DR.

RAM MANOHAR LOHIA NATIONAL

LAW UNIVERSITY

2018

ARBITRATION and DISPUTE RESOLUTION LAW

“INDIAN COURTS ON ONE WAY ARBITRATION CLAUSES”

SUBMITTED TO: SUBMITTED BY:

Dr. Shakuntla ‘Sangam’ Utkarsh Kumar Prajapati

Assistant Professor (Law) Enroll No: 150101151

Dr. Ram Manohar Lohia 7th Semester

National Law University,

Lucknow.
 ACKNOWLEDGMENT
I have taken efforts in this project. However, it would not have been possible without the kind

support and help of many individuals. I would like to extend my sincere thanks to all of them.

I would like to extend my sincere thanks to my teacher and Mentor, Dr. Shakuntla ‘Sangam’

for her able guidance and help. All through the exploration period, I have been guided by my

educator at whatever point I confronted any obstacles or was in a state of daze not having the

capacity to resolve the intricacies of the subject.

I would also like to express my special gratitude and thanks to my seniors for sharing their

valuable tips and my classmates for their constant support.

 TABLE OF CONTENTS

1- INTRODUCTION

2- THE DEVELOPMENT OF THE ENGLISH POSITION

3- ENFORCEABILITY IN INDIA

4- UNENFORCEABILITY IN INDIA

5- LIMITATIONS TO ONE SIDED ARBITRATION CLAUSES IN

INDIA

6- THE ARGUMENT FOR UNIFORM ENFORCEABILITY IN INDIA

7- CONCLUSION

8- BIBLIOGRAPHY
INTRODUCTION

The primary purpose of an arbitration clause is to represent the parties’ common agreement to
resolve disputes arising out of their contractual relationship by arbitration. One-way
arbitration clauses, however, serve this primary purpose while giving only one party the right
to commence arbitration proceedings. Consequently, the other party only has the option of
approaching a domestic court to pursue a claim.

In countries like India, banks and other financial institutions that engage in lending and
trading activities on an international scale take on a high litigation risk. To dilute this risk and
maintain profitability, they deny the benefits of opting for arbitration to their borrowers in an
attempt to ensure that only legitimate claims against them are made before domestic courts.
At the same time, they reduce the cost and risk involved in pursuing claims in different
jurisdictions for themselves by compelling both parties to arbitrate only if they choose to
initiate it. The clause’s ability to dilute the bank/financial institution’s litigation risk has been
responsible for its growing popularity.

Despite this growing popularity, the enforceability of such clauses has been a matter of great
controversy around the world, with courts in different countries taking divergent positions. In
India, however, no clear stance can be culled out of conflicting judgments rendered by
different High Courts.
THE DEVELOPMENT OF THE ENGLISH POSITION

The first reported judgment in England on the enforceability of one-way arbitration clauses is
Baron v. Suderland Corporation1, rendered in 1966. Here, the Court held that “mutuality”
was necessary for a valid arbitration agreement, and defined it to mean that all parties to an
agreement should have “equal procedural rights.” The court observed that “It seems to me
that this is about as unlike an arbitration clause as anything one could imagine. It is
necessary in an arbitration clause that each party shall agree to refer disputes to arbitration;
and it is an essential ingredient of an arbitration clause that either party may, in the event of
a dispute arising, refer it, in the provided manner, to arbitration. In other words, the clause
must give bilateral rights of reference.”

Since one-way clauses gave only one party the right to commence proceedings, the court
held that the clause gave the parties unequal procedural rights and was, therefore, void. In
1985, this position was reiterated in Tote Bookmakers v. Development and Property Holding2

A year after Tote, however, the position was changed in Pittalis v. Sherefettin3. Here, the court
held that a one-way arbitration clause is a consequence of the nature of the commercial
relationship between the parties, and would satisfy the mutuality requirement laid down in
Baron as long as both parties were aware of and had freely consented to it. Consequently,
such clauses continue to be enforceable in England today.4

1
1966 (1) All ER 555
2
[1985] 2 WLR 603.
3
[1986] 1 QB 868.
4
Kennedy law solutions, “Notes from the bar: should you agree to a one-sided arbitration clause?”, 15 Jun,
2017, http://www.kennedyslaw.com/shouldyouagreetoaonesidededarbitrationclause/
ENFORCEABILITY IN INDIA

The Calcutta High Court has consistently upheld one-way arbitration clauses. In Kedarnath
Atmaram v. Kesoram Cotton Mill5it first used the “prior knowledge and consent of both
parties” requirement to find that one-way clauses would be valid as long as this condition was
met.

In 2002, the Court’s decision in S&D Securities v. Union of India6, traced the development of
English law in this regard and finally relied on the reasoning in Pittalis to uphold their
validity. The Calcutta High Court’s position is, therefore, consistent with the current position
in most common law countries, as observed in the Singapore High Court’s recent decision in
Dyna-Jet Pte Ltd v. Wilson Taylor Asia Pacific Pte Ltd7.

UNENFORCEABILITY IN INDIA

The only other Indian High Court that has decided upon the enforceability of such clauses is
the Delhi High Court, which has adopted the opposite view. In Bhartia Cutler Hammer Ltd.
v. AVN Tubes8,the court first decided upon this matter, holding that the apparent inequality in
rights given to parties under the clause would render it void.

Most recently, in Lucent Technologies v. ICICI Bank9, the Delhi High Court succinctly
clarified its position. The court found, first, that such a clause would amount to an agreement
in restraint of legal proceedings since it restricted the rights of only one party to seek an
alternative form of dispute resolution (arbitration). On this basis, the Court held that the
clause was void under the Indian Contract Act. The court then overlooked Pittalis and relied
instead on Tote in holding that a one-way clause would, in any case, violate the “mutuality”
requirement of a valid arbitration clause.

LIMITATIONS TO ONE SIDED ARBITRATION CLAUSES IN INDIA

5
1949 SCC OnLineCal 382
6
2005 124 CompCas 340
7
[2016] SGHC 238
8
1991 SCC OnLine Del 322
9
MANU/DE/2717/2009
In India even now one sided arbitration clauses are legally sustained but with certain
limitations. The clauses which empowered one party to the contract, to appoint the sole
arbitrator are upheld by the Courts in India. Moreover, earlier that party with such a power
can appoint anybody including its own staff or former staff or anybody who is close
them. Such appointments were also upheld by the Courts in India. To ensure transparency and
to make the Arbitration system in India more efficient, Government of India enacted
Arbitration and conciliation (Amendment) Act,2015, which came to effect from 23rd October
2015. The said amendment Act, brought in many pro- arbitration changes to ensure neutrality
of arbitrators and to ensure an efficient arbitration system in India. The most important
change is the introduction of Schedule V & VII by which certain category of persons based
on their relationship with the parties were legally disqualified to be appointed as arbitrators.
These schedules incorporated in the Act are similar to the IBA Rules on Conflict of interest in
International Arbitrations. These Schedules made the practice of appointing present & past
staff members as arbitrators, illegal. To ensure that a declaration procedure is made
mandatory to be filed by the arbitrators under S.12(5) disclosing their relationship with the
parties as well as counsels appearing for parties in the arbitration. But still, the one-sided
arbitration agreements which empowered one of the party to appoint the sole arbitrator
continue to exist.

In a recent Judgment Of Supreme Court of India pronounced on 3rd July 2017 in TLF
Limited Vs Energo Engineering Projects Limited (2017 SCC Online) 692, a three Judge
Bench of Supreme Court of India has held that the person who is in the disqualified category
as per Schedules V& VII also are not qualified to make appointment of sole arbitrators. That
means as per the said judgment, if a person is not eligible to be an arbitrator, in view of the
provisions of S.12(5) read with Schedule V and Schedule VII, of the Act, he also loses the
authority to act as an appointing authority, even though the arbitration clause provides for the
same. The said Judgment of the Supreme Court of India is a positive step towards a neutral
and truly independent arbitration system. Hence in India, if an arbitration clause gives right to
a person to appoint himself as an arbitrator or to appoint anybody else, then if he is
disqualified to be an arbitrator, he cannot appoint somebody else also. Hence if any party is in
the practice of using such clauses, they should better alter the same, to avoid unnecessary
future litigations, while making appointment of arbitrators.
In the above said case, the contract between the parties had an Arbitration clause in its
General terms and conditions of the purchase order (GTCPO). The said Arbitration clause
authorised the Managing Director of Energo Engineering Projects Limited, to be either the
arbitrator or nominate somebody who will act as the arbitrator. Hence, based on the clause,
when disputes arose between the parties, Energo Engineering appointed a former Judge of a
High Court as the sole arbitrator. Even though TLF Limited did not have any compliant
towards the said judge who was nominated as the arbitrator, challenged the said appointment
on based on Vth and VIIth Schedules of the Act, under Section 11(5) read with section 11(6)
of the Act, seeking appointment of an Arbitrator by the High court. High court rejected the
said application, on the ground, that the Amendment Act 2015 even though prohibits certain
category of persons for appointment as arbitrators, by way of Schedule V and VII, but it does
prohibit that person from nominating or appointing a different person as arbitrator. The High
Court also observed that prior to the 2015 amendment Act, the practice of one party
appointing an arbitrator was well recognized and the said amending legislation did not deal
with the said issue. But the Supreme Court of India, by the said Judgment reversed the High
Court Judgment, expanded the scope of the amendment Act, and gave larger interpretation to
the Vth & VIIth Schedule of the 1996 Act. In India, the interpretation given to a legislation by
the Supreme Court of India is the law of the Nation and hence the scope of one-sided
arbitration clauses are reduced now.
THE ARGUMENT FOR UNIFORM ENFORCEABILITY IN INDIA

Notwithstanding the Delhi High Court’s finding to the contrary, I would argue that the
uniform Indian position should be that such clauses are enforceable since they fulfill the two
broad conditions of a valid clause – fair terms and free consent from all parties to it.

First, one-way arbitration clauses are a consequence of the high litigation risk that financial
institutions face. However, while the right to commence an arbitration reflects this risk, the
terms of the arbitration itself are in no way tilted in favour of the financial institutions. This
means that the fairness of a potential verdict is not affected at all.

Furthermore, the Delhi High Court’s decision that such a clause amounts to an agreement in
restraint of legal proceedings in Lucent is unfounded. The right to commence an arbitration is
merely a contractual right, which can be distributed in an unbalanced manner between the
parties as long as the parties to the contract consent to it. In any case, the unbalanced
distribution of this right does not leave any party without a remedy in case of a breach, since
the right to pursue a claim before a domestic court remains untouched.

Second, on procedural fairness. Here, the requirement of “prior knowledge and consent” laid
down by the Calcutta High Court and contemporary English courts is of importance. This
means that no blanket assumption of procedural unfairness can be made in such cases – the
court must instead analyse this on a case-to-case basis. Thus, a one-way arbitration clause
would be struck down on procedural grounds only if it can be established that there was a
gross inequity of bargaining power that vitiated consent to the clause in that particular case.
See Central Inland Water Transport Corporation v. BrojoNathGanguly 10, for a discussion on
procedural unconscionability of contracts in Indian law. As long as both parties to the clause
validly consent to it, however, it should be enforced.

CONCLUSION
10
(1986) 2 SCC 156
As noted above, no consensus has been arrived at on the enforceability of one-way arbitration
clauses around the world. India has seen two High Courts consistently adopt opposite
viewpoints on this issue. In the absence of a conclusive judgment from India’s Supreme
Court or any legislative direction specific to one-way arbitration clauses, this confusion will
persist. Thus, while it is possible to argue that such clauses should be uniformly enforceable
across India, it is prudent for financial institutions to avoid the use of such clauses in India for
now.

BIBLIOGRAPHY

1- allenovery.com/publications/The-end-of-the-road-for-one-way-jurisdiction-and-
arbitration-clauses.

2- arbitrationblog.kluwerarbitration.com/2017/08/30/navigating-labyrinth-indian-courts-
one-way-arbitration-clauses.

3- one-sided-arbitration-clauses-valid-india-s-ravi-shankar

4- Book- Alternate dispute resolution – the indian perspective by Shashank garg.