Unilateral Arbitration Clauses: Potential Challenges to the Enforcement of Foreign Awards in Pakistan

Unilateral arbitration clauses (UACs) allow one party the discretion to choose between a specific forum and mode of dispute resolution, such as litigation or arbitration, while binding the other party to that choice.[1] The asymmetric nature of such arbitration clauses has raised questions of its validity and enforce ability in many jurisdictions. On the one hand, common law jurisdictions like England, Hong Kong and Australia are most likely to consider UACs valid and enforce them; while many countries, such as Russia, France, China and some US states, entirely invalidate these arbitration agreements due to lack of mutuality (consideration), equality of treatment and other public policy concerns.[2] Since no conclusive position has been internationally adopted, the fate of Unilateral Arbitration Clauses remains uncertain and debated. Due to lack of statuary and judicial guidance, no direct jurisprudence has been developed on this particular issue in Pakistan. However, in the light of various challenges to the enforce ability of such clauses in other jurisdictions, this paper analyses the potential challenges to the enforce ability of foreign arbitral awards based on UACs in Pakistan, and argues that there is a strong case for the enforcement of such foreign arbitral awards.

Unilateral arbitration clauses are widely used in international commercial contracts involving banking and construction.[3] In Pakistan, any foreign arbitral award based on UACs will have to be recognized and enforced under the Recognition and Enforcement (Arbitration Agreements and Foreign Arbitral Awards) Act, 2011. Pursuant to Section 7 of the said Act, it has been established by the courts in the Louis Dreyfus case that “the only grounds of refusal shall be those stated in Article V of the New York Convention”.[4] Therefore, under the Act, two grounds can be potentially raised to challenge the enforcement of foreign awards based on UACs in Pakistan.

Firstly, Article V(1)(a) can be used to challenge the validity of an arbitration agreement before the courts of Pakistan and enforcement can be denied on this basis. However, the validity has to be analysed under the law to which the parties subjected it or, in the absence of a governing law, the law of the country where the award was made. Number of potential challenges have been successfully raised to invalidate UACs in various jurisdictions. In an Indian case[5], Section 28 of Contract Act, 1872 was invoked to invalidate UACs that put absolute restraint on the right of a party to legal proceedings, with no default option of any dispute resolution forum.[6] Similarly, lack of mutuality or mutual consideration that only creates the obligation for one party and not another has also been argued to render Unilateral Arbitration Clauses unenforceable in the US State of Maryland.[7] The rationale behind it is that UACs, based on the principle of sever ability, need to fulfill the requirement of consideration separately. Whereas in other states, party autonomy has been argued to uphold UACs.[8] However, it raises an important question that if one party only intended to accept the choice of the other party, then can it specifically show that both parties intended to arbitrate at the time of agreement? As the success of this ground is directly dependent on the legal status of Unilateral Arbitration Clauses under the governing law of an agreement, challenges to the enforcement of foreign awards based on Unilateral Arbitration Clauses are likely to be decided on a case-to-case basis in Pakistan.

Secondly, Article V(2)(b) provides that recognition and enforcement of an award can be denied if it is contrary to the public policy of the country where the enforcement is sought. Unlike the grounds of Article V(1), there is no burden of proof requirement on the person invoking Article V(2). This adds to the discretion of countries to refuse enforcement of foreign award as public policy can vary considerably from one country to another. Number of countries have raised the public policy arguments including lack of equal access to justice[9], equality of treatment[10] and unconscionability[11] to reject the validity of UACs. Firstly, the Russian Courts held that Unilateral Arbitration Clauses violate the principle of equality that pertains to due process rights, which are also reflected in Article 6 (‘right of fair trial’) of the European Convention on Human Rights.[12] Similarly, an Indian case[13] noted that UACs are against the public policy of India, although there are varying stances and contradictory case law on the validity of Unilateral Arbitration Clauses in India.[14]

In Pakistan, the term ‘public policy’ has not been defined in the 2011 Act. The High Court in the Orient Power Company Case[15] recognizes the lack of definition, discusses its meaning under various jurisdictions at length and makes some insightful inferences. The High Court states that public policy exception can be “invoked in cases of patent illegality and fundamental matters of state”.[16] It further elaborates that the public policy exception “allows the state to safeguard core values and fundamental notions of morality and justice which may change over time”.[17] It also warns that such exception is “restrictive and limited to exceptional circumstances that affect the most fundamental values of a State….and should not become a back door to review the merits of a foreign arbitral award or to create grounds which are not available under Article V of the Convention”.[18]

The public policy arguments that are raised to challenge the validity of UACs in other jurisdictions will most likely fail to fall within the public policy exception in Pakistan for several reasons. Firstly, it is seen that the equality of treatment or unconscionability does not constitute a case of either patent illegality or a fundamental state matter, as required by the High Court for the applicability of public policy exception. Secondly, the argument that Unilateral Arbitration Clauses hinder equal access to justice might apparently seem to fit the public policy criteria of morality and justice, as laid down by the High Court. However, it is argued that courts of Pakistan are more likely to hold that the principle of equal access to justice relates to the treatment within a chosen forum instead of the choice of the forum itself. Even the principles of natural justice, as upheld in a Pakistani case[19], are only regarding rules against bias and the right to be heard. Similarly, the due process ground of refusal of an award, stated in Article V(1)(b) of the New York Convention, is the inability of a party to present its case. It is evident that since UACs do not affect the right of a party to be heard on a specific forum, therefore, Unilateral Arbitration Clauses are neither against the principles of natural justice nor do they violate due process rights of a party under Article V(1)(b). Even if the forum is decided unilaterally by one party, the equality of treatment and access to justice can be ensured in that particular forum. A similar stance was taken by English courts in the Mauritius Commercial Bank Case[20].

Moreover, the fact that the High Court warns against creating grounds that are not given under Article V also points towards limiting the due process ground to the right of a party to present its case rather than broadening its scope and reading the choice of the forum into it through the public policy ground. Lastly, the High Court explicitly mentions that the public policy exception should be limited to exceptional circumstances and hence reinforces the pro-enforcement bias under the law of Pakistan. Since the arguments that are used to invalidate unilateral arbitration clauses by other states do not fit the criteria of the public policy exception in Pakistan, it is argued that Article V(2)(b) of the New York Convention is unlikely to be successfully invoked in Pakistan to challenge enforcement of foreign arbitral awards based on Unilateral Arbitration Clauses.

Based on the aforementioned considerations, Unilateral Arbitration Clauses. are unlikely to render foreign arbitral awards unenforceable in Pakistan. However, due to the ambiguity surrounding the legal status of  Unilateral Arbitration Clauses in many jurisdictions, it is pivotal that the applicable law, the seat of arbitration and the place of enforcement are carefully considered by parties to obviate any risks to the enforcement of arbitral awards based on Unilateral Arbitration Clauses.Unilateral Arbitration Clauses

References

  1. Kevin Cheung, ‘Unilateral Option Clauses to Arbitration: The Debate Continues’ (Kluwer Arbitration Blog, 2020) <http://arbitrationblog.kluwerarbitration.com/2020/02/25/unilateral-option-clauses-to-arbitration-the-debate-continues/> accessed 30 April 2020.
  2. Nishanth Vasanth and Rishabh Raheja, ‘Examining the Validity of Unilateral Option Clauses in India: A Brief Overview’ (Kluwer Arbitration Blog, 2017) <http://arbitrationblog.kluwerarbitration.com/2017/10/20/examining-validity-unilateral-option-clauses-india-brief-overview/> accessed 30 April 2020.
  3. Youssef Nassar, ‘Are Unilateral Option Clauses Valid?’ (Kluwer Arbitration Blog, 2018) <http://arbitrationblog.kluwerarbitration.com/2018/10/13/are-unilateral-option-clauses-valid/> accessed 30 April 2020.
  4. Louis Dreyfus Commodities Suisse v. Acro Textile Mills Ltd (2018 LHC 788).
  5. Emmsons International Ltd. v. Metal Distributors (2005 (80) DRJ 256).
  6. Ibid (n 2).
  7. ‘Unilateral Arbitration Clauses: What Are They’ (Watt Tieder, 2016) <https://watttieder.com/resources/articles/unilateral-arbitration-clauses-what-are-they>. accessed 30 April 2020.
  8. Ibid (n 1).
  9. Ibid (n 1).
  10. Ibid (n 3).
  11. Ibid (n 8).
  12. Ibid (n 2).
  13. Ibid (n 5).
  14. Ibid (n 2).
  15. Orient Power Company Case v. Sui Northern Gas Pipelines (P L D 2019 Lahore 607)
  16. Ibid (n 17).
  17. Ibid.
  18. Ibid.
  19. Petrosin Products Pakistan v. Federation of Pakistan (2001 CLC 820).
  20. Mauritius Commercial Bank v Hestia Holdings Limited and another [2013] EWHC 1328 (Comm).

Author:

Mahnum Ikram

The author is a law graduate from the Lahore University of Management Sciences (LUMS).