unilaterally invoke arbitration. In such circumstances, the second party to the agreement is bound by the choice of the party exercising it.

Debate Around UOCs

When it comes to unilateral option clauses, specifically unilateral arbitration clauses, the issue that arises is the tussle between party autonomy and equal treatment of parties. On one hand, UOCs are heralded as the pinnacle of party autonomy, where the parties have consented to such clauses, and it is the reflection of the respective party’s bargaining power. On the other hand, UOCs are inherently against the fundaments of equitable treatment, since one party is not awarded the choice to select a dispute resolution forum. Additionally, there is another issue when it comes to UOCs, wherein the choice given to the party is vis-à-vis any forum and is not specific to arbitration which sometimes puts the clauses beyond the realm of arbitration. Since the arbitration agreement in such a case does not come into existence until arbitration is specifically chosen by the party, there exist concerns regarding the certainty of such clauses, the lack of which would render them inoperative. However, proponents of such clauses argue that such flexibility is necessary given the nature of some disputes, wherein the suitable dispute resolution option can only be exercised once the nature of the dispute is known.

The debate on UOCs has given rise to various judicial precedents. Common law countries like the United Kingdom, Singapore and Hong Kong have slowly integrated them. However, Russia has rejected the concept, and although France has not decided on UOCs itself, it has invalidated unilateral jurisdiction clauses, a similar concept wherein one party has the right to unilaterally choose the competent jurisdiction.

Examining the Indian Position

The issue has not yet been brought before the Apex Court, which has resulted in a slew of conflicting High Court decisions, where some have accepted the usage and others have invalidated it. These decisions can be categorized into the relevant points discussed below. Before delving into the jurisprudence behind UOCs, it must also be noted that these decisions pertain to a form of UOCs wherein one party has the right to refer to arbitration.

i. Existence of an Arbitration Agreement

The very existence of the arbitration agreement in UOCs itself has been highly debated by various High Courts. In Union of India v. Bharat Engineering Corporation (“Bharat Engineering”), the Delhi High Court held that as soon as the option for arbitration was exercised, an arbitration agreement came into existence. In the case of New India Assurance Co. Ltd. v. Central Bank of India (“New Insurance”), the Court confirmed the position in Bharat Engineering regarding the fruition of the arbitration agreement.

ii. Mutuality and Consent

The presence, or lack thereof, of mutuality and consent has been a point of contention amongst various High Courts across India. The first known case that considered UOCs was Kedarnath Atmaram v. Kesoram Cotton Mills Ltd. The Defendant argued that the arbitration clause was invalid on the grounds of mutuality. The Calcutta High Court herein rejected the Defendant’s contention and stated that an arbitration clause merely needs to abide by the standard of validity as per the Arbitration Act, 1940 (“1940 Act”), and the existence of unilateral choice does not affect the validity as envisaged in the 1940 Act. The concept was further delved into in Bharat Engineering, where the Court relied on the English case of Baron v. Sunderland Corporation (“Baron”). The High Court held mutuality to be an essential ingredient of an arbitration agreement. This interpretation of mutuality came into existence as soon as the dispute clause turned into an arbitration agreement after the option to the forum was exercised. Further, in New Insurance, the Calcutta High Court brought in the notion of advanced consent. The Court derived the unilateral right from the idea that advanced consent was given by the other party during the time of negotiating the contract, and hence it was held that the same cannot be vitiated, since it is a bilateral agreement. All these decisions, while acknowledging the requirement of mutuality and consent, upheld the validity of UOCs.

On the other hand, there are a few Delhi High Court decisions that have invalidated UOCs on the ground of lack of mutuality. In Bhartia Cutler Hammer v. AVN Tubes, (“Bhartia Cutler”), the Court once again relied on Baron to reiterate mutuality as an essential part of an arbitration agreement but reached a different conclusion with respect to the existence of mutuality in UOCs. Here, the Court stated that the existence of prior consent does not make the agreement bilateral, since the choice itself is still unilateral. In Lucent Technology v. ICICI Bank (“Lucent Technology”), the High Court agreed with the interpretation of mutuality in Bhartia Cutler and used it amongst many other reasons to invalidate the clause.

An anomaly in Indian jurisprudence is the Madras High Court judgment in Castrol India Ltd. v. Apex Tooling Solutions. Going against the tide, the Court herein stated that mutuality is not a requirement for checking the validity of an arbitration agreement, after going through a plethora of English and Australian cases. This case changed the landscape of arguments in favour of UOCs by establishing that mutuality need not be a concern for determining the validity of an arbitration agreement.

iii. Section 28 of the Indian Contract Act, 1872 (“ICA”)

Section 28 of the ICA states that agreements restraining parties from enforcing their right to legal proceedings are void. This provision has been used by the courts to invalidate UOCs. In Emmsons International Ltd. v. Metal Distributors, (“Emmsons”), the Court invalidated UOCs since they curtailed the right to legal remedies by restraining the recourse to legal proceedings, and hence were hit by public policy. Similarly, in Lucent Technology, the Court relied on Emmsons and used Section 28 of the ICA to invalidate the clause.

iv. Uncertainty

In addition to other grounds, the Court in Lucent Technology also invalidated the clause due to its uncertainty. Although this ground arises from the very facts and circumstances of the case, it must still be looked at. This uncertainty was caused because the party that exercised the unilateral option could choose any method of alternate dispute resolution, and there was no agreement vis-à-vis the method or derivation of such forum. However, uncertainty as a ground to invalidate UOCs has only been seen in this case.

Issues with the Grounds of Invalidation

There are several inconsistencies and issues with the usage of these grounds to invalidate UOCs. As seen from the above, mutuality is a highly contested and misapplied ground. Before understanding its misapplication in India, it is imperative to understand the English position on UOCs, since there is a heavy reliance on it to import the concept to India. It is true that in Baron, mutuality was considered essential to arbitration agreements, and hence UOCs were invalidated on account of them not conferring mutual rights on parties to refer disputes to arbitration. But the position in England has evolved since then. In Pittalis v. Sherefettin (“Pittalis”), the Court ruled that mutuality is not a requirement in arbitration and upheld the validity of UOCs. The position in England has since been stagnant as even visible in the decision in the case of NB Three Shipping Ltd. v. Harebell Shipping Ltd. The position in English law can also be derived from Jindal Exports Ltd v. Fuerst Day Lawson Ltd., wherein the Court upheld a UOC. The Court stated that mutuality is irrelevant and that if a bilateral agreement exists then the unilateral right to disputes is not relevant to validity.

Although the English position is clear, domestic courts have failed to appreciate the position laid out thereunder. There has been an incorrect application and reliance on Baron in Bharat Engineering, where the Court relied on Baron, but came to a different conclusion than what the Court in Baron had decided. In Bhatia Cutler, although the Court applied Baron correctly, it failed to appreciate the change in English law via Pittalis. The understanding of UOCs that is most consistent with English law is in Castrol, which correctly validated UOCs.

Further, the usage of Section 28 of the ICA to invalidate UOCs is faulty. The Section expressly states that for the agreement to be void, it must restrain the right to legal proceedings completely. However, most UOCs only partially restrain the rights of second parties, especially when there is a blanket right to go to litigation but only one party has the right to commence arbitration, as in most cases. This would essentially mean that all types of UOCs cannot be invalidated in a blanket manner. The application of the same would depend on a case-to-case basis, depending on the particular clause.


There exists sufficient confusion with respect to the law regarding UOCs in India. Recent developments and the increasing importance of commercial arbitration make it a priority to consider party autonomy. Parties should be given the freedom to curate clauses that meet the needs of the growing commercial world. Although it is important to counterbalance the rights of parties to ensure there exists some form of equitable treatment, UOCs must be considered and upheld in cases where there is a lack of any gross form of unequal treatment visible. Given the loopholes in the existing grounds for invalidation, there is hope that UOCs will be validated in India following the footsteps of common law countries, but the eventual outcome will depend upon the approach of Courts and the jurisdiction they decide to consider.

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