Unilateral option clauses are arbitration clauses in contracts allowing only one party to decide on the form of dispute resolution that should be used when a dispute arises. [1] Different jurisdictions have different approaches to unbalanced private agreements. This has led to varying decisions on whether unilateral option clauses are valid in any agreement. So, is a clause allowing one party to make a unilateral decision a legitimate way of resolving disputes?
The Law of England and Wales has encouraged a hands-off approach when it comes to private disputes, allowing party autonomy in the creation of contracts. Where parties have capacity to enter into a contract, they shall be held to the terms they agree to, with very few exceptions. [2] Unilateral option clauses in arbitration are no exception here; they are valid in England and Wales. The magic circle firm Clifford Chance concluded in a 2017 survey that issues with this approach are unlikely as solicitors tend to draft with the doctrine 'freedom of contract” in mind. [3] However, this is not the case in many other legal systems that do not encourage this doctrine of party autonomy, allowing courts to intervene in the dealings of individuals. [4]
Internationally, there is variation in the dealings of contracts that include unilateral arbitration clauses, which leads to significant issues in individual cases. France have changed their stance multiple times causing issues in cases such as Rothschild, where the clause was refused because a potestative right was created. [5] Currently, parties must satisfy multiple tests before the court will enforce the clause, resulting in parties being required to take extreme care when drafting agreements. [6] Clifford Chance’s survey found that it was more likely to be issued with this approach (ranked red on their traffic light system) than with the English approach (ranked green). [7] Similarly, Bulgaria adopted the French approach in 2011, preventing the enforcement of clauses which create a potestative right [8]: a right which is completely in the hands of the favoured party to the contract. [9]
From a comparative perspective, England and Wales have one of the most liberal approaches to party autonomy, a stark contrast from the approach adopted by France and Bulgaria. Clifford Chance believe there will be more issues caused by the latter approach, but which is the 'right' approach?
The legislative bodies of Bulgaria and France have made it clear that unilateral clauses create an imbalance of power, resulting in the creation of a potestative right. They intervene to protect potentially 'weak' parties from being taken advantage of, making these clauses invalid. By removing party autonomy, these jurisdictions are infantilising individuals to appear to 'balance' power, to the best of their abilities. However, parties generally will not sign an unfair agreement in the first place, especially when advised by their solicitors. The disadvantaged party will negotiate terms that give them additional power to ensure the agreement is as fair as possible. [10] Arbitration clauses may be implemented to advantage the 'weaker' party by balancing the power should a disagreement arise. Where the 'weak' party has the benefit of the unilateral option clause, then surely removing the clause will only strengthen the imbalance of power, putting the weak party at an even further disadvantage in their agreement.
Allowing a 'weak' party the benefit of a unilateral clause will allow for more flexibility, as they can wait until a dispute arises to determine their method of resolution. This produces an advantage to the party as they can decide which method favours them based on the exact details of the dispute that has arisen. There will always be a power imbalance between the parties but the clauses in favour of the 'weak party' will seek to balance that power in a way that both parties have agreed upon.
However, even where the clause is deemed valid by the court, the consequence in some jurisdictions such as Russia is that the arbitral award will be deemed unenforceable. [11] Allowing the parties to make unilateral decisions, to the detriment of the opposition, poses a risk to public policy. [12] Consequently, the clause is obsolete as the resulting decision from the resolution can be deemed unfair, requiring litigation to be undertaken instead. Therefore, the power will be removed from the favoured party. Undertaking arbitration based on a valid unilateral clause only for the consequential decision to be deemed void is a needless waste of resources. This means that these clauses are best to be avoided in Russia and in legal systems with similar stances as the subsequent arbitration is likely to result in an invalid award. [13]
Allowing a unilateral option clause can create efficient and flexible resolutions of disputes by removing the delay caused by parties bickering over which method to use. Where the agreement has been created by capable and consenting parties then why should the courts seek to infantilise, removing the autonomy of those involved in the agreement?
Endnotes
[1] Kevin Cheung, 'Unilateral Option Clauses to Arbitration: The Debate Continues' (Kluwer Arbitration Blog, 2020) accessed 26th July 2021.
[2] Halsbury’s Laws of England, 'Freedom of Contract' (Lexis Nexis, Sale of Goods and Supply of Services (Volume 91, para 1-400 Commentary, 2019)).
[3] Marie Berard et al, ‘Unilateral Option Clauses Survey’ (Clifford Chance, 2021) accessed 26th July 2021.
[4] Ibid.
[5] Allen & Overy, 'French Supreme Court Strikes Down a One-Way Jurisdiction Clause' (Allen & Overy, 2012) accessed 1st August 2021.
[6] Phillip Clifford and Oliver Browne, 'Avoiding Pitfalls in Drafting and Using Unilateral Option Clauses' (Latham & Watkins LLP, 2013) accessed 26th July 2021; Berard et al (n3).
[7] Berard et al (3) 13.
[8] Gilles Cuniberti, ‘Bulgarian Court Strikes Down One Way Jurisdiction Clause’ (Conflict Of Laws, 2012) accessed 26th July 2021; Marie Berard and James Dingley, ‘Unilateral Option Clauses in Arbitration: A Survey As To Their Effectiveness’ (Clifford Chance Briefing Note, 2013) accessed 26th July 2021.
[9] Howe W, ’Studies in Civil Law' (Nabu Press, 2010) page 134.
[10] Corey O’Loughlin, ‘Differentiating Between Balanced and One-Sided Agreements’ (Open View Partners Blog, 2011) accessed 1st August 2021.
[11] Cheung (n1).
[12] Ibid.
[13] Berard (n3) 13.