Asymmetric arbitration agreements

This article examines the enforceability of asymmetric arbitration clauses agreed between sophisticated parties in a number of key jurisdictions.

One of the cornerstone principles of arbitration is that parties can agree how to resolve their disputes. Their agreement is often contained in the form of a contractually binding promise by each party to refer disputes to arbitration. Such an agreement is symmetrical–each party has the same right to invoke arbitration. However, it is not uncommon for parties to agree asymmetric, rather than symmetric, rights. The classic case is where only one party has the right to refer disputes to arbitration, but the other must litigate. Such asymmetric clauses are frequently used in financing transactions, where one party wishes to be sued only in its forum of choice (such as its home jurisdiction), but conversely wants the flexibility to enforce security and pursue assets against the other party wherever possible.

Enforcement of asymmetric clauses can be tricky. In some jurisdictions, there is a perception that they depart from the cornerstone principle of agreement between the parties. For example, in China, such clauses are prohibited. Users of asymmetric clauses must be aware of potential difficulties, to avoid being forced into litigation in an unfamiliar or unwanted forum.

The Singapore Court of Appeal recently confirmed the validity of an asymmetric clause in Dyna-Jet Pte Ltd v Wilson Taylor Asia Pacific Pte Ltd [2017] SGCA 32. The clause provided that at the election of one party (Dyna-Jet), a dispute may be referred to and settled by arbitration. Therefore, not only was the clause asymmetric and “lacking mutuality” but it was optional in that it depended on an election being made by Dyna-Jet. This is the first time that the Court of Appeal has ruled on the validity of an asymmetric and optional arbitration clause under Singapore law.

Upholding the High Court’s decision, the Court of Appeal held that the dispute resolution clause was a valid arbitration agreement. The court held that, in establishing the validity of the arbitration agreement, it is “immaterial” that the arbitration clause is asymmetric and that arbitration of a future dispute entirely optional instead of imposing on parties an immediate obligation to arbitrate their disputes.

English courts have consistently found asymmetric clauses enforceable. The case of NB Three Shipping v Harebell Shipping [2004] EWHC 2001 (Comm) concerned an application to stay arbitration proceedings under an asymmetric clause. The shipowner was entitled to bring arbitration but the charterer was limited to High Court proceedings. Morison J noted the clause gave “‘better’ rights” to the shipowners but refused to stay the arbitration. However, in Law Debenture Trust Corp v Elektrim Finance BV & Ors [2005] EWHC 1412 (Ch), Mann J considered an asymmetric clause providing for arbitration but granting an option to one of the parties to litigate. In this case, the application to stay arbitration proceedings was granted as the right to seek arbitration was subject to the agreed option to litigate. These cases demonstrate that English courts will  give effect to the parties’ chosen dispute resolution method irrespective of whether it is asymmetric.

This is reinforced in two recent cases on asymmetric court jurisdiction clauses. In Barclays Bank plc v Ente Nazionale di Previdenza Ed Assistenza dei Medici e Degli Odontoiatri [2015] EWHC 2857 (Comm), the High Court upheld a clause allowing one party to sue only in English courts but giving the other party a free choice, noting there were “good practical reasons” for the clause. Equally, in Commerzbank AG v Pauline Shipping Limited Liquimar Tankers Management Inc [2017] EWHC 161 (Comm) (still on appeal) the court held that asymmetric jurisdiction clauses are exclusive jurisdiction clauses for the purposes of Article 31(2) the Brussels 1 Recast Regulations. This is important as Article 31(2) provides that where there is an exclusive jurisdiction agreement, an EU Member State court is required to stay proceedings brought before it, until the court given jurisdiction under the parties’ jurisdiction agreement declares that it has no jurisdiction over the dispute. The court noted that it would undermine the parties’ agreement and foster abusive tactics if asymmetric jurisdiction clauses were treated as nonexclusive. These recent cases provide further comfort to those relying on asymmetric arbitration clauses. Even though they deal with a choice between courts rather than between arbitration and courts, the principle relied upon is the same – parties should be free to choose how to resolve their disputes and courts should respect that choice.

In Sicaly, Cass. 1st civ., 15 May 1974, the Cour de cassation upheld an asymmetric clause giving one party only the right to choose between a court or an arbitral tribunal.

However, since then, the Cour de cassation has issued some controversial decisions where it refused to enforce unilateral option clauses. Those cases arguably had no real bearing on asymmetric arbitration clauses since the option offered was between national courts. For instance, in the highly criticised Rothschild case (Cass. 1st civ., 26 September 2012, No. 11-26.022), the Cour de cassation held that an agreement providing an option to one party to choose between an indefinite choice of jurisdictions is void.

But in the recent Apple case (Cass. 1st civ. 7 October 2015, No. 14-16.898), the Cour de cassation clarified its position. The court gave effect to a clause that offered a rather limited choice to the beneficiary of the option, i.e. between the Irish courts, the court of the reseller’s corporate seat (France), or “any jurisdiction where harm to [the reseller] is occurring”. The court reached its conclusion on the basis that such a clause was foreseeable as the option permitted the identification of the jurisdictions before which the action could be brought.

In light of this latest decision, most scholars and practitioners are of the view that asymmetric clauses are valid under French law, provided that the choice offered to the beneficiary of the option is objectively limited and predictable.

The position under Russian law is complex and enforcement of asymmetric clauses can be problematic. In a widely reported case in 2012, the Presidium of the Supreme Arbitrazh Court (then the highest court for commercial matters) ruled that a clause which gave only one party an option to litigate in addition to the standard arbitration clause binding both parties, would be contrary to Russian law as it would give one party unfair advantage over the other and therefore contravene the equality of arms principle (see Resolution dated 19 June 2012 No. 1831/12 in case No. А40-49223/11-112-40). As a result, the court permitted both parties to bring claims before the Russian courts. In other words, the asymmetric clause was construed as a symmetrical one. Other courts, both before and since, have taken different approaches to this issue. In some, the court did not consider such asymmetric clauses to be problematic, whereas in others, the courts followed the view of the Presidium of the Supreme Arbtirazh Court.

Russian law does not appear, however, to require a simple symmetric arbitration agreement. Alternative dispute resolution agreements where both parties have a choice to refer a dispute to either a court or an arbitral tribunal appear to be valid and enforceable in Russian law. Likewise, a clause under which one of the parties can refer disputes only to arbitration, but the other is entitled only to litigate, has been held valid.

As enforcement of asymmetric clauses in Russia is complex, and much depends on the precise terms of the clause itself, careful drafting by an arbitration expert is required. Although Russian law permits some asymmetry in arbitration agreements, any outright attempt to give one party better rights than the other should be approached with caution.

The status of asymmetric clauses in India is unclear, in light of inconsistent decisions by Indian courts.

The starting point under Indian law is that there must be mutuality in an arbitration agreement. The Delhi High Court held that an asymmetric arbitration clause is not valid (nor indeed even an arbitration agreement) until the point at which the party exercises its option to arbitrate – prior to that, there is a lack of mutuality (Union of India vs Bharat Engineering Corporation ILR 1977 Delhi 57). However, the Calcutta High Court subsequently upheld the validity of an asymmetric arbitration clause (New India Assurance Co Ltd v Central Bank of India & Ors AIR 1985 Cal 76). The Calcutta High Court expressly declined to adopt the reasoning of the Delhi High Court and held that an asymmetric arbitration clause constitutes a valid arbitration agreement from the outset, albeit enforceable only by the party with an option to arbitrate. It is also likely that the Indian courts will take into account the balance of convenience, the interests of justice and similar considerations when deciding whether the Indian courts have jurisdiction under a contractual choice of forum or court clause. Indeed, such considerations may be “essential in the interests of international trade and commerce of the better relations between the countries and the people of the world” (see The Black Sea Steamship U.L. Lastochkina ODESSA USSR v Union of India AIR 1976 ANDH PRA 103).

Although not dealing with the point directly, more recent cases may indicate that the Indian courts are comfortable with some asymmetry between the parties’ rights in arbitration clauses. Very recently, the Supreme Court of India in TRF Ltd v Energy Engineering Projects Ltd (July 3, 2017, Civil Appeal No. 5306 of 2017) reiterated that a clause entitling one party to appoint an arbitrator alone and without the input of the other is valid. The High Court of Judicature in Bombay also dealt with a clause whereby one party was solely entitled to appoint the arbitrator and did not consider it necessary to consider whether that aspect of the clause was valid (26 May 2017, Arbitration Application No. 65 of 2016).

Until the uncertainty caused by inconsistent decisions is resolved by the Supreme Court or the legislature, the position of asymmetric arbitration clauses under Indian law will remain unclear. Although recent cases may suggest that Indian courts will permit some asymmetry in arbitration clauses, the position is far from settled and parties should approach asymmetric clauses with caution.

In recent years, Turkish courts have adopted an eclectic approach towards the interpretation of arbitration clauses.

A key prerequisite for the validity of arbitration clauses generally is that they are explicit and exclusive. The Court of Appeal favours a strict approach when analysing the parties’ intent to arbitrate. Arbitration clauses that stipulate for both arbitration and state courts are deemed null and void generally. The choice of language is also important – the use of the word “may” instead of “must” or “shall” in an arbitration clause renders the clause invalid since it fails to establish an absolute intent to arbitrate (19th Civil Chamber, decision No. 2012/9080).

In a recent case, the Court of Appeal held that a clause which gave one party only a right to initiate both litigation and domestic arbitration while the other was restricted to litigation (11th Civil Chamber, decision No. 2009/3257) was invalid. The court cited reasons of due process and the right to be heard. (For example, the party with the right to go to arbitration could bar state court proceedings by invoking the arbitration clause, while the other party could not have recourse to arbitration at all.) The court also held that the intent to arbitrate was not clear and absolute since the agreement allowed one party to initiate both litigation and arbitration.

More recently, the Court of Appeal recognised the validity of an asymmetric court forum selection clause that gave one of the parties the right to bring proceedings before a foreign court as well as before the courts of the other party’s country/place of business (11th Civil Chamber, decision No. 2016/4646).

Some view this as potentially indicating positive treatment of asymmetric international arbitration clauses by Turkish courts in the future. Whether this is correct remains to be seen. For now, the validity of asymmetric international arbitration clauses remains uncertain and such clauses should be approached with caution.

As can be seen, whether or not an asymmetric clause will be upheld depends upon which jurisdiction’s courts will ultimately be called upon to rule upon its validity. Some courts, such as those in India and Russia, are uncomfortable with the proposition of a lack of mutuality between the parties or that one party may be at a disadvantage in choosing a dispute resolution forum. Others, such as those in England and Wales, Singapore and France, are comfortable giving parties more freedom in choosing how to resolve their disputes and are more willing to permit asymmetry between the parties’ rights.

Parties wishing to include asymmetric arbitration clauses are well advised to consider carefully the approaches of the courts to such clauses in all relevant jurisdictions. It is essential to consider the commercial background to the transaction and identify which laws are likely to be relevant. Bearing in mind that an invalid arbitration agreement is a ground for resisting enforcement of an arbitral award, two critical considerations are the validity at the seat of arbitration as well as the governing law of the agreement. But parties should also consider validity in jurisdictions where an award might be enforced and any other jurisdictions where a party might seek to bring proceedings in breach of the arbitration agreement (for example, the parties’ home courts). A careful analysis at the drafting stage can reduce the risk of only discovering that the arbitration clause is unenforceable at the point a dispute arises, and when it is most needed.

This article was co-authored with special contribution from Nosherwan H Vakil, Advocate, High Court Bombay.